**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
                1934****For
                the fiscal year ended September 30, 2006, or**o
            **TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934****For
                the transition period from _______________ to
                ___________________**





**Commission
      File No. 0-26053**











**MDU
      COMMUNICATIONS INTERNATIONAL, INC.**


(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, or a non-accelerated filer. See definition of "accelerated
      filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large
      accelerated filer o Accelerated filer o Non-accelerated filer 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




As
      of
      September 30, 2006, the aggregate market value of the voting and nonvoting
      common equity (based upon the closing price on the OTC Bulletin Board) held
      by
      non-affiliates was approximately $35.5M. The number of shares of common stock
      ($0.001 par value) outstanding as of December 19, 2006 was 51,234,953.








**TABLE
      OF CONTENTS**





**Page****PART
                I**ITEM
                1.
            Business
            4ITEM
                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
            13**PART
                II**ITEM
                5.
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            13ITEM
                6.
            Selected
                Financial Data
            15ITEM
                7.
            Management’s
                Discussion and Analysis of Financial Condition and Results of Operation
            16ITEM
                7A.
            Quantitative
                and Qualitative Disclosures about Market Risk
            27ITEM
                8.
            Financial
                Statements and Supplementary Data
            28ITEM
                9.
            Changes
                In and Disagreements with Accountants on Accounting and Financial
                Disclosure
            51ITEM
                9A.
            Controls
                and Procedures
            51ITEM
                9B.
            Other
                Information
            52**PART
                III**ITEM
                10.
            Directors,
                Executive Officers and Corporate Governance
            52ITEM
                11.
            Executive
                Compensation
            55ITEM
                12.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            56ITEM
                13.
            Certain
                Relationships and Related Transactions
            59ITEM
                14.
            Principal
                Accountant Fees and Services
            5959**PART
                IV**ITEM
                15.
            Exhibits,
                Financial Statement Schedules
            60





**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.


3





**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, Trammell Crow Residential, Post
      Properties, Roseland Property Company, Related Companies, as well as many
      others, to understand and meet the technology needs of these groups. The Company
      operates in only one market segment.





**HISTORY
      OF THE COMPANY**





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 the Company relocated its 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
      USA
      operates in fourteen states with regional offices in the New York, Chicago,
      Washington, DC and Miami greater metropolitan areas.





**RECENT
      DEVELOPMENTS**





The
      Company achieved positive EBITDA, as defined hereafter, during the fourth
      quarter of fiscal 2006 and established an operating plan designed to ensure
      the
      Company continues to operate at positive EBITDA in fiscal 2007. Each of the
      Company’s market territories are now contributing to positive EBITDA due to
      the economies of scale and subscriber level achieved in each market region.
      Therefore, the Company is in a very good position to not only remain positive
      EBITDA, but to improve its earnings in fiscal 2007. The Company has also sought
      to increase its regional market presence and enhance its future growth
      capabilities in these markets, which is being accomplished through its
      developing relationship with BellSouth in the Southeast and with its new
      relationship with Verizon in the Northeast. These relationships are and will
      continue to assist in the generation of more bundled access agreements for
      exclusive and bulk deployments of services.


4





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 has a term of five years with interest payable monthly on the
      principal outstanding during the term. The credit facility is specially tailored
      to the Company’s needs by being divided into four $5 million increments with the
      interest rate per increment declining as principal is drawn from each increment.
      The Company is under no obligation to draw any increment beyond the first $5
      million.





The
      Company’s previously executed Sales Teaming Agreement with BellSouth
      Corporation, to jointly market and deploy services to the residential MDU market
      in the BellSouth territory, is beginning to produce results. Under the
      Agreement, BellSouth and the Company are offering innovative bundles of voice,
      data and DIRECTV Ò programming packages specifically designed for the MDU market. Joint proposals
      and coordinated deployment of services will provide multi-family property owners
      and condominium boards with a full menu of premium residential technology
      services that will result in time and cost savings to residents. BellSouth’s
      comprehensive portfolio of voice and data products, coupled with MDU
      Communications’ ability to deliver leading edge, innovative entertainment, will
      provide the multi-family market with one dependable source for the services
      that
      meet their needs. The Company believes that teaming with BellSouth, and mutually
      leveraging assets, in these southeastern states will accelerate the Company’s
      deployment of its video services and connect the Company’s footprint all along
      the eastern seaboard.





To
      assist
      its growth in the Northeast, the Company entered into a Sales Teaming Agreement
      with Verizon Services Corporation to jointly market and deploy a triple play
      of
      information and communication services to residential multi-dwelling unit
      properties in Verizon markets. Under this Sales Teaming Agreement, Verizon
      will
      offer voice and data services and MDU Communications will offer DIRECTV® digital
      satellite programming in packages specifically designed for owners and residents
      of apartments, condominiums, cooperatives and other multi-family properties.
      Again, this partnership will provide the Company with additional business
      opportunities in the Northeast.





Regarding
      other upcoming initiatives, the Company is still exploring the launch of a
      Voice
      over Internet Protocol (VoIP) beta trial during fiscal 2007, with the goal
      of
      beginning to bundle this service with the Company’s DIRECTV and broadband
      services in select markets for a true “triple play.” Additionally, the Company
      is exploring a number of acquisition opportunities that fit within its expansion
      plans for fiscal 2007.





**STRATEGIC
      ALLIANCE WITH DIRECTV**





In
      May of 2000, we entered into a long-term proprietary System Operator
      Agreement with DIRECTV. Under this agreement we are able to establish and
      maintain MDU distribution systems in non-rural states of the United States
      (as
      identified in the agreement) and act as a commissioned sales agent for the
      marketing of DIRECTV programming to residents of MDU properties. We only incur
      costs associated with the implementation of our services and do not pay any
      of
      DIRECTV’s programming or broadcasting costs. On September 29, 2003, the
      Company entered into a new System Operator Agreement with DIRECTV, which
      replaced the System Operator Agreement previously executed by the Company,
      which
      was due to initially expire on May 19, 2005. The new agreement has an
      initial term of three years with two, two-year automatic renewal periods upon
      the Company’s achievement of certain subscriber growth goals, with an automatic
      extension of the entire agreement to coincide with the expiration date of the
      Company’s latest property access agreement. The Company executed an addendum to
      the September 29, 2003 System Operator Agreement effective as of November 15,
      2004. The new addendum provides for an “Analog Commission” to the Company for
      the addition of a new Bulk Choice Advantage (“BCA”) subscriber, a program
      offering that was specifically designed by DIRECTV for the multi-dwelling unit
      market.





Under
      the
      DIRECTV agreement, we may not solicit sales or provide equipment for any other
      direct-to-home digital satellite television service in the United States.
      Consequently, we are totally dependent on DIRECTV for our digital set-top
      programming in the United States. We are not, however, prohibited from
      contracting with other program providers in connection with our private cable
      services. During the fiscal year ended September 30, 2006, revenues from
      DIRECTV direct-to-home (“DTH”) were 23% 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.


5





DIRECTV
      offers in excess of 800 entertainment channels of digital quality video and
      compact disc quality audio programming. DIRECTV currently transmits via nine
      high power satellites and has plans to launch two additional satellites in
      2007.
      We believe that DIRECTV’s extensive line up of pay per view movies and events
      and sports packages, including the exclusive “NFL Sunday Ticket,” have enabled
      DIRECTV to capture a majority market share of existing direct broadcast
      satellite (“DBS”) subscribers and will continue to drive strong subscriber
      growth for DIRECTV programming in the future.  Through our strategic
      relationship with DIRECTV, we expect to capitalize on the significant name
      recognition that DIRECTV creates and maintains as well as their immense
      advertising budget and advertised programming specials. Additionally, we benefit
      from the large-scale national marketing campaigns that are continuously run
      by
      DIRECTV.





**MARKET**





The
      United States MDU market represents a large niche market of potential
      telecommunications customers. There are over 26 million MDU television
      households out of a total of 100 million U.S. television households with
      the most densely populated MDU areas in the Northeast. Historically, the MDU
      market has been served by local cable television operators. Generally, these
      providers used analog technology and MDU residents could not access digital
      or
      competitive services, although many cable companies have now begun the process
      of upgrading to a digital signal. More importantly, the relationship between
      the
      property owners and managers that control access to these MDU properties and
      the
      cable operator have been significantly strained over the past 15 years due
      to the monopolistic sentiment of the cable operator.





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


·
            Advances
                in communication and information technology have created demand for
                new
                state-of-the-art services such as digital satellite television, high
                definition television (HDTV), 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, telecom providers and off-air broadcasters:





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





*Other
      Operators.* Our
      next
      largest competitor is other operators who build and operate communications
      systems such as satellite master antenna television systems, commonly known
      as
      SMATV, or private cable headend systems, which generally serve condominiums,
      apartment and office complexes and residential developments.  We also
      compete with other national DBS operators such as Echostar.


6





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





*Traditional
      Telephone Companies.* Traditional
      telephone companies such as Verizon and AT&T have over the past year or so
      diversified their service offerings to compete with traditional franchised
      cable
      companies in a triple play market. Although their subscriber growth 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
      multi-dwelling unit market. In the future, video offerings from traditional
      phone companies may become a significant competitor in the MDU market.




**GOVERNMENTAL
      REGULATION**





*Federal
      Regulation.* In
      February 1996, Congress passed the Telecommunications Act, which
      substantially amended the Federal Communications Act of 1934, as amended
      (“Communications Act”). This legislation has altered and will continue to alter
      federal, state, and local laws and regulations affecting the communications
      industry, including certain of the services we provide. On November 29,
      1999, Congress enacted the Satellite Home Viewer Improvement Act of 1999
      (“SHVIA”), which amended the Satellite Home Viewer Act. SHVIA permits DBS
      operators to transmit local television signals into local markets. In other
      important statutory amendments of significance to satellite carriers and
      television broadcasters, the law generally seeks to place satellite operators
      on
      an equal footing with cable television operators in regards to the availability
      of television broadcast programming. SHVIA amends the Copyright Act and the
      Communications Act in order to clarify the terms and conditions under which
      a
      DBS operator may retransmit local and distant broadcast television stations
      to
      subscribers. The law was intended to promote the ability of satellite services
      to compete with cable television systems and to resolve disputes that had arisen
      between broadcasters and satellite carriers regarding the delivery of broadcast
      television station programming to satellite service subscribers. As a result
      of
      SHVIA, television stations are generally entitled to seek carriage on any DBS
      operator’s system providing local service in their respective markets. SHVIA
      creates a statutory copyright license applicable to the retransmission of
      broadcast television stations to DBS subscribers located in their markets.
      Although there is no royalty payment obligation associated with this license,
      eligibility for the license is conditioned on the satellite carrier’s compliance
      with the applicable Communications Act provisions and FCC rules governing the
      retransmission of such “local” broadcast television stations to satellite
      service subscribers. Noncompliance with the Communications Act and/or FCC
      requirements could subject a satellite carrier to liability for copyright
      infringement. We are subject to certain provisions of SHVIA. SHIVIA was
      essentially extended and re-enacted. The new law, the Satellite Home Viewer
      Extension and Reauthorization Act (SHVERA) was signed in December of 2004.





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





*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.


7





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





*Preferential
      Access Rights.* We
      generally negotiate exclusive rights to provide satellite services singularly,
      or in competition with competing cable providers, and also negotiate where
      possible “rights-of-first-refusal” to match price and terms of third-party
      offers to provide other communication services in buildings where we have
      negotiated broadcast access rights. We believe that these preferential rights
      of
      entry are generally enforceable under applicable law, however, current trends
      at
      state and federal level suggest that the future enforceability of these
      provisions may be uncertain. The FCC has recently issued an order prohibiting
      telecommunications service providers from negotiating exclusive contracts with
      owners of commercial MDU properties, though it deferred determination in a
      pending rulemaking whether to render existing exclusive access agreements
      unenforceable, or to extend this prohibition to residential MDUs due to an
      inadequate administrative record. Although it is open to question whether the
      FCC has statutory and constitutional authority to compel mandatory access,
      there
      can be no assurance that it will not attempt to do so. Any such action may
      undermine the exclusivity provisions of our rights of entry on the one hand,
      but
      would also open up many other properties to which we could provide a competing
      service. There can be no assurance that future state or federal laws or
      regulations will not restrict our ability to offer access payments, limit MDU
      owners’ ability to receive access payments or prohibit MDU owners from entering
      into exclusive agreements, any of which could have a material adverse effect
      on
      our business.





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





**EMPLOYEES**





The
      Company had 104 employees, all full-time, as of September 30, 2006. None of
      the Company’s employees are represented by a labor union. The Company has
      experienced no work stoppages and believes that its employee relations are
      good.





**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
      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, 2006, it has accumulated losses of $38,956,353. The Company
      does not expect to have profitable operations for several years, and it cannot
      assure that it will ever achieve or attain profitability. If it cannot achieve
      operating profitability, the Company may not be able to meet its working capital
      requirements, which could have a material adverse effect on its business and
      may
      impair its ability to continue as a going concern.


8





***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.





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





On
      September 29, 2003, the Company entered into a new System Operator Agreement
      with DIRECTV to install and maintain distribution systems in MDU properties.
      Under the Company’s agreement with DIRECTV, the Company may not maintain or
      market direct-to-home satellite broadcast services for others. Consequently,
      the
      Company is totally dependent upon DIRECTV for its set-top direct broadcast
      satellite programming. During the year ended September 30, 2006, revenues from
      DIRECTV were 23% of the Company’s total revenues. DIRECTV is not required to use
      the Company on an exclusive basis for marketing its programming to MDUs. The
      Company’s contract with DIRECTV can be terminated under various circumstances,
      including, in particular, an uncured material breach by the Company of the
      contract. Any such termination may have material affect on the Company’s
      business.





Because
      the Company is an intermediary for DIRECTV, events the Company does not control
      at DIRECTV could adversely affect the Company. One of the most important of
      these is DIRECTV’s ability to provide programming that appeals to mass
      audiences. DIRECTV generally does not produce its own programming; it purchases
      programming from third parties. DIRECTV’s success - and accordingly the
      Company’s - depends in large part on DIRECTV’s ability to select popular
      programming sources and acquire access to this programming on favorable terms.
      The Company has no control or influence over this. If DIRECTV is unable to
      retain access to its current programming, the Company cannot 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 at levels
      greater than its current business plan. Because of the uncertainties in raising
      additional capital, there can be no assurance that the Company will be able
      to
      obtain the necessary capital to finance its growth initiatives. Insufficient
      capital may require the Company to delay or scale back its proposed development
      activities.





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





The
      Company is experiencing 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.


9





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





Cable
      television operators have a large, established subscriber base, and many cable
      operators have significant investments in, and access to, programming. One
      of
      the competitive advantages of DBS providers is their ability to provide
      subscribers with more channels and a better quality digital signal than
      traditional analog cable television systems. Many cable television operators
      have made significant investments to upgrade their systems from analog to
      digital, significantly increasing the number and variety of channels and the
      quality of the transmission they can provide to their subscribers. As a result
      of these upgrades, cable television operators have become better able to compete
      with DBS providers. If competition from cable television operators 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. The Company intends
      to be timely Sarbanes-Oxley compliant for its internal controls and procedures
      by the end of fiscal 2008.





***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.


10





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





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





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





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





***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 shareholder
      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 shareholder attempts to replace or
      remove current management. In addition, certain provisions of Delaware law
      may
      discourage, delay or prevent someone from acquiring or merging with the Company.
      These provisions could limit the price that investors might be willing to pay
      in
      the future for shares of the Company’s Common Stock.




11


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





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





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





The
      market price of the Company’s securities may be volatile and subject to wide
      fluctuations. If the Company’s revenues do not grow or grow more slowly than it
      anticipates, or, if operating or capital expenditures exceed its expectations
      and cannot be adjusted accordingly, or if some other event adversely affects
      the
      Company, the market price of the Company’s securities could decline. If
      securities analysts alter their financial estimates of the Company’s financial
      condition it could 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.





***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 million revolving five year credit facility to fund the Company’s subscriber
      growth. 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
      public trading market for the Company’s Common Stock is limited and may not be
      developed or sustained.***





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





**Item
      1B.**  **Unresolved
      Staff Comments**





None.





**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 $16,073, expiring July 31, 2009.
      We believe that this space is adequate to suit our needs for the foreseeable
      future.


12





We
      currently hold a lease for office and warehouse location in Chicago, Illinois
      for approximately 4,100 square feet that runs through September 30, 2008 at
      a
      monthly cost of $3,587 per month. This space is adequate to suit our needs
      for
      the foreseeable future in the Chicago metropolitan area.





We
      currently hold a lease for its office and warehouse location in Davie, Florida
      for approximately 2,000 square feet that runs through January 14, 2008 at a
      monthly cost of $2,394 per month. This space is adequate to suit our needs
      for
      the foreseeable future in the South Florida metropolitan area.





In
      addition, we carry short term office/warehouse lease space in Rockville,
      Maryland, outside Washington, DC.





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





From
      time
      to time, the Company may be subject to legal proceedings, which could have
      a
      material adverse effect on its business. At September 30, 2006 and through
      the
      date of this filing, the Company was not a party to any litigation matter.





**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**
            
            **Low**December 31,
                2004
            
            $
            3.50
            
            $
            2.46March 31,
                2005
            
            $
            3.48
            
            $
            2.43June 30,
                2005
            
            $
            2.72
            
            $
            1.95September 30,
                2005
            
            $
            2.23
            
            $
            1.35December 31,
                2005
            
            $
            1.92
            
            $
            1.39March 31,
                2006
            
            $
            1.53
            
            $
            1.15June 30,
                2006
            
            $
            1.33
            
            $
            0.88September 30,
                2006
            
            $
            0.95
            
            $
            0.50





**“Penny
      Stock” Rules**





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


13





**** **Holders**





As
      of
      December 15, 2006, the Company had 123 holders of record of its shares of
      common stock, with an approximate total of 1,900 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 financing described later in this Report.





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





**EQUITY
      COMPENSATION PLAN INFORMATION**


**(September 30,
      2006)**





**Plan
                category**
            
            **Number
                of securities to be**
              **issued
                upon exercise of**
              **outstanding
                options,**
              **warrants
                and rights**
            
            **Weighted-average
                exercise**
              **price
                of outstanding options,**
              **warrants
                and rights**
            
            **Number
                of securities**
              **remaining
                available for**
              **future
                issuance under equity**
              **compensation
                plans**Equity
                compensation plans approved by security holders
            
            
            2,602,072
                shares
            (1)
            $
            1.81
            
            
            691,994Equity
                compensation plans not approved by security holders
            
            
            0
            
            
            0
            
            
            0





(1)
                2001 Stock Option Plan,
      approved by the shareholders on May 10, 2001, see Note 4 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 common shares.





**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 to fund the Company’s subscriber growth. 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 and 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. The Company 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 are subject to a  Registration Rights Agreement that
      provides for demand registration within one hundred thirty five days 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. The 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
      these entities are “accredited investors” as such term is defined in Rule 501 of
      said Regulation D. Through the date of this filing, these warrants have not
      been
      registered or exercised and therefore there are no proceeds.





**Purchases
      of Equity Securities**





None.


14


**Item
      6.**   **Selected
      Financial Data**





The
      following table sets forth certain of our historical consolidated financial
      data
      for the five years ended September 30, 2006. The selected consolidated financial
      data should be read in conjunction with, “Management’s Discussion and Analysis
      of Financial Condition and Results of Operations,” and our audited consolidated
      financial statements and related notes included elsewhere in this
      document.


**Years
                  Ended September 30,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****Consolidated
                  Statements Of Operations Data:**Revenue
              
              $
              13,366,205
              
              $
              9,142,228
              
              $
              4,490,235
              
              $
              4,124,394
              
              $
              3,015,709Operating
                  Expenses (1)
              
              
              21,480,612
              
              
              14,778,568
              
              
              10,725,947
              
              
              6,033,043
              
              
              5,174,386Other
                  Income (Expenses) (2)
              
              
              103,353
              
              
              955,902
              
              
              (2,705,423
              )
              
              (209,058
              )
              
              (829,389
              )Net
                  Loss
              
              $
              (8,011,054
              )
              $
              (4,680,438
              )
              $
              (8,941,135
              )
              $
              (2,117,707
              )
              $
              (2,988,066
              )Basic
                  And Diluted Loss Per Common Share (3)
              
              $
              (0.16
              )
              $
              (0.10
              )
              $
              (0.24
              )
              $
              (0.09
              )
              $
              (0.16
              )Weighted
                  Average Common Shares Outstanding
              
              
              50,204,409
              
              
              48,479,204
              
              
              37,607,929
              
              
              22,788,924
              
              
              18,384,874**Consolidated
                  Balance Sheet Data:**Total
                  Assets
              
              $
              27,169,019
              
              $
              29,260,416
              
              $
              15,696,476
              
              $
              6,393,961
              
              $
              6,447,227Long
                  Term Debt (4)
              
              
              3,921,574
              
              
              266,037
              
              
              107,895
              
              
              181,374
              
              
              1,068,967Total
                  Liabilities
              
              
              7,250,913
              
              
              3,511,154
              
              
              1,925,612
              
              
              1,950,761
              
              
              3,127,416Total
                  Stockholders’
                  Equity
              
              
              19,918,106
              
              
              25,749,262
              
              
              13,770,864
              
              
              4,443,200
              
              
              3,319,811





1)
            Operating
                expenses include noncash charges. Additionally, 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 year ended September 30,
                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. The Company recognized
                stock-based compensation expense for the year ended September 30,
                2006 of
                $1,048,856 based upon the fair value at the grant dates (all of which
                were
                prior to October 1, 2005) for outstanding awards to employees using
                the
                fair value originally calculated for pro forma disclosure purposes
                under
                SFAS 123 amortized over the requisite vesting
                period.





2)
            For
                the years ended September 30, 2004, 2003 and 2002, interest expense
                included cashless transactions for the issuance of warrants and for
                the
                conversion of notes payable into common stock for principal and interest.
                Other income (expense) for fiscal 2004 includes a $2,755,115 charge
                for
                variable options.





3)
            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.
                The
                Company has had a net loss in each period and, accordingly, the effect
                of
                assuming the exercise of options and warrants would be
                anti-dilutive.





4)
            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 outstanding balance for the year
                ended
                September 30, 2006 is $3,879,569.




15


**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.





**OVERVIEW**





The
      Company earns its revenue through the sale of digital and analog satellite
      television programming and high-speed Internet services to owners and residents
      of MDUs. It negotiates long-term access agreements with the owners and managers
      of MDU properties allowing it 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”). The DBS 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 offerings
      the Company receives 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. Net revenues from Private
      Cable result from the difference between the wholesale prices charged by
      programming providers and the price the Company charges subscribers for the
      private cable programming package. The Company provides 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 as either Bulk DTH, Bulk PC, Bulk Choice Advantage
      (“BCA”) or Bulk ISP type subscribers in the Company’s periodic filings. 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.





**RESULTS
      OF OPERATIONS**





The
      Company continued along a strong growth curve for fiscal 2006. It reports
      revenue for the year ended September 30, 2006 of $13,366,205, an increase of
      46%
      over the prior fiscal year. For the year ended September 30, 2006, the Company
      reports negative earnings before interest, taxes, depreciation, amortization
      and
      noncash stock option charges (“EBITDA”) of $1,447,923, however, the Company
      realized positive EBITDA of $149,155 in the fourth fiscal quarter ended
      September 30, 2006 . The
      Company uses the common performance gauge of EBITDA to evidence earnings
      exclusive of mainly noncash events, as is common in the technology, and
      particularly the cable and telecommunications, industries. EBITDA is an
      important gauge because 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 loss of - in the Company’s case - interest,
      depreciation, amortization and non cash charges related to its warrants and
      stock options. EBITDA is not, and should not be considered, an alternative
      to
      income from operations, net income, net cash provided by operating activities,
      or any other measure for determining our operating performance or liquidity,
      as
      determined under accounting principles generally accepted in the United States
      of America. EBITDA also does not necessarily indicate whether our cash flow
      will
      be sufficient to fund working capital, capital expenditures or to react to
      changes in our industry or the economy generally. The following table reconciles
      the comparative EBITDA of the Company to our consolidated net loss as computed
      under accounting principles generally accepted in the United States of America:


16


**For
                  The Years Ended September 30,****2006**
              
              **2005**
              
              **2004**EBITDA
              
              $
              (1,447,923
              )
              $
              (767,947
              )
              $
              (561,580
              )Interest
                  expense
              
              
              (25,556
              )
              
              (7,771
              )
              
              (2,755,115
              )Provision
                  for doubtful accounts
              
              
              (107,044
              )
              
              (63,658
              )
              
              (131,739
              )Provision
                  for inventory reserve
              
              
              (57,977
              )
              
              (69,821
              )
              
              —Depreciation
                  and amortization
              
              
              (4,391,640
              )
              
              (3,055,287
              )
              
              (1,620,164
              )Effect
                    of shares and warrants issued for termination of professional
                    service agreement
              
              
              —
              
              
              (270,200
              )
              
              —Effect
                    of cancellation of shares and warrants issued for termination
                    of
                    professional service agreement
              
              
              —
              
              
              426,041
              
              
              —Effect
                  of variable accounting for option plans
              
              
              —
              
              
              (271,885
              )
              
              (2,801,682
              )Share-based
                  compensation expense - employees
              
              
              (1,048,856
              )
              
              —
              
              
              —Compensation
                  expense for issuance of common stock through employee
                  stock purchase plan
              
              
              (50,290
              )
              
              —
              
              
              —Compensation
                  expense for issuance of common stock for employee bonuses
              
              
              (99,833
              )
              
              —
              
              
              —Compensation
                  expense for issuance of common stock for employee wages
              
              
              (83,634
              )
              
              —
              
              
              —Compensation
                  expense accrued to be settled through the issuance of
                  common stock
              
              
              (299,907
              )
              
              —
              
              
              —Share-based
                  compensation expense - nonemployees
              
              
              (398,394
              )
              
              (599,910
              )
              
              (1,070,855
              )Net
                  Loss
              
              $
              (8,011,054
              )
              $
              (4,680,438
              )
              $
              (8,941,135
              )


The
      Company added 1,569 billable subscribers during the fourth quarter, an increase
      over the 358 net subscribers added in the third quarter. The Company experienced
      a 26% increase in its subscriber base during fiscal 2006, from 37,124 total
      subscribers as of September 30, 2005 to 46,653 total subscribers as of September
      30, 2006. The Company’s ARPU, defined as the average revenue from all revenue
      sources divided by the number of subscribers, was $26.54 at September 30, 2006.
      The Company’s ARPU is expected to increase in fiscal 2007 as the conversion of
      private cable systems to bulk or BCA DIRECTV services continues and as bulk
      rates increase per the terms of the Company’s access agreements. DIRECTV has
      been providing certain equipment and marketing assistance to the Company’s
      effort of converting properties from traditional private cable to DIRECTV
      programming. These incentives will continue through at least December 31, 2006.
      A breakdown of the Company’s subscriber base as of September 30, 2006 is as
      follows:




**Service
                Type**
            
            **Subscribers**
                **as
                  of**
              **Sept
                30, 2005**
            
            **Subscribers**
              **as
                of**
              **Dec.
                31, 2005**
            
            **Subscribers**
                **as
                  of**
              **March
                31, 2005**
            
            **Subscribers**
                **as
                  of**
              **June
                30, 2006**
            
            **Subscribers**
                **as
                  of**
              **Sept.
                30, 2006****Bulk
                DTH**
            
            
            5,470
            
            
            6,213
            
            
            7,226
            
            
            7,830
            
            
            8,475**DTH
                Choice / Exclusive**
            
            
            6,860
            
            
            7,498
            
            
            7,857
            
            
            7,703
            
            
            8,095**Bulk
                PC**
            
            
            16,587
            
            
            16,894
            
            
            18,011
            
            
            17,778
            
            
            17,596**PC
                Choice / Exclusive**
            
            
            1,399
            
            
            1,318
            
            
            1,303
            
            
            1,230
            
            
            1,240**Bulk
                Choice Advantage**
            
            
            2,941
            
            
            3,689
            
            
            4,627
            
            
            4,818
            
            
            5,334**Bulk
                ISP**
            
            
            1,823
            
            
            2,267
            
            
            3,116
            
            
            3,100
            
            
            3,118**ISP
                Choice / Exclusive**
            
            
            2,044
            
            
            2,392
            
            
            2,586
            
            
            2,625
            
            
            2,795**Total
                Subscribers**
            
            
            37,124
            
            
            40,271
            
            
            44,726
            
            
            45,084
            
            
            46,653





As
      of
      September 30, 2006, the Company had 58 properties and 29,062 units in
      work-in-progress (“WIP”). Of the current WIP, 13,469 are in new construction
      properties and 15,593 are in existing conversion properties. The Company’s
      breakdown of WIP units by type of service in the new construction area are
      as
      follows: (i) DIRECTV (Bulk DTH) 1,325; (ii) DIRECTV (DTH Choice/Exclusive)
      4,743; (iii) DIRECTV BCA Program (Bulk Choice Advantage) 1,564; (iv) Private
      Cable (Bulk PC) 231; (v) Private Cable (PC Choice/Exclusive) 1,493; (vi)
      Internet (Bulk ISP) 982; and, (vii) Internet (ISP Choice/Exclusive) 3,131.
      The
      Company’s breakdown of WIP units by type of service in the existing conversion
      properties are as follows: (i) DIRECTV (Bulk DTH) 1,701; (ii) DIRECTV (DTH
      Choice/Exclusive) 6,325; (iii) DIRECTV BCA Program (Bulk Choice Advantage)
      668;
      (iv) Private Cable (Bulk PC) 0; (v) Private Cable (PC Choice/Exclusive) 1,642;
      (vi) Internet (Bulk ISP) 0; and, (vii) Internet (ISP Choice/Exclusive) 5,257.
      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 exists WIP. WIP is not reduced by the number of units turned billable
      during any given quarter.


17




As
      of
      September 30, 2006, the Company had 9,105 “under contract” subscribers in WIP
      that the Company expects will become “billable” subscribers in the next few
      quarters. Under contract is defined in actual potential subscribers, not as
      units. The under contract subscribers are an important component of the
      Company’s subscriber base evaluation in that they represent the number of
      remaining "billable" subscribers the Company expects to realize from WIP. The
      Company breaks down and reports its under contract subscribers into new
      construction and existing conversion properties, due to the time differential
      that new construction properties remain in under contract. A breakdown of these
      “under contract” subscribers for new construction and existing conversion
      properties (already reduced to reflect appropriate property type and penetration
      rate) shows the following:





**Bulk**
              **Subscribers**
            
            **Exclusive**
              **Subscribers**
            
            **Competitive**
              **Subscribers**
            
            **Total**
              **Subscribers**New
                construction “under contract”
              subscribers
                as of September 30, 2006:
            
            
            3,249
            
            
            843
            
            
            2,148
            
            
            6,240Existing
                conversion “under contract”
              subscribers
                as of September 30, 2006:
            
            
            666
            
            
            598
            
            
            1,601
            
            
            2,865Total
                “under contract” subscribers:
            
            
            3,915
            
            
            1,441
            
            
            3,749
            
            
            9,105





The
      Company continues to concentrate its 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 64%
      increase in Bulk DTH and Bulk Choice Advantage (BCA) subscriber growth and
      a 53%
      increase in broadband subscriber growth over the past fiscal year. The Company
      will continue to focus on bulk deployments in fiscal 2007, however, its growing
      presence in the Southeast and Mid-Atlantic is also expected to generate a
      significant number of exclusive type access agreements. 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, subscriber
      growth and the Company’s subscriber penetration rates, while maintaining or
      reducing its subscriber acquisition capital costs.





**RESULTS
      OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2006 AND 2005**




**Year
                  Ended September 30, 2006**
              
              **Year
                  Ended September 30, 2005**
              
              **Change**
                **($)**
              
              
              **Change
                  (%)**REVENUE
              
              $
              13,366,205
              
              100
              %
              
              $
              9,142,228
              
              100
              %
              
              $
              4,223,977
              
              
              46
              %Direct
                  costs
              
              
              5,307,770
              
              40
              %
              
              
              3,582,407
              
              39
              %
              
              
              1,725,363
              
              
              48
              %Sales
                  expenses
              
              
              1,629,228
              
              12
              %
              
              
              1,963,127
              
              22
              %
              
              
              (333,899
              )
              
              -17
              %Customer
                  service and operating expenses
              
              
              4,762,336
              
              36
              %
              
              
              2,858,881
              
              31
              %
              
              
              1,903,455
              
              
              67
              %General
                  and administrative expenses
              
              
              5,389,638
              
              40
              %
              
              
              3,318,866
              
              36
              %
              
              
              2,070,772
              
              
              62
              %Depreciation
                  and amortization
              
              
              4,391,640
              
              33
              %
              
              
              3,055,287
              
              34
              %
              
              
              1,336,353
              
              
              44
              %OPERATING
                  LOSS
              
              
              (8,114,407
              )
              -61
              %
              
              
              (5,636,340
              )
              -62
              %
              
              
              (2,478,067
              )
              
              44
              %Total
                  other income, net
              
              
              103,353
              
              1
              %
              
              
              955,902
              
              10
              %
              
              
              (852,549
              )
              
              -89
              %NET
                  LOSS
              
              $
              (8,011,054
              )
              -60
              %
              
              $
              (4,680,438
              )
              -52
              %
              
              $
              (3,330,616
              )
              
              71
              %





***Net
      Loss.*** Primarily as a result of the matters discussed below, we reported a net loss
      of
      $8,011,054 for the year ended September 30, 2006, compared to a net loss of
      $4,680,438 for the year ended September 30, 2005.





***Revenues.*** Revenue
      for the year ended September 30, 2006 increased 46% to $13,366,205 compared
      to
      revenue of $9,142,228 for the year ended September 30, 2005. The revenue
      increase is directly attributable to the (i) 26% increase in the number of
      subscribers between the two periods, (ii) product shift to subscribers that
      produce higher recurring revenue streams, (iii) increase in the number of
      subscribers to Internet services, and (iv) increase in installation revenue.
      We
      expect an increase in revenue as our subscriber growth and conversion to DTH
      from private cable continues.  Revenue for the years ended September 30,
      2006 and 2005 was derived, as a percent, from the following sources:




**2006**
            
            **2005**Private
                Cable Programming Revenue
            
            
            29
            %
            
            41
            %DTH
                Programming Revenue and Subsidy
            
            
            54
            %
            
            47
            %Internet
                Access Fees
            
            
            11
            %
            
            8
            %Installation
                Fees, Wiring and other Sales
            
            
            6
            %
            
            4
            %




18




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. This emphasis is expected to continue in fiscal 2007.





***Direct
      Costs.*** Direct
      costs are comprised of private cable programming costs, monthly recurring
      Internet T-1 line connections and costs relating directly to installation
      services. Direct costs stayed fairly constant as a percent of revenue, however,
      direct costs increased to $5,307,770 for the year ended September 30, 2006,
      as
      compared to $3,582,407 for the year ended September 30, 2005, primarily as
      a
      result of the increase in the number of subscribers over the twelve months
      as a
      whole from the prior period.  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. We expect to continue to increase the number of
      DIRECTV and broadband subscribers in 2007 and convert certain private cable
      subscribers to DIRECTV services, therefore, direct costs as a percentage of
      revenue are expected to decline.





***Sales
      Expenses.*** Sales
      expenses were $1,629,228 and $1,963,127 for the years ended September 30, 2006
      and 2005, respectively. This is a significant (10%) reduction in expense as
      a
      percent of revenue. The decrease in sales expenses primarily results from the
      elimination of one time charges from the expansion into the Midwest, Southeast
      and Mid-Atlantic regions. New marketing initiatives to increase our subscriber
      base, including expansion into the Midwest, Southeast, inclusive of expansion
      into the Atlanta area, and Mid-Atlantic regions are continuing,
      however, with the increase in revenue and certain expenses being fixed, we
      anticipate a decline in sales expense as a percent of revenue into 2007.





***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 $4,762,336 and
      $2,858,881 for the years ended September 30, 2006 and 2005, respectively, a
      5%
      increase as a percent of revenues. This increase is primarily the result of
      (i)
      the 26% increase in number of subscribers the Company serviced during these
      time
      periods, (ii) the utilization of contractors in new regions to assist with
      service, maintenance and project management, (iii) an increase in our customer
      service quality levels, and (iv) positioning the Company to expand its services
      to a larger subscriber base in the future. Certain personnel and expense
      reduction initiatives implemented to achieve positive EBITDA are expected to
      reduce the expenses as a percentage of revenue from its current level in fiscal
      2007. A breakdown of customer service and operating expenses is as
      follows:




**Year
                Ended September 30, 2006**
            
            **Year
                Ended September 30, 2005**Call
                center expenses
            
            $
            1,718,168
            
            
            36
            %
            $
            1,054,807
            
            
            37
            %General
                operation expenses
            
            
            1,388,743
            
            
            29
            %
            
            787,364
            
            
            28
            %Property
                system maintenance expenses
            
            
            1,655,425
            
            
            35
            %
            
            1,016,710
            
            
            35
            %$
            4,762,336
            
            
            100
            %
            $
            2,858,881
            
            
            100
            %





We
      expect
      an increase in customer service and operating expenses with achieved subscriber
      growth during 2007. As with the sales expense, certain expenses are fixed and
      as
      a result, the customer service and operating expense as a percent of revenue
      is
      expected to decline in 2007. ****


19




***General
        and Administrative Expenses.*** General
        and administrative expenses increased to $5,389,638 from $3,318,866 for the
        years ended September 30, 2006 and 2005, respectively.  Of the general
        and administrative expenses for the years ended September 30, 2006 and 2005,
        the
        Company had total noncash charges included of $2,099,706 and $849,433,
        respectively, described below:


**Years
                Ended September 30,****2006**
            
            **2005**Total
                general and administrative expense
            
            $
            5,389,638
            
            $
            3,318,866**Noncash
                charges:**Share
                based compensation - nonemployees (1)
            
            
            398,394
            
            
            599,910Share
                based compensation - employees (1)
            
            
            1,048,856
            
            
            —Effect
                of variable accounting for stock options
            
            
            —
            
            
            271,885Effect
                of issuance of common stock in exchange for termination of
                agreement
            
            
            —
            
            
            270,200Effect
                of cancellation of common stock and warrants in exchange for termination
                of agreement
            
            
            —
            
            
            (426,041
            )Excess
                discount for the issuance of stock under stock purchase
                plan
            
            
            50,290
            
            
            —Issuance
                of common stock for bonuses
            
            
            99,833
            
            
            —Issuance
                of common stock for wages
            
            
            83,634
            
            
            —Provision
                for compensation expense settled through the issuance of common
                stock
            
            
            253,678
            
            
            —Bad
                debt provision
            
            
            107,044
            
            
            63,658Inventory
                provision
            
            
            57,977
            
            
            69,821Total
                noncash charges
            
            
            2,099,706
            
            
            849,433Total
                G&A net of noncash charges
            
            $
            3,289,932
            
            $
            2,469,433G&A
                expense, net of noncash charges, as a percent of revenue
            
            
            25
            %
            
            27
            %







(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 of $1,048,856 based upon the fair value at the grant
                dates
                for awards to employees for the year ended September 30, 2006 amortized
                over the requisite vesting period. The total stock-based compensation
                expense not yet recognized and expected to vest over the next 24
                months is
                approximately $1,100,000.





Excluding
      $2,099,706 and $849,433 in noncash charges from the years ended September 30,
      2006 and 2005, respectively, general and administrative expenses were $3,289,932
      (25% of revenue), compared to $2,469,433 (27% of revenue). Although we
      anticipate general and administrative expense to increase, general and
      administrative expense should decrease as a percent of revenue in fiscal
      2007.





***Other
      Non-Cash Charges.*** Depreciation
      and amortization expenses increased from $3,055,287 during the fiscal year
      ended
      September 30, 2005 to $4,391,640 during the fiscal year ended September 30,
      2006.  The increase in depreciation and amortization is associated with
      additional equipment being deployed and other intangible assets that
      were acquired over the prior period.





***Other
      Income, Net.*** On
      May
      31, 2005, we sold 447 subscribers to Comcast of Maryland, Inc. for $1,049,048.
      The total gain on the sale of the customers and the related property and
      equipment was $1,046,088 of which, pursuant to the Joint Venture termination
      agreement, AvalonBay Communities, the former joint venture
      partner, received $411,708. The Company’s gain on the sale of this system,
      after expenses, was $634,380 (see Note 7 to the Consolidated Financial
      Statements). On November 8, 2004, we sold 102 subscribers to Comcast of
      Maryland, Inc. for $183,600. The total gain on the sale of customers and the
      related property and equipment was $161,120 of which, pursuant to the Joint
      Venture termination agreement, AvalonBay Communities, the former joint venture
      partner, received $79,804. The Company's gain on the sale of this system,
      after expenses, was $81,316 (see Note 7 to the Consolidated Financial
      Statements). The Company did not sell any subscribers in fiscal
      2006.





20


**RESULTS
      OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2005 AND 2004**




**Year
                Ended September 30, 2005**
            
            
            **Year
                Ended September 30, 2004**
            
            
            **Change****($)**
            
            **Change
                (%)**REVENUE
            
            $
            9,142,228
            
            
            100
            %
            
            $
            4,490,235
            
            
            100
            %
            
            $
            4,651,993
            
            
            104
            %Direct
                costs
            
            
            3,582,407
            
            
            39
            %
            
            
            1,391,464
            
            
            31
            %
            
            
            2,190,943
            
            
            157
            %Sales
                expenses
            
            
            1,963,127
            
            
            22
            %
            
            
            884,523
            
            
            20
            %
            
            
            1,078,604
            
            
            122
            %Customer
                service and operating expenses
            
            
            2,858,881
            
            
            31
            %
            
            
            1,268,694
            
            
            28
            %
            
            
            1,590,187
            
            
            125
            %General
                and administrative expenses
            
            
            3,318,866
            
            
            36
            %
            
            
            5,561,102
            
            
            124
            %
            
            
            (2,242,236
            )
            
            -40
            %Depreciation
                and amortization
            
            
            3,055,287
            
            
            34
            %
            
            
            1,620,164
            
            
            36
            %
            
            
            1,435,123
            
            
            89
            %OPERATING
                LOSS
            
            
            (5,636,340
            )
            
            -62
            %
            
            
            (6,235,712
            )
            
            -139
            %
            
            
            599,372
            
            
            -10
            %Total
                other income (expenses), net
            
            
            955,902
            
            
            10
            %
            
            
            (2,705,423
            )
            
            -60
            %
            
            
            3,661,325
            
            
            -135
            %NET
                LOSS
            
            $
            (4,680,438
            )
            
            -52
            %
            
            $
            (8,941,135
            )
            
            -199
            %
            
            $
            4,260,697
            
            
            -48
            %





***Net
      Loss.*** Primarily as a result of the matters discussed below, we reported a net loss
      of
      $4,680,438 for the year ended September 30, 2005, compared to a net loss of
      $8,941,135 for the year ended September 30, 2004.





***Revenues.*** Revenue
      for the year ended September 30, 2005 of $9,142,228 increased 104% from
      September 30, 2004 revenue of $4,490,235. Revenue for the years ended
      September 30, 2004 and 2003 was comprised of:





**2005**
            
            **2004**Private
                Cable Programming Revenue
            
            
            41
            %
            
            37
            %DTH
                Programming Revenue and Subsidy
            
            
            47
            %
            
            51
            %Internet
                Access Fees
            
            
            8
            %
            
            8
            %Installation
                Fees, Wiring and other Sales
            
            
            4
            %
            
            4
            %





The
      revenue increase is attributable to the increase in number of subscribers over
      the prior year due to organic growth in subscribers as well as a substantial
      increase in the average revenue per subscriber and integrating the 2004
      acquisitions.





***Direct
      Costs.*** Direct
      costs are primarily comprised of private cable programming, monthly recurring
      Internet T-1 line connections and costs relating to installation services and
      are 39% of revenue for the year ended September 30, 2005 compared to 31%
      for the same period in the prior year. Direct costs increased to $3,582,407
      as
      of September 30, 2005 from $1,391,464 in the year ended September 30,
      2004. This increase was primarily due to the carrying for a full year of private
      cable subscribers acquired from Direct Satellite Inc. and PCM Acquisitions
      Corp.
      late in fiscal 2004.





***Sales
      Expenses.*** Sales
      expenses consist mainly of salaries, commissions, marketing materials, trade
      shows, advertising and promotion. Sales expenses increased to $1,963,127 as
      of
      September 30, 2005 from $884,523 in the year ended September 30, 2004.
      The increase in sales expenses primarily results from new marketing initiatives
      to increase our subscriber base, including expansion into the Midwest, Southeast
      and Mid-Atlantic regions.





***Customer
      Service Expenses.*** Customer
      service expenses consist mainly of call center, general operations and property
      and customer technical services. Customer service expenses were $2,858,881
      for
      the year ended September 30, 2005 compared to $1,268,694 for the year ended
      September 30, 2004. This increase is primarily the result of a 50% increase
      in our subscriber base over last year as well as providing better service and
      positioning the Company to continue to expand its services to a larger
      subscriber base in the future. A breakdown of customer service and operating
      expenses is as follows:




**Year
                Ended September 30, 2005**
            
            **Year
                Ended September 30, 2004**Call
                center expenses
            
            $
            1,054,807
            
            
            37
            %
            $
            639,589
            
            
            51
            %General
                operation expenses
            
            
            787,364
            
            
            28
            %
            
            360,459
            
            
            28
            %Property
                system maintenance expenses
            
            
            1,016,710
            
            
            35
            %
            
            268,646
            
            
            21
            %$
            2,858,881
            
            
            100
            %
            $
            1,268,694
            
            
            100
            %





21




***General
      and Administrative Expenses.*** General
      and administrative expenses decreased to $3,318,866 in 2005 from $5,561,102
      in
      the year ended September 30, 2004. The decrease is primarily the result of
      noncash charges of $4,004,276 in 2004 decreasing to $849,433 in 2005. The
      noncash charges for fiscal 2005 and 2004 are set forth below:





**Years
                Ended September 30,****2005**
            
            **2004**Total
                general and administrative expense
            
            $
            3,318,866
            
            $
            5,561,102**Noncash
                charges:**Share
                based compensation - nonemployees
            
            
            599,910
            
            
            757,815Effect
                of issuance of common stock, options and warrants in exchange for
                services
            
            
            —
            
            
            313,040Effect
                of variable accounting for stock options
            
            
            271,885
            
            
            2,801,682Effect
                of issuance of common stock in exchange for termination of
                agreement
            
            
            270,200
            
            
            —Effect
                of cancellation of common stock and warrants in exchange for termination
                of agreement
            
            
            (426,041
            )
            
            —Bad
                debt provision
            
            
            63,658
            
            
            131,739Inventory
                provision
            
            
            69,821
            
            
            —Total
                noncash charges
            
            
            849,433
            
            
            4,004,276Total
                G&A net of noncash charges
            
            $
            2,469,433
            
            $
            1,556,826G&A
                expense, net of noncash charges, as a percent of revenue
            
            
            27
            %
            
            35
            %





Excluding
      these noncash charges, general and administrative expenses were $2,469,433,
      an
      increase of 59% from September 30, 2004. This was primarily the result of (i)
      the expenses associated with opening the Chicago, South Florida and Washington,
      DC offices, (ii) increased professional fees relating to regulatory filings
      (iii) increased professional fees relating to preliminary planning for
      Sarbanes-Oxley compliance, and (iv) increased staff.





***Other
      Non-Cash Charges.*** Depreciation
      and amortization expenses increased from $1,620,164 during the fiscal year
      ended
      September 30, 2004 to $3,055,287 during the fiscal year ended September 30,
      2005.  The increase in depreciation and amortization is associated with
      additional equipment being deployed and other intangible assets that
      were acquired over the prior period.  There was no noncash interest
      expense for the year ended September 30, 2005, as compared to $2,735,796
      associated with the amortization of deferred finance costs and debt discount
      from warrants issued and charges to interest expense from the cashless exercise
      of warrants by investors for the year ended September 30,
      2004.





***Other
      Income (Expense), Net.*** On
      May
      31, 2005, we sold 447 subscribers to Comcast of Maryland, Inc. for $1,049,048.
      The total gain on the sale of the customers and the related property and
      equipment was $1,046,088 of which, pursuant to the Joint Venture termination
      agreement, AvalonBay Communities, the former joint venture
      partner, received $411,708. The Company’s gain on the sale of this system,
      after expenses, was $634,380 (see Note 7). On November 8, 2004, we sold 102
      subscribers to Comcast of Maryland, Inc. for $183,600. The total gain on the
      sale of customers and the related property and equipment was $161,120 of which,
      pursuant to the Joint Venture termination agreement, AvalonBay Communities,
      the
      former joint venture partner, received $79,804. The Company's gain on the
      sale of this system, after expenses, was $81,316 (see Note 7 to the Consolidated
      Financial Statements).




22




**LIQUIDITY
      AND CAPITAL RESOURCES**





During
      the years ended September 30, 2006, 2005 and 2004, we recorded a net
      loss of $8,011,054, $4,680,438 and $8,941,135, respectively. We had negative
      cash flows from operating activities of $1,992,912, $852,929 and $744,693 during
      the years ended September 30, 2006, 2005 and 2004, respectively. At
      September 30, 2006, we had an accumulated deficit of $38,956,353.





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 (“Financing”) to fund the Company's subscriber growth.
      The Financing was specifically designed to provide a permanent funding solution
      to the Company’s subscriber growth capital requirements. The $20 million debt
      Financing (subject to a borrowing base) is a non-amortizing five year term
      facility. The size of the Financing 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 and subscriber growth, an increasing
      percentage of future subscriber acquisition costs should be funded from earnings
      in fiscal 2007, despite the availability of more capital through an increasing
      borrowing base.




The
      Financing is secured by the Company’s cash and temporary investments, accounts
      receivable, inventory, access agreements and certain property, plant and
      equipment. The Financing contains covenants limiting the Company’s ability to,
      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.





The
      Financing 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 four $5 million increments. The Company is under no obligation
      to
      draw any increment beyond the first $5 million nor is it obligated 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%, and the final $5 million at prime plus 1%. The
      Company is under no obligation to draw any increment beyond the first $5
      million. However, the
      Financing requires that to access funds above $10 million that the Company
      comply with a quarterly covenant of positive EBITDA and maintain certain
      subscriber growth rates. As of September 30, 2006, we had $3,879,569
      outstanding under the Financing which is due on September 11, 2011.




The
      Financing 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.





***Cash
      Position.*** At
      September 30, 2006, we had cash and cash equivalents of $3,238,939 compared
      to $9,358,021 at September 30, 2005.





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, described above.





Due
      to
      our cash position as of the year ended September 30, 2006, primarily from the
      Financing, we believe that the Company has adequate financial resources to
      fund
      operations. However, this is a capital-intensive business and any increased
      rate
      of growth may require the Company to exceed the initial $5 million increment
      of
      the $20 million revolving credit facility during fiscal 2007.




23





On
      November 24, 2004, the Company completed a $16.25 million private equity
      placement, pursuant to which the Company sold 6,063,440 units. Each unit
      consisted of one share of common stock and three-tenths of one three-year
      warrant to purchase one share of common stock at an exercise price of $3.40
      per
      share, to accredited investors at a per unit price of $2.68. After the payment
      of fees and expenses, the Company received net proceeds of
      $15,045,444.


***Operating
        Activities.*** Our operations used net cash of $1,992,912, $852,929 and $744,693 for the
        years
        ended September 30, 2006, 2005 and 2004, respectively. Net cash used from
        operating activities included a $169,614, $1,168,015 and $44,769 increase
        in our
        accounts payable and accrued liabilities during the years ended September
        30,
        2006, 2005 and 2004, respectively. Additionally, during the years ended
        September 30, 2006, 2005 and 2004 the net increase in accounts receivable
        was
        $186,825, $687,404 and $618,957, respectively.  Our net losses of
        $8,011,054, $4,680,438 and $8,941,135 for the years ended September 30, 2006,
        2005 and 2004, 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 $6,245,083, $3,904,720 and
        $5,624,440 for the same periods.
 
 ***Investing
        Activities.*** During the year ended September 30, 2006, we purchased $7,549,353 of equipment
        relating to subscriber additions and paid $42,864 for the acquisition of
        other
        intangible assets.
 
 During
        the year ended September 30, 2005, we purchased $11,402,476 of equipment
        relating to subscriber additions and paid $390,600 for the acquisition of
        other
        long-term assets. Additionally, we received $1,232,648 in proceeds from the
        sale
        of 549 subscribers in AvalonBay properties, which had been part of a
        joint venture. The Company purchased AvalonBay's interest in the Joint Venture
        on July 28, 2003. The Company's gain on the sale of these private cable systems,
        after expenses, was $715,696.
 
 During
        the year ended September 30, 2004, we purchased $2,132,351 of equipment relating
        to subscriber additions during the period and for future periods and paid
        $319,232 for the acquisition of new subscribers. Specifically, (i) on June
        1,
        2004, we purchased $819,159 in equipment and $1,695,841 for the acquisition
        of
        subscribers from Chicago based Direct Satellite, Inc. for a total of $2,500,000
        in cash, and (ii) o n
        September 20, 2004, we purchased $102,921 in accounts receivable, assumed
        (37,500) in liabilities, $779,121 in equipment and $611,249 for the acquisition
        of subscribers from PCM Acquisitions Corporation for a total of
        $1,500,000.
 
 ***Financing
        Activities.*** 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 to the Company of $16,544, (iv) entered
        into a Financing for a senior secured $20,000,000 revolving five year credit
        facility and received $3,879,569 in proceeds, and (v) incurred $444,910 in
        deferred finance costs.
 
 During
        the year ended September 30, 2005, we used $73,532 and $3,694 for the repayment
        of certain notes payable and entered into a capital lease agreement in the
        amount of $35,368 and received proceeds of $200,000 from the issuance of
        a note
        payable to Wachovia Bank.  Regarding equity financing activities, we (i)
        issued 449,667 shares of common stock upon the exercise of warrants to purchase
        common shares, which resulted in net proceeds to the Company of $448,958,
        (ii)
        issued 1,004,104 common shares upon the exercise of options, which resulted
        in
        net proceeds to the Company of $409,772, (iii) issued 18,040 shares of common
        stock through the Employee Stock Purchase Plan, which resulted in net proceeds
        of $38,708, and (iv) closed a $16,250,000 private equity placement financing
        for
        net proceeds of $15,045,444.
 
 During
        the year ended September 30, 2004, we used $91,721 for the repayment of certain
        notes payable and converted one trade account payable in the total amount
        of
        $19,367 into a short term note payable. Regarding
        equity financing activities ,
        (i)
        issued 78,314 shares of common stock in connection with conversion of notes
        payable and accrued interest thereon in the amount of $25,844, (ii) issued
        103,353 shares of common stock for accrued salaries of $79,134, (iii) issued
        42,703 shares of common stock through the Employee Stock Purchase Plan, which
        resulted in net proceeds of $41,531, (iv) issued 40,135 shares of common
        stock
        with a fair value of $28,094 as settlement of a trade accounts payable, (v)
        issued 7,997,067 common shares upon the exercise of warrants to purchase
        common
        shares, which resulted in net proceeds to the Company of $2,586,326, (vi)
        issued
        1,091,069 common shares upon the exercise of options, which resulted in net
        proceeds to the Company of $606,100, and (viii) warrants to purchase 950,000
        common shares were exercised pursuant to cashless provisions with 821,971
        shares
        being issued and 128,029 warrants cancelled in exchange for the exercise
        price.
 
 On
        November 24, 2003, the Company closed on the sale of 22 units in a private
        placement pursuant to a Confidential Offering Memorandum, with each unit
        consisting of 100,000 common shares and 50,000 warrants to purchase common
        shares.  The price of the common shares and the exercise price of the
        warrants to purchase common shares were set as of the offering date at $1.50
        and
        $1.75 per share, respectively, for $3,300,000 in net proceeds to the Company.
 
 On
        May
        27, 2004, the Company closed a private placement of its securities pursuant
        to a
        Confidential Offering Memorandum of 1,314,532 units with each unit consisting
        of
        two common shares and one three-year warrant to purchase common shares. The
        price of the common shares and the exercise price of warrants to purchase
        common
        shares were set as of the offering date at $2.10 and $2.46 per share,
        respectively. The Company received net proceeds of $5,049,613 and issued
        2,629,064 common shares at effectively $2.10 per share and 1,314,532 warrants
        to
        purchase common shares.





***Working
      Capital.*** As
      of
      September 30, 2006 and 2005, we had working capital of $2,063,075 and
      $7,784,821, respectively. The Financing discussed earlier provided $3,879,569
      in
      proceeds towards working capital.





***Capital
      Commitments and Contingencies.*** We
      have access agreements with the owners of multiple dwelling unit 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 cash 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 September 11, 2006 Financing become
      unavailable to us, there is no guarantee that we will be able to sustain an
      increasing rate of growth.




24




**CONTRACTUAL
        OBLIGATIONS AND OTHER COMMERCIAL COMMITTMENTS**
  As
        of
        September 30, 2006, the resources required for scheduled payment of contractual
        obligations were as follows :
  **Total**
              
              **Due
                      in**
                    **1
                      year**
                    **or
                      less**
              
              **Due
                      after**
                    **1
                      year through**
                    **3
                      years**
              
              **Due
                      after**
                    **3
                      years through**
                    **5
                      years**Capital
                  leases (equipment):
              
              $
              167,349
              
              $
              79,306
              
              $
              88,043
              
              $
              -Operating
                  leases
              
              
              791,092
              
              
              334,414
              
              
              456,678
              
              
              -Notes
                  payable
              
              
              150,847
              
              
              48,732
              
              
              102,115
              
              
              -Loan
                  agreement
              
              
              3,879,569
              
              
              -
              
              
              -
              
              
              3,879,569Total
                  contractual obligations
              
              $
              4,988,857
              
              $
              462,452
              
              $
              646,836
              
              $
              3,879,569
 
 **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
      September 29, 2003, the Company entered into a new System Operator Agreement
      with DIRECTV, Inc. for the delivery of DIRECTV digital satellite programming.
      Under the new agreement, the upfront activation commission that the Company
      receives from DIRECTV for each new subscriber is paid to the Company based
      on
“gross” subscriber additions in a given month. However, the Company must obtain
      an annual commitment from a subscriber for DIRECTV programming in order to
      receive the commission. The commission can be proportionally “charged back” by
      DIRECTV only if a subscriber disconnects within the annual commitment period.
      Because after twelve months no portion of the commission can be “charged
      back,” the Company recognizes this revenue over one year.





In
      late
      December 2004, the Company executed an addendum to the September 29, 2003 System
      Operator Agreement with DIRECTV, Inc. effective as of November 15, 2004. The
      new
      addendum provides 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 addendum
      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, the portion of the “Individual Subscriber PPC” that relates to the
      equipment discount is recognized in conjunction with the depreciation of the
      related equipment over seven years.





*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.





25




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 year ended September 30, 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.
  Prior
        to
        the adoption of SFAS 123R, the Company accounted for its stock-based employee
        compensation plans under the intrinsic value method in accordance with
        Accounting Principles Board Opinion 25, “Accounting for Stock Options issued to
        Employees” and provided proforma information as if a fair value based method had
        been used to determine the cost of options and that the cost was amortized
        over
        the vesting period of the options. We estimated the fair value of options
        issued to employees for pro-forma disclosure purposes using an option-pricing
        model (generally, the Black-Scholes model) that meets the criteria set forth
        in
        Statement of Financial Accounting Standards No. 123, “Accounting for
        Stock-Based Compensation” (“SFAS 123”). 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 proforma fair values of options
        and warrants using the Black-Scholes option pricing model, we used the following
        assumptions in the year ended September 30, 2006, 2005 and 2004:
  **2006**
              
              **2005**
              
              **2004**Expected
                  volatility
              
              
              52%
              
              
              76%
              
              
              68%Risk-free
                  interest rate
              
              
              4.72%
              
              
              4.00%
              
              
              4.00%Expected
                  years of option life
              
              
              1
                    to 5
              
              
              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, 2006 and 2005.





*Valuation
      of long-lived assets:*





We
      assess
      the recoverability of long-lived tangible and intangible assets whenever we
      determine that events or changes in circumstances indicate that their carrying
      amount may not be recoverable. Our assessment is primarily based upon our
      estimate of future cash flows associated with these assets. Although there
      has
      been a sustained weakness in our operating results through September 30,
      2006, we continue to project income in the future. Accordingly, we have
      determined that there has not been an impairment of any of our long-lived
      assets. However, should our operating results deteriorate, we may determine
      that
      some portions of our long-lived tangible or intangible assets are impaired.
      Such
      determination could result in non-cash charges to income that could materially
      affect our consolidated financial position or results of operations for that
      period.




26




**RECENT
        ACCOUNTING PRONOUNCEMENTS**
 
 In
        December 2004, the FASB issued 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.
 
 In
        June
        2005, the Financial Accounting Standards Board (“FASB”) issued Statement of
        Financial Accounting Standards No. 154, “Accounting Changes and Error
        Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3”. This
        Statement replaces APB Opinion No. 20, “Accounting Changes,” and FASB Statement
        No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and
        changes the requirements for accounting for and reporting of a change in
        accounting principle. SFAS 154 requires retrospective application to financial
        statements of prior periods’ for a voluntary change in accounting principle
        unless it is impracticable. SFAS 154 is effective for accounting changes
        and
        corrections of errors made in fiscal years beginning after December 15, 2005.
        The adoption of SFAS 154 is not expected to have a material impact on our
        financial position and results of operations.
  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 generally accepted
        accounting principles. 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 financial statements.


The
      Financial Accounting Standards Board, the Emerging Issues Task Force (the
“EITF”) and the Securities and Exchange Commission have issued certain other
      accounting pronouncements and regulations as of September 30, 2006 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 2006, 2005 and 2004, 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.




**Item
      7A.**  **QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**




Our
      operating results and cash flows are subject to minor fluctuations from changes
      in foreign currency exchange rates and interest rates.




We
      maintain relationships with certain suppliers in Canada. To date, the market
      risk associated with foreign currency exchange rates has not been material
      in
      relation to the Company's financial position, results of operations, or cash
      flows. The Company does not have any significant trade accounts receivable,
      trade accounts payable, or commitments in a currency other than that of the
      reporting unit's functional currency. A 10% adverse change in the underlying
      foreign currency exchange rates would not have a material impact to our
      financial condition. As such, the Company does not currently use derivative
      financial instruments to manage the exposure in its non-U.S. operations or
      for
      trading or speculative purposes.




The
      Company seeks to manage its exposure to adverse interest rate changes through
      its normal operations and does not use any derivative financial instruments
      to
      manage such exposure. The Company uses a line of credit to provide for a portion
      of its financing needs. At September 30, 2006, the balance outstanding under
      this arrangement was $3,879,569. Interest costs would increase by approximately
      $39,335, annually, for each percentage point increase in the rate of interest
      on
      this credit facility, assuming current balances.




27




Our
      interest income is immaterially exposed to interest rate fluctuations on our
      short-term investments that are comprised of United States government treasury
      notes, which we hold on an available-for-sale basis. We have not entered into
      derivative financial instruments.





**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, 2006 and
      2005, 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, 2006. 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, 2006 and
      2005, and their results of operations and cash flows for each of the years
      in
      the three year period ended September 30, 2006, 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
              November 22,
                2006







28




**MDU
      COMMUNICATIONS INTERNATIONAL, INC.**


**Consolidated
      Balance Sheets**


**September
      30, 2006 and 2005**





**September
                    30,**
                **2006**
            
            **September
                    30,**
                **2005****ASSETS**CURRENTCash
                and cash equivalents
            
            $
            3,238,939
            
            $
            9,358,021Accounts
                receivable- trade, net of an allowance of $162,402 and
                $151,045
            
            
            1,642,179
            
            
            1,562,398Prepaid
                expenses and deposits
            
            
            387,812
            
            
            200,345TOTAL
                CURRENT ASSETS
            
            
            5,268,930
            
            
            11,120,764Telecommunications
                equipment inventory, net of reserve of $0 and
                $69,821
            
            
            906,448
            
            
            963,081Property
                and equipment, net of accumulated depreciation of $8,384,705 and
                $4,954,301
            
            
            18,719,922
            
            
            14,435,784Intangible
                assets, net of accumulated amortization of $3,241,154 and
                $2,279,918
            
            
            1,822,415
            
            
            2,740,787Deferred
                financing costs, net of accumulated amortization of $7,415
            
            
            451,304
            
            
            —TOTAL
                ASSETS
            
            $
            27,169,019
            
            $
            29,260,416**LIABILITIES
                and STOCKHOLDERS’ EQUITY**CURRENT
                LIABILITIESAccounts
                payable
            
            $
            1,131,462
            
            $
            1,196,504Other
                accrued liabilities
            
            
            1,348,999
            
            
            1,114,343Current
                portion of deferred revenue
            
            
            597,356
            
            
            934,270Current
                portion of note payable
            
            
            48,732
            
            
            45,670Current
                portion of capital lease obligations
            
            
            79,306
            
            
            45,156TOTAL
                CURRENT LIABILITIES
            
            
            3,205,855
            
            
            3,335,943Deferred
                revenue, net of current portion
            
            
            251,522
            
            
            —Credit
                line borrowing, net of debt discount
            
            
            3,603,378
            
            
            —Note
                payable, net of current portion
            
            
            102,115
            
            
            150,636Capital
                lease obligations, net of current portion
            
            
            88,043
            
            
            24,575TOTAL
                LIABILITIES
            
            
            7,250,913
            
            
            3,511,154COMMITMENTS
                AND CONTINGENCIES**STOCKHOLDERS’
                EQUITY**Preferred
                stock, par value $0.001; 5,000,000 shares authorized, none issued
            
            
            —
            
            
            —Common
                stock, par value $0.001; 70,000,000 shares authorized, 50,462,121
                and
                49,812,922 shares issued and outstanding
            
            
            50,462
            
            
            49,815Additional
                paid-in capital
            
            
            58,823,997
            
            
            57,194,221Unearned
                compensation
            
            
            —
            
            
            (549,475
            )Accumulated
                deficit
            
            
            (38,956,353
            )
            
            (30,945,299
            )TOTAL
                STOCKHOLDERS’ EQUITY
            
            
            19,918,106
            
            
            25,749,262TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            27,169,019
            
            $
            29,260,416





See
      accompanying notes to the consolidated financial statements




29




**MDU
      COMMUNICATIONS INTERNATIONAL, INC.**


**Consolidated
      Statements of Operations**


**Years
      Ended September 30, 2006, 2005 and 2004**






**For
                the years ended September
                30,****2006**
            
            
            **2005**
            
            
            **2004**REVENUE
            
            $
            13,366,205
            
            $
            9,142,228
            
            $
            4,490,235OPERATING
                EXPENSESDirect
                costs
            
            
            5,307,770
            
            
            3,582,407
            
            
            1,391,464Sales
                expenses
            
            
            1,629,228
            
            
            1,963,127
            
            
            884,523Customer
                service and operating expenses
            
            
            4,762,336
            
            
            2,858,881
            
            
            1,268,694General
                and administrative expenses
            
            
            5,389,638
            
            
            3,318,866
            
            
            5,561,102Depreciation
                and amortization
            
            
            4,391,640
            
            
            3,055,287
            
            
            1,620,164TOTALS
            
            
            21,480,612
            
            
            14,778,568
            
            
            10,725,947OPERATING
                LOSS
            
            
            (8,114,407
            )
            
            (5,636,340
            )
            
            (6,235,712
            )Other
                income (expense)Gain
                on sale of customers
            
            
            —
            
            
            715,696
            
            
            —Gain
                on settlement of accounts payable
            
            
            —
            
            
            15,190
            
            
            33,840Interest
                income
            
            
            128,909
            
            
            232,787
            
            
            48,033Interest
                expense
            
            
            (25,556
            )
            
            (7,771
            )
            
            (2,755,115
            )Other
            
            
            —
            
            
            —
            
            
            (32,181
            )NET
                LOSS
            
            $
            (8,011,054
            )
            $
            (4,680,438
            )
            $
            (8,941,135
            )BASIC
                AND DILUTED LOSS PER COMMON SHARE
            
            $
            (0.16
            )
            $
            (0.10
            )
            $
            (0.24
            )WEIGHTED
                AVERAGE COMMON SHARES OUTSTANDING
            
            
            50,204,409
            
            
            48,479,204
            
            
            37,607,929





See
      accompanying notes to the consolidated financial statements





30




**MDU
      COMMUNICATIONS INTERNATIONAL, INC.**


**Consolidated
      Statements of Stockholders’ Equity**


**Years
      Ended September 30, 2006, 2005 and 2004**




**Common
                stock**
            
            **Additional
                paid-in**
            
            **Unearned**
            
            **Accumulated****Shares**
            
            **Amount**
            
            **capital**
            
            **compensation**
            
            **deficit**
            
            **Total****Balance
                October 1, 2003**
            
            
            27,751,479
            
            $
            27,750
            
            $
            21,822,509
            
            $
            (83,333
            )
            $
            (17,323,726
            )
            $
            4,443,200Conversion
                of notes payable and accrued interest
            
            
            78,314
            
            
            79
            
            
            25,765
            
            
            
            
            
            
            
            
            25,844Issuance
                of common stock for accrued compensation
            
            
            103,353
            
            
            103
            
            
            79,031
            
            
            
            
            
            
            
            
            79,134Issuance
                of common stock for compensation
            
            
            182,190
            
            
            182
            
            
            413,284
            
            
            (405,626
            )
            
            
            
            
            7,840Issuance
                of common stock as settlement of accounts payable
            
            
            40,135
            
            
            40
            
            
            28,054
            
            
            
            
            
            
            
            
            28,094Issuance
                of common stock in exchange for services
            
            
            100,000
            
            
            100
            
            
            229,900
            
            
            
            
            
            
            
            
            230,000Issuance
                of common stock and warrants in connection with private placement
            
            
            4,829,064
            
            
            4,829
            
            
            8,344,785
            
            
            
            
            
            
            
            
            8,349,614Effect
                of variable accounting for options
            
            
            
            
            
            
            
            
            2,801,682
            
            
            
            
            
            
            
            
            2,801,682Issuance
                of common stock for warrants exercised, including effects of cashless
                exercises
            
            
            7,997,067
            
            
            7,998
            
            
            5,299,477
            
            
            
            
            
            
            
            
            5,307,475Issuance
                of common stock for options exercised, including effects of cashless
                exercises
            
            
            1,091,069
            
            
            1,092
            
            
            605,009
            
            
            
            
            
            
            
            
            606,101Issuance
                of common stock, options and warrants in exchange for services
            
            
            500,000
            
            
            500
            
            
            2,473,400
            
            
            (2,398,700
            )
            
            
            
            
            75,200Amortization
                of unearned compensation
            
            
            
            
            
            
            
            
            
            
            
            757,815
            
            
            
            
            
            757,815Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (8,941,135
            )
            
            (8,941,135
            )**Balance,
                October 1, 2004**
            
            
            42,672,671
            
            $
            42,673
            
            $
            42,122,896
            
            $
            (2,129,844
            )
            $
            (26,264,861
            )
            $
            13,770,864Issuance
                of common stock for accrued compensation
            
            
            18,040
            
            
            18
            
            
            38,690
            
            
            
            
            
            
            
            
            38,708Issuance
                of common stock and warrants in connection with private placement
            
            
            6,063,440
            
            
            6,063
            
            
            15,039,381
            
            
            
            
            
            
            
            
            15,045,444Issuance
                of common stock for warrants exercised
            
            
            449,667
            
            
            450
            
            
            448,508
            
            
            
            
            
            
            
            
            448,958Issuance
                of common stock for options exercised
            
            
            1,004,104
            
            
            1,006
            
            
            408,766
            
            
            
            
            
            
            
            
            409,772Effect
                of variable accounting for options
            
            
            
            
            
            
            
            
            271,885
            
            
            
            
            
            
            
            
            271,885Issuance
                of common stock in exchange for termination of agreements
            
            
            105,000
            
            
            105
            
            
            468,595
            
            
            (198,500
            )
            
            
            
            
            270,200Cancellation
                of common stock and warrants in exchange for termination of
                agreements
            
            
            (500,000
            )
            
            (500
            )
            
            (1,604,500
            )
            
            1,178,959
            
            
            
            
            
            (426,041
            )Amortization
                of unearned compensation
            
            
            
            
            
            
            
            
            
            
            
            599,910
            
            
            
            
            
            599,910Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (4,680,438
            )
            
            (4,680,438
            )**Balance,
                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 for accrued compensation
            
            
            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 credit line agreement
            
            
            
            
            
            
            
            
            290,000
            
            
            
            
            
            
            
            
            290,000Share-based
                compensation - employees
            
            
            
            
            
            
            
            
            1,048,856
            
            
            
            
            
            
            
            
            1,048,856Share-based
                compensation credit - nonemployees
            
            
            
            
            
            
            
            
            (87,952
            )
            
            
            
            
            
            
            
            (87,952
            )Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (8,011,054
            )
            
            (8,011,054
            )**Balance,
                September 30, 2006**
            
            
            50,462,121
            
            $
            50,462
            
            $
            58,823,997
            
            $
            —
            
            $
            (38,956,353
            )
            $
            19,918,106




See
      accompanying notes to the consolidated financial statements


31


**MDU
      COMMUNICATIONS INTERNATIONAL, INC.**


**Consolidated
      Statements of Cash Flows**


**Years
      ended September 30, 2006, 2005 and 2004**




**For
                the years ended September 30,****2006**
            
            **2005**
            
            **2004**OPERATING
                ACTIVITIESNet
                loss
            
            $
            (8,011,054
            )
            $
            (4,680,438
            )
            $
            (8,941,135
            )Adjustments
                to reconcile net loss to net cash used in operating activities:Bad
                debt provision
            
            
            107,044
            
            
            63,658
            
            
            131,739Inventory
                provision
            
            
            57,977
            
            
            69,821
            
            
            —Depreciation
                and amortization
            
            
            4,391,640
            
            
            3,055,287
            
            
            1,620,164Share-based
                compensation expense - employees
            
            
            1,048,856
            
            
            —
            
            
            —Share-based
                compensation expense - nonemployees
            
            
            398,394
            
            
            599,910
            
            
            757,815Effect
                of variable accounting for stock options
            
            
            —
            
            
            271,885
            
            
            2,801,682Effect
                of issuance of common stock, options and warrants in exchange for
                services
            
            
            —
            
            
            —
            
            
            313,040Effect
                of issuance of common stock in exchange for termination of agreement
            
            
            —
            
            
            270,200
            
            
            —Effect
                of cancellation of common stock and warrants in exchange for termination
                of agreement
            
            
            —
            
            
            (426,041
            )
            
            —Charge
                to interest expense for amortization of deferred financing costs
                and debt
                discount
            
            
            7,415
            
            
            —
            
            
            14,645Charge
                to interest expense from cashless exercise of warrants by
                lenders
            
            
            —
            
            
            —
            
            
            2,721,151Compensation
                expense for issuance of common stock through employee stock purchase
                plan
            
            
            50,290
            
            
            —
            
            
            —Compensation
                expense for issuance of common stock for employee bonuses
            
            
            99,833
            
            
            —
            
            
            —Compensation
                expense for issuance of common stock for employee services
            
            
            83,634
            
            
            —
            
            
            —Gain
                on settlement of accounts payable
            
            
            —
            
            
            (15,190
            )
            
            (33,840
            )Gain
                on sale of customers
            
            
            —
            
            
            (715,696
            )
            
            —Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (186,825
            )
            
            (687,404
            )
            
            (618,957
            )Prepaid
                expenses and deposits
            
            
            (124,338
            )
            
            (101,511
            )
            
            364,480Accounts
                payable
            
            
            (65,043
            )
            
            602,579
            
            
            157,866Other
                accrued liabilities
            
            
            234,657
            
            
            565,436
            
            
            (113,097
            )Deferred
                revenue
            
            
            (85,392
            )
            
            274,575
            
            
            79,754Net
                cash used in operating activities
            
            
            (1,992,912
            )
            
            (852,929
            )
            
            (744,693
            )INVESTING
                ACTIVITIESPurchase
                of property and equipment
            
            
            (7,549,353
            )
            
            (11,402,476
            )
            
            (2,132,351
            )Proceeds
                from sale of customers and property and equipment
            
            
            —
            
            
            1,232,648
            
            
            —Acquisition
                of intangible assets
            
            
            (42,864
            )
            
            (390,600
            )
            
            (319,232
            )Acquisition
                of Direct Satellite, Inc.
            
            
            —
            
            
            —
            
            
            (2,515,000
            )Acquisition
                of PCM Acquisitions Corp.
            
            
            —
            
            
            —
            
            
            (1,455,691
            )Net
                cash used in investing activities
            
            
            (7,592,217
            )
            
            (10,560,428
            )
            
            (6,422,274
            )FINANCING
                ACTIVITIESProceeds
                from credit line borrowings
            
            
            3,879,569
            
            
            —
            
            
            —Deferred
                financing costs
            
            
            (444,910
            )
            
            —
            
            
            —Proceeds
                from notes payable
            
            
            —
            
            
            200,000
            
            
            —Payments
                of notes payable
            
            
            (45,459
            )
            
            (3,694
            )
            
            (91,721
            )Proceeds
                from private placement of common stock and warrants
            
            
            —
            
            
            15,045,444
            
            
            8,349,614Proceeds
                from purchase of common stock through employee stock purchase
                plan
            
            
            41,718
            
            
            38,708
            
            
            41,531Proceeds
                from options exercised
            
            
            16,544
            
            
            409,772
            
            
            606,100Proceeds
                from warrants exercised
            
            
            87,500
            
            
            448,958
            
            
            2,586,328Payments
                of capital lease obligations
            
            
            (68,915
            )
            
            (73,532
            )
            
            (126,938
            )Net
                cash provided by financing activities
            
            
            3,466,047
            
            
            16,065,656
            
            
            11,364,914**NET
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS**
            
            
            (6,119,082
            )
            
            4,652,299
            
            
            4,197,947**CASH
                AND CASH EQUIVALENTS, BEGINNING OF YEAR**
            
            
            9,358,021
            
            
            4,705,722
            
            
            507,775**CASH
                AND CASH EQUIVALENTS, END OF YEAR**
            
            $
            3,238,939
            
            $
            9,358,021
            
            $
            4,705,722




32




**For
                the years ended September 30,****2006**
            
            **2005**
            
            **2004****SUPPLEMENTAL
                DISCLOSURE OF NON-CASH INVESTING AND FINANCING
                ACTIVITIES:**Conversion
                of notes payable and accrued interest into 78,314 shares of common
                stock
            
            $
            —
            
            $
            —
            
            $
            25,844Issuance
                of 126,720, 0 and 60,650 shares, respectively, of common stock
                for accrued compensation
            
            $
            133,924
            
            $
            —
            
            $
            37,603Issuance
                of 40,135 shares of common stock as settlement of accounts
                payable
            
            $
            —
            
            $
            —
            
            $
            28,094Issuance
                of warrants in connection with credit line borrowing
                agreement
            
            $
            290,000
            
            $
            —
            
            $
            —Equipment
                acquired through capital lease obligations
            
            $
            166,533
            
            $
            35,368
            
            $
            92,418**SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATION**Interest
                paid
            
            $
            25,556
            
            $
            7,771
            
            $
            19,319





See
      accompanying notes to the consolidated financial statements





33




**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 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, 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 financing costs on the
        consolidated balance sheet 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
        interest method over the term of the related loan.
 
 *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
  34
 
 *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, 2006, 2005 and 2004.
 
 *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
        September 29, 2003, the Company entered into a new System Operator Agreement
        with DIRECTV, Inc. for the delivery of DIRECTV digital satellite programming.
        Under the new agreement, the upfront activation commission that the Company
        receives from DIRECTV for each new subscriber is paid to the Company based
        on
“gross” subscriber additions in a given month. However, the Company must obtain
        an annual commitment from a subscriber for DIRECTV programming in order to
        receive the commission. The commission can be proportionally “charged back” by
        DIRECTV only if a subscriber disconnects within the annual commitment period.
        Because after twelve months no portion of the commission can be “charged back,”
the Company recognizes this revenue ratably over one year.
 
 In
        late
        December 2004, the Company executed an addendum to the above September 29,
        2003
        System Operator Agreement effective as of November 15, 2004. The new addendum
        provides 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 addendum
        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, the portion of the “Individual Subscriber PPC” that relates to the
        equipment discount is recognized in conjunction with the depreciation of
        the
        related equipment over seven years.
  35
  *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, 2006, 2005 and 2004, 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, 2006, 2005 and 2004 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:
 
 **For
                  the years ended September 30,****2006**
              
              **2005**
              
              **2004**Warrants
              
              
              6,298,885
              
              
              5,648,885
              
              
              4,226,348Options
              
              
              2,602,072
              
              
              3,300,342
              
              
              2,539,306Potentially
                  dilutive common shares
              
              
              8,900,957
              
              
              8,949,227
              
              
              6,765,654
 
 *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, 2006, 2005 and 2004 and cumulative
        translation gains and losses as of September 30, 2006 and 2005 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 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 year ended September 30, 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.
  36
  Prior
        to
        the adoption of SFAS 123R, the Company accounted for its stock-based employee
        compensation plans under the intrinsic value method in accordance with APB
        25
        and provided pro forma information as if a fair value-based method had been
        used
        as further disclosed in Note 4. Under APB 25 and its related interpretations,
        employee stock options with cashless exercise provisions and options that
        had
        been re-priced were subject to variable accounting, pursuant to which the
        Company recognized a charge or credit to compensation expense for the increase
        or decrease in the excess of the market price of the Company’s stock over the
        exercise price of the option in each period.
 
 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.
 
 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, notes payable, revolving credit line
        borrowings and capital lease obligations at September 30, 2006 and 2005 are
        estimated to approximate their carrying values due to the relative liquidity
        or
        short-term nature 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.
 
 The
        Company places its cash and cash equivalents with high credit quality
        institutions.  At September 30, 2006, the Company has cash balances that
        exceed Federally insured limits. Accounts receivable from DIRECTV (see
        Note 6) at September 30, 2006 and 2005, represented 47% and 47%,
        respectively, of total trade accounts receivable. Revenues realized from
        DIRECTV
        represented 23%, 25% and 24% of total revenues in the years ended
        September 30, 2006, 2005 and 2004, respectively. Management believes the
        Company has an adequate allowance for potential losses from such concentration.
 
 *Income
        Taxes*
 
 The
        Company accounts for income taxes pursuant to the asset and liability method
        which requires deferred income tax assets and liabilities to be computed
        annually for temporary differences between the financial statement and tax
        bases
        of assets and liabilities that will result in taxable or deductible amounts
        in
        the future based on enacted tax laws and rates applicable to the periods
        in
        which the differences are expected to affect taxable income. Valuation
        allowances are established when necessary to reduce deferred tax assets to
        the
        amount expected to be realized. The income tax provision or credit is the
        tax
        payable or refundable for the period plus or minus the change during the
        period
        in deferred tax assets and liabilities.
 
 *Other
        Recently Issued and Not Yet Effective Accounting Standards*
 
 In
        May
        2005,the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a
        replacement of APB Opinion No. 20 and FASB Statement No. 3”, (“SFAS 154”). SFAS
        154 replaces APB Opinion No. 20, “Accounting Changes,” and FASB Statement No. 3,
“Reporting Accounting Changes in Interim Financial Statements,” and changes the
        requirements for accounting for and reporting of a change in accounting
        principle. SFAS 154 requires retrospective application to financial statements
        of prior periods for a voluntary change in accounting principle unless it
        is
        impracticable. SFAS 154 is effective for accounting changes and corrections
        of
        errors made in fiscal years beginning after December 15, 2005. The adoption
        of
        SFAS 154 is not expected to have a material impact on our financial position
        and
        results of operations.
 
 37
 
 In
        September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
        157”). SFAS 157 defines fair value and establishes a framework for measuring
        fair value in accordance with generally accepted accounting principles. 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 financial statements.
 
 The
        Financial Accounting Standards Board, the Emerging Issues Task Force (the
        “EITF”), and the SEC have issued certain other accounting pronouncements and
        regulations as of September 30, 2006 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
        2006, 2005 and 2004, 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.
 
 **3.** **** **DEBT
        AND CAPITAL LEASE OBLIGATIONS**
 
 *Loan
        and Security Agreement*
 
 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 $20,000,000 credit
        facility to fund the Company's subscriber growth.
  The
        credit facility has a term of five years with interest only payable monthly
        on
        the principal outstanding. The 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 final $5,000,000 at prime plus 1%. The
        Company is under no obligation to draw any increment beyond the first $5,000,000
        nor is it obligated to draw an entire increment at one time. As of September
        30,
        2006, the Company has borrowed $3,879,596 under the credit line and must
        draw
        the entire first $5,000,000 by December 11, 2006. The outstanding principal
        is
        payable on September 11, 2011.
 
 The
        Loan
        and Security Agreement calls for an immediate closing fee of 3.5% on the
        first
        $5,000,000 increment only, with closing and/or annual fees of 1% for the
        remaining three $5,000,000 increments as they are drawn. Morgan Joseph & Co.
        Inc., who acted as advisor and placement agent, will also receive a success
        fee
        of 2% as the increments close. The closing fee is included in deferred financing
        costs.
 
 The
        credit facility borrowings are secured by the assets of the Company. 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 $20,000,000. The credit facility can be prepaid upon thirty
        days notice with a penalty of 4% to 1% of the outstanding principal balance
        depending on the prepayment timing.
 
 38
  To
        access
        the credit facility above $10,000,000, the Company must have positive Earnings
        before Interest, Taxes, Depreciation and Amortization (“EBITDA”), as defined,
        and 50,000 subscribers. To access the credit facility above $15,000,000,
        the
        Company must have positive EBITDA and 55,000 subscribers.
  The
        Financing is secured by the Company’s cash and temporary investments, accounts
        receivable, inventory, access agreements and certain property, plant and
        equipment. The Financing contains covenants limiting the Company’s ability to,
        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.
  The
        Financing 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 September 11, 2006 Loan and Security Agreement, 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 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
        lenders are "accredited investors" as such term is defined in Rule 501 of
        said
        Regulation D. 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 line borrowing, and
        is
        being amortized using the interest method over the term of the related loan.
  *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, 2006 is presented
        in the table below:
  **Year
                  ending September 30,**
              
              **Capital**
                **Lease**2007
              
              $
              96,0202008
              
              
              86,0422009
              
              
              9,561Total
                  minimum payments
              
              
              191,623Less
                  amount representing interest
              
              
              24,274Present
                  value of net minimum payments
              
              
              167,349Less
                  current portion
              
              
              79,306Long-term
                  portion
              
              $
              88,043
 
 The
        net
        book value of equipment under capital leases as of September 30, 2006 and
        2005 was $154,159 and $125,384, respectively, and is included in property
        and equipment.
 
 39
  *Notes
        Payable*
 
 Notes
        payable under term loans outstanding as of September 30, 2006 consisted of
        the following:
 
 **2006**
              
              **2005**Wachovia
                  Bank Note**a**-
                  current portion
              
              $
              48,732
              
              $
              45,670Wachovia
                  Bank Note**a**-
                  long term
              
              
              102,115
              
              
              150,636Total
              
              $
              150,847
              
              $
              196,306
 ______________
 
 (a)
              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.
 
 Future
        principal payments for the notes payable in years subsequent to September
        30,
        2006 is presented in the table below:
 
 **Year
                  ending September 30,**
              
              **Notes**
                **Payable**2007
              
              $
              48,7322008
              
              
              51,8162009
              
              
              50,299Total
              
              $
              150,847
 
 **4.** **** **STOCKHOLDERS’
        EQUITY**
 
 *Preferred
        Shares*
 
 As
        of
        September 30, 2006, 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, 2006 and 2005.
 
 *Common
        Stock Issued to Consultants*
 
 On
        April
        6, 2004 and May 7, 2004, respectively, the Company issued 250,000 shares
        of
        common stock and warrants for the purchase of 250,000 shares of common stock
        exercisable at $1.84 per share to each of PDI Communications Inc. (“PDI”) and
        B.A.A.M., LLC (“BAAM”) pursuant to an agreement executed on February 12, 2004
        for future assistance over the next three years in establishing the Company's
        presence in the Southeast multi-dwelling unit market. The market value of
        the
        shares was $1,100,000 on the date of issuance, which resulted in a charge
        to
        unearned compensation and an increase in additional paid-in capital in that
        amount. The unearned compensation was being amortized to expense over three
        years.
 
 On
        June
        2, 2004, the Company issued 178,690 shares of common stock to Cablecom/Spacelink
        in return for future consulting services over the next two year period in
        establishing the Company’s presence in the Chicago multi-dwelling unit market.
        The market value of the shares was $405,626 on the date of issuance, which
        resulted in a charge to unearned compensation and an increase in additional
        paid-in capital in that amount. The fair value of the shares of common stock
        was
        amortized to expense over two years.
 
 On
        November 18, 2004, the Company and PDI executed an agreement for the termination
        of the agreement executed on February 12, 2004. As final compensation, PDI
        (i)
        returned to the Company for cancellation the original stock certificate
        representing 250,000 shares of common stock, (ii) returned to the Company
        for
        cancellation the original warrant agreement for the purchase of 250,000 shares
        of common stock exercisable at $1.84 per share, and (iii) executed a standard
        release for any and all causes of action under the PDI Agreement. In return,
        the
        Company (i) re-issued to PDI a stock certificate for 50,000 registered shares
        of
        common stock, and (ii) agreed that PDI shall remain the Company’s preferred
        equipment provider for a period of one year. The Company had initially recorded
        the fair value of the 250,000 shares and the warrants to purchase 250,000
        shares
        of $1,055,000 as unearned compensation of which $219,791 was amortized to
        expense during the period from February 12, 2004 to September 30, 2004. The
        50,000 shares issued in connection with the termination of the PDI Agreement
        had
        a fair value of $152,500. Accordingly, the Company recorded a net credit
        to
        expense of $67,291 during the three months ended December 31, 2004 thereby
        reducing the total compensation charged to expense over the period from February
        12, 2004 to November 18, 2004 to $152,500. The Company also reversed the
        remaining $835,209 of unearned compensation.
 
 40
  On
        May
        19, 2005, the Company and BAAM executed an agreement for the termination
        of the
        agreement executed on February 12, 2004. The termination resulted in the
        return
        to the Company for cancellation of the original stock certificate representing
        250,000 shares of common stock and the execution by BAAM of a standard release
        for any and all causes of action under the BAAM Agreement. In return, the
        Company re-issued to BAAM a stock certificate for 55,000 registered shares
        of
        common stock. The Company had initially recorded the fair value of the
        250,000 shares of $550,000 as unearned compensation of which $206,250 was
        amortized to expense during the period from February 12, 2004 to March 31,
        2005.
        The 55,000 shares issued in connection with the termination of the BAAM
        agreement had a fair value of $117,700. Accordingly, the Company recorded
        a net
        credit to expense of $88,550 during the three months ended June 30, 2005
        thereby
        reducing the total compensation charged to expense over the period from February
        12, 2004 to May 19, 2005 to $117,700. The Company also reversed the remaining
        $343,750 of unearned compensation.
 
 *Suppliers’
        Stock Option Plan (“Suppliers’ Plan”)*
 
 On
        December 31, 1998, the Company established a non-qualified Suppliers’ Stock
        Option Plan pursuant to which certain key suppliers of the Company were granted
        options on completion of specified activities. Under the terms of the Suppliers’
Plan, eligible suppliers earned options to purchase an aggregate of 250,000
        common shares of the Company. As of September 30, 2003, all 250,000 options
        had been granted with terms of five years and exercise prices ranging from
        $1.50
        to $2.00. During the year ended September 30, 2003, the Board repriced
        50,000 of the supplier options from $1.50 per share to $0.33 per share. As
        a
        result of such repricing, the Company was subject to variable accounting
        for
        such options and, accordingly, recognized a non-cash charges of $6,797
        and $118,750 during the years ended September 30, 2005 and 2004
        based on changes in the fair value of the options subsequent to the date
        of
        repricing.
 
 On
        February 13, 2004, 80,000, options at an exercise price of $0.60 were exercised,
        and 10,000 options at an exercise price of $0.60 were exercised each on February
        23, 2004 and March 13, 2004, respectively. On March 1, 2004, 40,000 options
        and
        on March 26, 2004, 33,885 options each at an exercise price of $1.50 were
        exercised. On February 16, 2005, 50,000 options with an exercise price of
        $0.33
        were exercised, and on March 17, 2005 the remaining 12,375 options at $1.75
        and
        13,740 options at $2.00 were exercised. As of March 17, 2005, all supplier
        options were exercised and there were no remaining options outstanding under
        the
        Suppliers’ Plan.
 
 *Employee
        Stock Option Plans (“Employee 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
        (“2000 Option Plan”). Under the 2000 Option Plan, the Company was authorized to
        grant certain employees, consultants, officers and directors of the Company
        and
        its affiliates options to purchase up to 4,000,000 common shares of the Company
        at $5.00 per share. The options have vesting periods ranging from immediate
        to
        three years after the grant date. Of the options originally authorized as
        part
        of the November 24, 1998 Employee Plan, 90,276 were redesignated to be
        included in the 2000 Option Plan.
 
 On
        April 11, 2001, the Board of Directors approved the 2001 Stock Option Plan
        (“2001 Option Plan”) to replace the 2000 Option Plan. The 2001 Option Plan is in
        all respects identical to the 2000 Option Plan, which had not been approved
        by a
        vote of the stockholders within one year of its adoption by the Board and
        therefore became ineffective. The 2001 Option Plan was approved by a vote
        of the
        stockholders at the Annual General Meeting on May 10, 2001.  In
        October 2000, the Board of Directors of the Company approved the
        re-pricing, at $2.00 per share, of the exercise price of all options previously
        granted at $5.00 per share under the 2000 Option Plan. On March 9, 2001,
        the Board of Directors approved the repricing, at $0.60 per share, of these
        same
        options. On April 11, 2001, the Board of Directors of the Company approved
        the re-pricing, at $0.60 per share, of all options previously granted to
        directors at $2.50 per share under the 2000 Option Plan.  During the year
        ended September 30, 2003, the Board of Directors approved the repricing of
        certain options previously granted to directors, officers, employees and
        consultants from $0.60 per share to $0.33 per share.  As of
        September 30, 2003, a total of 1,925,624 of the 2,565,000 shares subject to
        outstanding options under the 2001 Stock Option Plan had been repriced to
        $0.33
        per share.  As a result of such repricing, the Company was subject to
        variable-plan accounting for such options and, accordingly, it recognized
        non-cash charges for compensation expense of $265,088 and $2,682,932 during
        the
        years ended September 30, 2005 and 2004 based on the net increases in the
        market value of the options subsequent to the respective dates of
        repricing.  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.
 
 41
  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 years ended September 30, 2004, 2005 and 2006:
  **Number
                  of shares**
              
              
              **Weighted-average**
                **exercise
                  price****Options
                  outstanding at October 1, 2003**(1)
              
              
              2,815,000
              
              $
              0.44Options
                  granted (weighted average fair value of $1.70 per share)
              
              
              821,000
              
              $
              1.62Options
                  cancelled/expired
              
              
              (5,625
              )
              $
              0.33Options
                  exercised
              
              
              (1,091,069
              )
              $
              0.56**Options
                  outstanding at September 30, 2004**(1)
              
              
              2,539,306
              
              $
              0.77Options
                  granted (weighted average fair value of $2.09 per share)
              
              
              2,100,000
              
              $
              2.51Options
                  cancelled/expired
              
              
              (334,860
              )
              $
              2.69Options
                  exercised
              
              
              (1,004,104
              )
              $
              0.41**Options
                  outstanding at September 30, 2005**(1)
              
              
              3,300,342
              
              $
              1.79Options
                  granted
              
              
              --
              
              $
              --Options
                  cancelled/expired
              
              
              (648,134
              )
              $
              1.83Options
                  exercised (2)
              
              
              (50,136
              )
              $
              0.33**Options
                  outstanding at September 30, 2006**(3)
              
              
              2,602,072
              
              $
              1.81**Options
                  exercisable at September 30, 2006**(3)
              
              
              2,005,816
              
              $
              1.52
 _____________
 
 (1)
            As
                discussed above, the Company re-priced certain options and, as a
                result,
                such options were subject to variable accounting provisions prior
                to the
                adoption of SFAS 123R.  Accordingly, during the years ended September
                30, 2005 and 2004, the Company recognized charges to general and
                administrative expenses of $271,885 and $2,801,682, respectively,
                for the
                increase in market price per share of the Company’s common
                stock. (2)
            The
                aggregate intrinsic value of options exercised during the year ended
                September 30, 2006 was $22,818. (3)
            The
                weighted average remaining contractual term of outstanding and exercisable
                options at September 30, 2006 was 3.0 and 2.8 years, respectively.
                The aggregate intrinsic value of outstanding and exercisable options
                at
                September 30, 2006 was $292,996 and $245,600,
                respectively. 
 At
        September 30, 2006, a total of 691,994 shares of common stock were
        available for grant.
 
 Prior
        to
        the adoption of SFAS 123R, as explained in Note 2, the Company accounted
        for its
        stock-based employee compensation plans under the intrinsic value method
        per APB
        25, whereby compensation cost was only recorded for the excess, if any, of
        the
        quoted market price of the common shares over the exercise price at the date
        of
        grant for all employee stock options issued. SFAS 123 had established accounting
        and disclosure requirements using a fair-value-based method of accounting
        for
        stock-based employee compensation plans. However, SFAS 123, and SFAS
        148, "Accounting for Stock-Based Compensation - Transition and Disclosure,"
        permitted a company to elect to continue to apply the intrinsic-value-based
        method of accounting described above until it adopted SFAS 123R provided
        it made
        appropriate pro forma disclosures of the use of a method
        that estimated the fair value of the options at the grant date and then
        amortized the fair value to expense over the options' vesting period. For
        the
        years ended September 30, 2005 and 2004, the Company has shown its
        historical results of operations using the intrinsic value method under the
        provisions of APB 25 and, accordingly, is required to present the additional
        pro
        forma information in the table that follows showing the effects on its
        historical results of operations of the use of a method that estimates the
        fair
        value of the options at the grant date and then amortizes the fair value
        to
        expense over the options’ vesting period:
  42
  **Years
                  Ended September 30,****2005**
              
              **2004**Net
                  loss, as reported
              
              $
              (4,680,438
              )
              $
              (8,941,135
              )Add:
                  Total stock-based employee compensation expense determined under
                  the
                  intrinsic value method for all awards, net of related tax effects
              
              
              304,485
              
              
              2,682,932Deduct:
                  Total stock-based employee compensation expense determined under
                  the
                  Black-Scholes option-pricing model (which is a fair value based
                  method)
                  for all awards, net of related tax effects
              
              
              (1,041,900
              )
              
              (385,320
              )Pro
                  forma net loss
              
              $
              (5,417,853
              )
              $
              (6,643,523
              )Basic
                  and diluted net loss per share:As
                  reported
              
              $
              (0.10
              )
              $
              (0.24
              )Pro
                  forma
              
              $
              (0.11
              )
              $
              (0.18
              )
 
 As
        explained above, during the year ended September 30, 2006, the Company adopted
        the provisions of SFAS 123R and recognized a charge to general and
        administrative expenses for share-based employee compensation of $1,048,856
        for
        the amortization over the service period of the fair value of the unvested
        options as of October 1, 2005, the date SFAS 123R was adopted. Additionally,
        the
        Company recognized share-based compensation expense for non-employees of
        $398,394 for the year ended September 30, 2006.  An
        additional charge of approximately $1,100,000 is expected to vest and be
        recognized subsequent to September 30, 2006 over a weighted average period
        of 24 months. The charge will be amortized to general and
        administrative expenses as the options vest in subsequent periods.
 
 *Warrants
        to Purchase Common Shares*
 
 The
        following table summarizes all of the Company’s warrant activity during the
        years ended September 30, 2006, 2005 and 2004:
  **Number
                  of**
                **Warrants
                  Outstanding**
              
              
              **Weighted
                  Avg. Exercise**
                **Price
                  Per Share**Outstanding
                  at October 1, 2003
              
              
              9,467,363
              
              $
              0.37Issued
                  (A)
              
              
              3,085,985
              
              
              2.08Cancelled
                  (B)
              
              
              (329,933
              )
              
              0.33Exercised
                  (C)
              
              
              (7,997,067
              )
              
              0.40Outstanding
                  at September 30, 2004
              
              
              4,226,348
              
              
              1.57Issued
                  (D)
              
              
              2,122,204
              
              
              3.40Cancelled
                  (E)
              
              
              (250,000
              )
              
              1.84Exercised
                  (F)
              
              
              (449,667
              )
              
              1.00Outstanding
                  at September 30, 2005
              
              
              5,648,885
              
              
              2.29Issued
                  (G)
              
              
              1,000,000
              
              
              0.82Cancelled
                  (H)
              
              
              —
              
              
              —Exercised
                  (I)
              
              
              (350,000
              )
              
              0.25Outstanding
                  at September 30, 2006
              
              
              6,298,885
              
              
              2.17
 ____________________
 
 (A)
              In
                  connection with the November 24, 2003 private placement described
                  below,
                  the Company issued warrants to purchase 1,100,001 shares of common
                  stock
                  at an exercise price of $1.75 per share that expire on November
                  24,
                  2006.
                
                The
                  Company issued warrants to purchase 40,000 shares of common stock
                  for
                  consulting services that had been provided by JRJ Capital. The
                  warrants
                  have an exercise price of $0.65 per share and expire on October
                  1, 2006.
                  The fair value of the warrants was $75,200 on the date of the grant,
                  as
                  calculated using the Black-Scholes option pricing model, which
                  resulted in
                  a charge to compensation expense and an increase in additional
                  paid-in
                  capital.
                
                In
                  connection with the agreements with PDI and BAAM on February 12,
                  2004
                  described above, the Company issued warrants to purchase 500,000
                  shares of
                  common stock at an exercise price of $1.84 per share that expire
                  on
                  February 12, 2008 of which, warrants to purchase 250,000 shares
                  were
                  cancelled in the year ended September 30, 2005. The remaining warrants
                  vest quarterly over three years. The fair value of the remaining
                  warrants
                  was $505,000 on the date of the grant, as calculated using the
                  Black-Scholes option pricing model.
                
                In
                  connection with the May 27, 2004 private placement described below,
                  the
                  Company issued warrants to purchase 1,314,532 shares of common
                  stock at an
                  exercise price of $2.46 per share that expire on May 27, 2007.
                  In
                  addition, the Company issued similar warrants to purchase 131,452
                  shares
                  of common stock to the placement agent as partial consideration
                  for the
                  placement fee.
  43
  (B)
              Certain
                  of the warrants issued to investors contain cashless exercise provisions.
                  During the year ended September 30, 2004, certain investors exercised
                  warrants to purchase 1,987,383 shares of common stock with an exercise
                  price of $0.33 per share and 150,000 shares of common stock with
                  an
                  exercise price of $0.31 per share. Pursuant to the cashless provisions,
                  warrants to purchase 329,933 shares were canceled as payment for
                  the
                  exercise price based on agreements with the investors and 1,807,450
                  shares
                  were issued.(C)
              During
                  the year ended September 30, 2004, certain investors exercised
                  warrants to
                  purchase 2,072,117 shares of common stock with an exercise price
                  of $0.33
                  per share, 4,017,500 shares of common stock with an exercise price
                  of
                  $0.43 per share, and 100,000 shares of common stock with an exercise
                  price
                  of $1.75 per share and, as a result, the Company received cash
                  proceeds of
                  $2,586,328.(D)
              In
                  connection with the November 24, 2004 private placement described
                  below,
                  the Company issued warrants to purchase 2,122,204 shares of common
                  stock
                  at an exercise price of $3.40 per share that expire on November
                  24, 2007.(E)
              As
                  explained above, on November 18, 2004, the Company and PDI terminated
                  an
                  agreement executed on February 12, 2004. As part of the termination,
                  PDI
                  returned to the Company for cancellation the original warrant agreement
                  for the purchase of 250,000 shares of common stock exercisable
                  at $1.84
                  per share originally issued on February 12, 2004.(F)
              During
                  the year ended September 30, 2005, certain investors exercised
                  warrants to
                  purchase 253,000 shares of common stock with an exercise price
                  of $0.33
                  per share, 166,667 shares of common stock with an exercise price
                  of $1.75
                  per share, and 30,000 shares of common stock with an exercise price
                  of
                  $2.46 per share, and as a result, the Company received cash proceeds
                  of
                  $448,958.(G)
              In
                  connection with the September 11, 2006 Loan and Security Agreement,
                  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 warrants had a fair value
                  of
                  $290,000. The warrants 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.(H)
              During
                  the year ended September 30, 2006, no warrants expired or were
                  cancelled.(I)
              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.
  44
 
 *Assumptions
        Used in Determining Fair Value of Stock Options and Warrants*
 
 For
        purposes of determining the fair value of options and warrants using the
        Black-Scholes option pricing model, we used the following assumptions in
        the
        years ended September 30, 2006, 2005 and 2004:
 
 **2006**
              
              **2005**
              
              **2004**Expected
                  volatility
              52%
              
              76%
              
              68%Risk-free
                  interest rate
              4.72%
              
              4.00%
              
              4.00%Expected
                  years of option life
              1
                  to 5
              
              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.
 
 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 years ended September 30, 2006, 2005 and 2004, the Company issued
        162,678, 18,040 and 103,353 shares, respectively, to employees who purchased
        shares under the Purchase Plan through payroll deductions. The aggregate
        purchase price for those shares of $175,642, $38,708 and $79,134, respectively,
        was paid by the employees through the offset of the amount they owed for
        the
        shares against an equivalent amount the Company owed them for accrued salaries,
        bonus or severance. Funds derived from the employee purchase of Company common
        stock under the Purchase Plan can be used for general corporate purposes.
 
 *Shares
        Issued in Lieu of Salary of Executive Officer*
 
 On
        September 30, 2003, the Board of Directors authorized the grant of a $50,000
        year-end bonus to the Chief Executive Officer with the option to take the
        bonus
        in cash or common shares at the purchase price used for the Employee Stock
        Purchase Plan.  The Chief Executive Officer elected to take the net effect
        of the bonus in common shares.  The Company issued 60,650 shares for this
        obligation on February 6, 2004.
 
 *Shares
        Issued for Settlement of Accounts Payable*
 
 The
        Company issued 40,135 shares of common stock during the year ended September
        30,
        2004 with a fair value of $28,094 pursuant to agreements for settlements
        of
        outstanding trade accounts payable and recognized a gain of $33,840. The
        Company
        also issued 100,000 shares with a fair value of $230,000 to SCO Financial
        Group,
        LLC as settlement of an account payable and resulting litigation therefrom.
 
 *Shares
        Issued Pursuant to Private Placement*
 
 On
        November 24, 2003, the Company closed a private placement of its securities
        pursuant to a Confidential Offering Memorandum.  The placement was made up
        of 22 units with each unit consisting of 100,000 common shares and 50,000
        warrants to purchase common shares at an exercise price of $1.75 per
        share.  The Company received net proceeds in the amount of $3,300,000 and
        issued 2,200,000 common shares at effectively $1.50 per share, and 1,100,001
        warrants to purchase common shares.
 
 45
  On
        May
        27, 2004, the Company closed a private placement of its securities pursuant
        to a
        Confidential Offering Memorandum. The placement was made up of 1,314,532
        units
        with each unit consisting of two common shares and one three-year warrant
        to
        purchase common shares at an exercise price of $2.46 per share. The Company
        received net proceeds of $5,049,584 and issued 2,629,064 common shares at
        effectively $2.10 per share, and 1,314,532 warrants to purchase common shares.
 
 On
        November 24, 2004, the Company completed a $16.25 million private equity
        placement, pursuant to which the Company sold 6,063,440 units. Each unit
        consisted of one share of common stock and three-tenths of one three-year
        warrant to purchase one share of common stock at an exercise price of $3.40
        per
        share, to accredited investors at a per unit price of $2.68. After the payment
        of fees and expenses, the Company received net proceeds of $15,045,444 and
        issued 6,063,440 common shares and 2,122,204 warrants to purchase common
        shares.
 
 **5.** **** **COMMITMENTS
        AND CONTINGENCIES**
 
 *Litigation*
 
 On
        or
        about March 11, 2005, the Company brought suit against Star Choice
        Communications Inc. for (i) a dispute over the amount of goods and services
        tax
        that was owed to the Company’s Canadian subsidiary on associated programming
        commissions from 2000 and 2001, and (ii) non-payment of programming commissions
        on a specific property site for 2004 and 2005. The litigation was settled
        during
        the fiscal year ended September 30, 2006 for a payment of $73,500 (CDN) to
        the
        Company. The Company is currently not a party to any litigation.
 
 *Contracts*
 
 The
        Company has entered into an open ended management agreement with a senior
        executive that provides for annual compensation, excluding bonuses, of $260,000.
        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.
 
 During
        the year ended September 30, 2005, the Company entered into an additional
        open
        ended management agreement with another senior executive that provides for
        annual compensation, excluding bonuses, of $225,000. The Company can terminate
        this agreement at any time upon reasonable notice and the payment of an amount
        equal to 12 to 18 months of salary, depending on timing. 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 12 months of
        salary.
        On July 10, 2006, this management agreement was terminated and the Company
        issued 126,720 shares of common stock to satisfy the termination provision
        with
        a fair value of $83,635.
 
 *Operating
        Leases* ******
 
 The
        Company is obligated under non-cancelable operating leases for its various
        facilities that expire through the years ending September 30, 2009 to make
        future minimum rental payments in years subsequent to September 30, 2006
        as
        summarized in the following table:
 
 **Year
                  ending September 30,**
              
              **Minimum
                  Rental**
                **Payments**2007
              
              $
              334,4142008
              
              
              309,5222009
              
              
              147,156Total
                  minimum payments
              
              $
              791,092
 
 Rent
        expense under all operating leases amounted to $368,105, $193,374, and $134,422
        respectively, for the years ended September 30, 2006, 2005 and
        2004.
 
 46
  **6.** **STRATEGIC
        ALLIANCE WITH DIRECTV**
 
 On
        September 29, 2003, the Company entered into a new System Operator
        Agreement with (“DIRECTV”), which replaced the System Operator Agreement
        previously executed by the Company and was due to initially expire on
        May 19, 2005.  The
        new
        agreement has an initial term of three years with two, two-year automatic
        renewal periods upon the Company’s achievement of certain subscriber growth
        goals.The Company’s contract with DIRECTV gives the Company a share of
        monthly net subscriber receipts, depending upon the number of active
        subscribers, from the sale of DIRECTV programming services, plus a commission
        for each new subscriber addition. The Company incurs only the costs associated
        with the implementation of its services and will not share any of DIRECTV’s
        programming or broadcasting costs.
 
 **7.** **GAIN
        ON SALE OF CUSTOMERS AND RELATED PROPERTY AND EQUIPMENT**
 
 On
        May
        31, 2005, the Company sold 447 subscribers and certain related property and
        equipment to Comcast of Maryland, Inc. for $1,049,048. The total gain on
        the
        sale was $1,046,088 of which, pursuant to the Joint Venture termination
        agreement, AvalonBay Communities, the former joint venture partner, received
        $411,708. The Company’s gain on the sale of this system, after expenses, was
        $634,380.
 
 On
        November 8, 2004, the Company sold 102 subscribers and certain related property
        and equipment in a non-core 158-unit system to Comcast of Maryland, Inc.
        for
        $183,600. The total gain on the sale was $161,120 of which, pursuant to the
        Joint Venture termination agreement, AvalonBay Communities, the former joint
        venture partner, received $79,804. The Company's gain on the sale of this
        system, after expenses, was $81,316.
 
 **8.
                     
ACQUISITIONS OF BUSINESSES, SUBSCRIBERS AND EQUIPMENT**
 
 On
        June
        1, 2004, the Company acquired Direct Satellite, Inc. (“DSI”) for $2,400,000 in
        cash plus $115,000 of closing costs. DSI was primarily a private cable operator
        serving approximately 4,400 video and 400 high-speed Internet subscribers
        in 15
“Class A” multi-family properties signed to long term access agreements in the
        greater Chicago metropolitan area. The acquisition was accounted for under
        the
        purchase method and the assets, liabilities, revenues and expenses related
        to
        DSI were consolidated with the accounts of the Company effective June 1,
        2004.
        Acquisition costs were allocated to the fair value of the net assets assumed
        as
        set forth below:
 
 Property
                  and equipment
              
              $
              819,159Amortizable
                  intangible assets
              
              
              1,695,841Total
                  Acquisition Cost
              
              $
              2,515,000
 
 The
        intangible assets were attributable to the building access agreements and
        customer lists. The intangible assets acquired are being amortized over five
        years. The Company also entered into a consulting agreement with
        Cablecom/Spacelink for the development of the Company’s presence in the Chicago
        market (see Note 4).
 
 On
        September 20, 2004, the Company acquired PCM Acquisitions Corporation for
        $1,380,691 in cash plus $112,500 of closing costs. PCM was primarily a private
        cable operator serving approximately 3,200 subscribers. The acquisition included
        the accounts receivable and a pro-rated revenue and cost amount for the month
        of
        September 2004. Acquisition costs were allocated to the fair value of the
        net
        assets assumed as set forth below:
 
 Accounts
                  receivable
              
              $
              102,821Property
                  and equipment
              
              
              779,121Amortizable
                  intangible assets
              
              
              611,249Total
              
              $
              1,493,191
 
 The
        intangible assets were attributable to the building access agreements and
        customer lists. The intangible assets acquired are being amortized over five
        years.
 
 The
        following table presents the unaudited pro forma results of operations for
        informational purposes for the year ended September 30, 2004, assuming that
        the
        Company had acquired DSI and PCM at the beginning of the year:
  47
 
 **2004**Total
                  revenue
              
              $
              5,716,785Net
                  loss
              
              
              (8,821,988
              )Net
                  loss per common share
              
              $
              (0.23
              )
 
 The
        pro
        forma results of operations give effect to certain adjustments including
        amortization of purchased intangibles. This information may not necessarily
        be
        indicative of the future combined results of operations of the Company.
 
 **9.** **PROPERTY
        AND EQUIPMENT**
 
 The
        components of property and equipment are set forth below:
 
 **September 30,****2006**
              
              **2005**Telecommunications
                  equipment, installed
              
              $
              25,680,276
              
              $
              18,304,151Computer
                  equipment
              
              
              975,996
              
              
              734,265Furniture
                  and fixtures
              
              
              234,447
              
              
              189,092Leasehold
                  improvements
              
              
              163,083
              
              
              133,314Other
              
              
              50,825
              
              
              29,26327,104,627
              
              
              19,390,085Less:
                  Accumulated depreciation
              
              
              (8,384,705
              )
              
              (4,954,301
              )$
              18,719,922
              
              $
              14,435,784
  Depreciation
        expense amounted to $3,430,404, $2,182,970 and $1,138,077 for the years ended
        September 30, 2006, 2005 and 2004, respectively.
 
 **10.** **INTANGIBLE
        ASSETS**
 
 The
        components of intangible assets are set forth below:
 
 **September 30,****2006**
              
              **2005**Building
                  access agreements and subscriber lists
              
              $
              5,063,569
              
              $
              5,020,705Less:
                  Accumulated amortization
              
              
              (3,241,154
              )
              
              (2,279,918
              )$
              1,822,415
              
              $
              2,740,787
 
 Amortization
        expense amounted to $961,236, $872,317 and $482,087 for the years ended
        September 30, 2006, 2005 and 2004, respectively. Amortization of
        intangibles in the years subsequent to September 30, 2006 is as follows:
 
 **Year**
              
              **Amortization**
                **Amount**2007
              
              $
              668,1902008
              
              
              611,9632009
              
              
              478,4702010
              
              
              63,792
  48
  **11.** **OTHER
        ACCRUED LIABILITIES**
 
 Other
        accrued liabilities consist of the following:
 
 **2006**
              
              **2005**Accrued
                  costs and expenses:Equipment
              
              $
              296,295
              
              $
              186,404Employee
                  stock purchases and employee compensation payable in common
                  stock
              
              
              227,000
              
              
              7,908Subcontractors
                  maintenance and installation
              
              
              228,827
              
              
              487,946Professional
                  fees
              
              
              166,577
              
              
              99,181Wages
              
              
              282,466
              
              
              246,404Other
              
              
              147,834
              
              
              86,500Totals
              
              $
              1,348,999
              
              $
              1,114,343
 
 **12.** **INCOME
        TAXES**
 
 The
        Company had pre-tax losses but did not record any credits for Federal or
        other
        income taxes for the years ended September 30, 2006, 2005 and 2004. The
        Company did not record Federal income tax benefits at the statutory rate
        of 34%
        and state income tax credits because (a) it has incurred losses in each
        period since its inception and cannot carry back any of its losses against
        previously recorded income tax expense and (b) although such losses, among
        other things, have generated future potential income tax benefits, there
        is
        significant uncertainty as to whether the Company will be able to generate
        income in the future to enable it to realize any of those benefits and,
        accordingly, it has had to take valuation reserves against those potential
        benefits as shown below.
 
 As
        of
        September 30, 2006 and 2005, 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:
 
 **2006**
              
              **2005**Deferred
                  tax assets:Benefits
                  from net operating loss carryforwards:United
                  States
              
              $
              11,469,000
              
              $
              8,101,000Canada
              
              
              3,374,000
              
              
              3,287,000Tax
                  benefit for nonqualified stock options
              
              
              26,000
              
              
              246,000Amortization
                  of intangible assets
              
              
              795,000
              
              
              619,000Other
              
              
              224,000
              
              
              300,000Totals
              
              
              15,888,000
              
              
              12,553,000Deferred
                  tax liabilities—depreciation of property and equipment
              
              
              (2,012,000
              
              
              (1,445,000
              )Net
                  deferred tax assets
              
              
              13,876,000
              
              
              11,108,000Less
                  valuation allowance
              
              
              (13,876,000
              )
              
              (11,108,000
              )Totals
              
              $
              —
              
              $
              —
 
 At
        September 30, 2006 and 2005, the Company had net operating loss carry
        forwards of approximately $28,700,000 and $19,388,000, respectively, available
        to reduce future Federal taxable income and net operating loss carryforwards
        of
        approximately $7,400,000 and $7,225,000, respectively, available to reduce
        future Canadian taxable income. As of September 30, 2006, the Federal tax
        loss carry forwards will expire from 2007 through 2026 and the Canadian tax
        loss
        carryforwards will expire from 2007 through 2011. However, the Company
        terminated substantially all of its Canadian operations in the year ended
        September 30, 2002.
 
 49
  The
        deferred tax valuation allowance increased by $2,768,000, $1,218,000 and
        $2,428,000 for the years ended September 30, 2006, 2005 and 2004,
        respectively.
 
 **13.** **SUBSEQUENT
        EVENTS**
 
 From
        October 1, 2006 through December 15, 2006, 480,692 shares of common stock
        were
        issued to employees from the Employee Stock Purchase Plan for total cash
        proceeds of $299,288. Of the 480,692 shares of common stock issued, 380,673
        shares were issued to senior management who purchase d stock
        from July 1, 2006 through September 30, 2006 during the period that the Company
        was conserving its cash resources, prior to the September 11, 2006 when it
        received financing through the credit facility (see Note 3).
  On
        October 1, 2006, employee stock options for 239,398 shares were
        exercised, with 133,042 of these options exercised at $0.33 per share
        with proceeds of $43,904 to the Company, and 106,356 of these options at
        $0.33
        per share were exercised cashless (by special resolution of the Board of
        Directors) with the remaining 85,602 options returned to the Company in lieu
        of
        the exercise price.
 
 On
        October 15, 2006, the Company entered into a Consulting Agreement for business
        advisory services with Howard Interests, the principal of which is the spouse
        of
        Company Board member Carolyn Howard. The Consulting Agreement is for a six
        month
        term, with an option for renewal, and requires a monthly payment of
        $5,000.
 
 On
        November 7, 2006 employee options were exercised for 20,000 shares of common
        stock at $0.33 per share for total proceeds of $6,600.
 
 On
        November 24, 2006, previously issued warrants to purchase 873,334 shares
        of the
        Company’s common stock expired.
 
 On
        December 11, 2006, 32,742 shares of common stock were issued in lieu of $20,300
        in severance due an executive officer.
 
 **14.** **VALUATION
        AND QUALIFYING ACCOUNTS**
 
 Information
        with respect to evaluation and qualifying accounts is shown in the following
        schedule:
 
 **Description**
              
              **Balance
                  at beginning of period**
              
              **Additions
                  charged to costs and expenses**
              
              **Additions
                  charged to other accounts(1)**
              
              **Deductions(2)**
              
              **Balance
                  at end of period**Year
                  ended September 30, 2006Allowance
                  for doubtful accounts
              
              $
              (151,045
              )
              $
              (107,044
              )
              $
              (45,439
              )
              $
              141,126
              
              $
              (162,402
              )Reserve
                  for telecommunications equipment inventory obsolescence
              
              
              (69,821
              )
              
              (57,977
              )
              
              -
              
              
              127,798
              
              
              -Year
                  ended September 30, 2005Allowance
                  for doubtful accounts
              
              
              (76,319
              )
              
              (63,658
              )
              
              (19,155
              )
              
              8,087
              
              
              (151,045
              )Reserve
                  for telecommunications equipment inventory obsolescence
              
              
              -
              
              
              (69,821
              )
              
              -
              
              
              -
              
              
              (69,821
              )Year
                  ended September 30, 2004Allowance
                  for doubtful accounts
              
              
              (76,319
              )
              
              (131,739
              )
              
              (42,672
              )
              
              174,411
              
              
              (76,319
              )Reserve
                  for telecommunications equipment inventory obsolescence
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
  
 (1)
                Adjustment
                    to allowance for doubtful accounts
 (2)
                Write-off of accounts receivable
                    and
                    telecommunications equipment
                    inventory
  50
  **15.****SUPPLEMENTAL
        QUARTERLY INFORMATION (UNAUDITED)**
  Summarized
        operations information for the years ended September 30, 2006 and 2005 is
        shown
        in the following schedules:
  **Quarter
                  Ended****December
                  31, 2005**
              
              **March
                  31, 2006**
              
              **June
                  30, 2006**
              
              **September
                  30, 2006****Consolidated
                  Statements of Operations Data:**Revenue
              
              $
              2,918,061
              
              $
              3,326,136
              
              $
              3,449,752
              
              $
              3,672,256Operating
                  expenses(1)
              
              
              4,892,009
              
              
              5,505,777
              
              
              5,660,024
              
              
              5,422,802Operating
                  loss
              
              
              (1,973,948
              )
              
              (2,179,641
              )
              
              (2,210,272
              )
              
              (1,750,546
              )Other
                  income (expenses)
              
              
              56,404
              
              
              35,816
              
              
              15,753
              
              
              (4,620
              )Net
                  income (loss)
              
              
              (1,917,544
              )
              
              (2,143,825
              )
              
              (2,194,519
              )
              
              (1,755,166
              )Basic
                  and diluted loss per common share
              
              
              (0.04
              )
              
              (0.04
              )
              
              (0.04
              )
              
              (0.03
              )Weighted
                  average common shares outstanding
              
              
              49,972,555
              
              
              50,185,014
              
              
              50,252,146
              
              
              50,408,019
  **Quarter
                  Ended****December
                  31, 2004**
              
              **March
                  31, 2005**
              
              **June
                  30, 2005**
              
              **September
                  30, 2005****Consolidated
                  Statements of Operations Data:**Revenue
              
              $
              1,899,071
              
              $
              2,075,552
              
              $
              2,414,566
              
              $
              2,753,039Operating
                  expenses(1)
              
              
              3,590,677
              
              
              4,219,297
              
              
              2,653,911
              
              
              4,314,683Operating
                  loss
              
              
              (1,691,606
              )
              
              (2,143,745
              )
              
              (239,345
              )
              
              (1,561,644
              )Other
                  income (expenses)
              
              
              96,787
              
              
              67,201
              
              
              703,279
              
              
              88,635Net
                  income (loss)
              
              
              (1,594,819
              )
              
              (2,076,544
              )
              
              463,934
              
              
              (1,473,009
              )Basic
                  and diluted loss per common share
              
              
              (0.04
              )
              
              (0.04
              )
              
              0.01
              
              
              (0.03
              )Weighted
                  average common shares outstanding
              
              
              45,300,436
              
              
              49,376,080
              
              
              49,610,854
              
              
              49,656,849
  
 (1)
              Operating expenses includes noncash
                  charges
                  of $2,145,935 and $849,433 for the years ended September 30, 2006
                  and
                  2005, 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 for the year
                  ended
                  September 30, 2006 of $1,048,856.
 **Item
          9.** **Changes
          in and Disagreements with Accountants on Accounting and Financial Disclosure**
 
 None.
 
 **Item
          9A.** **Controls
          and Procedures**
 
 **Evaluation
          of Disclosure Controls and Procedures**
 
 The
          Company, under the supervision and with the participation of its management,
          including the Chief Executive Officer, who is also the Chief Financial
          Officer,
          as well as the Vice President of Finance and Administration, evaluated
          the
          effectiveness of the design and operation of the Company’s disclosure controls
          and procedures (as defined in Rule 13a-15(e) under the Securities Exchange
          Act
          of 1934 (the Exchange Act)) as of September 30, 2006, the end of the period
          covered by this report. The
          term
“disclosure controls and procedures” means controls and other procedures that
          are designed to ensure that information required to be disclosed by a company
          in
          reports that it files or submits under the Exchange Act is recorded, processed,
          summarized and reported, within the time periods specified in the SEC’s rules
          and forms. Disclosure controls and procedures include controls and procedures
          designed to ensure that such information is accumulated and communicated
          to the
          company’s management, including its principal executive and principal financial
          officers, as appropriate, to allow timely decisions regarding required
          disclosure. Management recognizes that any controls and procedures, no
          matter
          how well designed and operated, can provide only reasonable assurance of
          achieving their objectives and management necessarily applies its judgment
          in
          evaluating the cost-benefit relationship of possible controls and procedures.
          Because of its inherent limitations, internal control over financial reporting
          may not prevent or detect misstatements. Projections of any evaluation
          of
          effectiveness to future periods are subject to the risk that controls may
          become
          inadequate because of changes in conditions, or that the degree of compliance
          with the policies or procedures may deteriorate. Based on the evaluation
          of our
          disclosure controls and procedures as of September 30, 2006, our Chief
          Executive Officer, who is also our Chief Financial Officer, and our Vice
          President of Finance and Administration concluded that as of that date,
          our
          disclosure controls and procedures were effective at the reasonable assurance
          level.
  51





**Changes
      in Internal Controls**





There
      has
      been no change in the Company’s internal control over financial reporting or in
      other factors during the quarter ended September 30, 2006 that has materially
      affected, or is reasonably likely to materially affect, the Company’s internal
      control over financial reporting subsequent to the date of the evaluation
      referred to above.





**Item
      9B.**  **Other
      Information**





None.





**PART
      III**





**Item
      10.**  **Directors,
      Executive Officers and Corporate Governance**





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





***DIRECTORS***





**Sheldon
      B. Nelson** ,
      45, has
      served as Chief Executive Officer and Chairman of the Board of the Company
      since
      November 1998. From 1983 to 1998 he was President of 4-12 Electronics
      Corporation, a provider of products and services to the Canadian satellite,
      cable, broadcasting and SMATV industries. In addition to his day-to-day
      responsibilities during his tenure at 4-12 Electronics, Mr. Nelson
      developed 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.





**Douglas
      G. Hooper** , 46,
      joined the Board of Directors in May 2000. He is currently CEO and
      Board Chair of Canadian Bioenergy Corporation, a privately owned biodiesel
      business. Mr. Hooper has also served, from 1997 to present, in many capacities
      as an acquisitions and finance consultant, with extensive experience
      as a venture capitalist and mergers and acquisition specialist in the mineral
      exploration, industrial processing and software industries. He was President
      and
      CEO of Sand River Resources Ltd. from 1995 to 1997. Mr. Hooper was a
      founder and President of TelSoft Mobile Data Inc. from 1992 to 1995, now
      Mobile Data Solutions, Inc., a wireless communications software company. In
      that position, he developed and implemented corporate strategy and was
      responsible for raising capital, strategic alliances and mergers and
      acquisitions.





**John
      Edward "Ted" Boyle** ,
      59,
      joined the Board of Directors in May of 2000. He is currently the Vice-President
      of Corporate Development of Cable Bahamas, in Nassau. From 2002 to 2004 he
      was
      President of the cable division of 180 Connect Inc., North America's largest
      cable and satellite installation and service contractor. From 1998 to 2001
      he
      was the President and CEO of Multivision (Pvt.) Ltd., the cable television
      provider for Sri Lanka. From 1996 -1997, Mr. Boyle was the President and CEO
      of
      PowerTel TV, a Toronto based digital wireless cable company. As founding
      President and CEO of ExpressVu Inc. (1994 -1996), Mr. Boyle was responsible
      for
      taking Canada's first Direct-to-Home satellite service from inception to launch.
      Prior to 1994, Mr. Boyle held executive positions with Tee-Comm Electronics,
      Regional Cablesystems and Canadian Satellite Communications (Cancom). As the
      founding officer of Regional Cablesystems at Cancom, and later as Vice-President
      of Market Development at Regional, he led the licensing and construction or
      acquisition of over 1000 Canadian and American cable systems.




52





**Carolyn
      C. Howard,** 43,
      accepted appointment to the Board of Directors in July 2005 and is serving
      on
      the Company’s Audit Committee as the independent financial expert. Ms. Howard
      has been employed by Howard Interests since 1987, a venture capital firm, of
      which she is a co-founder and manager. Prior to that, Ms. Howard owned and
      managed a personnel and staffing firm and held a position in banking with a
      focus on Fannie Mae/Freddie Mac lending. Additionally, she has held positions
      with securities firms trading and covering institutional accounts. In 1992
      through 1997, she acted as CEO and COO of one of New Hampshire’s largest food
      service and bottled water companies. In 1997, she sold the company to Vermont
      Pure Springs, Inc., a publicly traded company. Ms. Howard also sits on the
      board
      and chairs the audit committee of Video Display Corporation, (VIDE) a publicly
      traded company. In February 2005, she was named Treasurer to the Jaffrey Gilmore
      Foundation, a New Hampshire non-profit organization for the arts.





**Steve
      J. Cox,** 45,
      accepted appointment to the Board of Directors in July 2005. He was most
      recently executive vice president of Sales, Distribution and Business
      Development for DIRECTV, Inc. In this position, he was responsible for
      overseeing all elements of DIRECTV’s sales and distribution strategy, including
      management of national and regional consumer electronics retailers, telephony
      partners, independent accounts and internal sales; execution of new sales
      programs; management of commercial and multi-dwelling unit (MDU) sales programs;
      and sales operations and support. Prior to overseeing the Sales and Distribution
      Division, Mr. Cox served as executive vice president of DIRECTV Global Digital
      Media and as senior vice president of New Ventures, where he was responsible
      for
      structuring and negotiating DIRECTV’s strategic partnerships, acquisitions and
      investments, as well as developing new business opportunities. Mr. Cox joined
      DIRECTV in 1995 as vice president, Business Affairs and General Counsel, from
      his previous post as corporate counsel for Science Applications International
      Corporation (SAIC). His primary responsibilities at SAIC included acquisitions
      and divestitures, strategic alliances and joint ventures. Mr. Cox resigned
      from
      the Board of Directors on November 30, 2006 due to other professional
      commitments.





***OFFICERS***





**Patrick
      Cunningham, Vice President of Sales and Business
      Development** .
      Mr.
      Cunningham, 38, has been a Vice President with the Company since 2000.  He
      has over fourteen years of management experience focused on the
      telecommunications industry. Mr. Cunningham was formerly the Vice President
      of
      Distribution and Sales for SkyView World Media. 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.





**Brad
      Holmstrom, General Counsel and Corporate Secretary.** Mr.
      Holmstrom, 41, has been with the Company since 2000 serving as the Company’s
      inhouse legal counsel. Prior to joining the Company, Mr. Holmstrom was partner
      in the Kansas City, Missouri office of Shughart Thomson & Kilroy,
      PC.





**Carmen
      Ragusa, Jr., Vice President of Finance and Administration.** Mr.
      Ragusa, 58, 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, 49, 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 Backoffice operations.  He brings
      over 20 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 backoffice 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.




53





**John
      Silvers, Vice President of Field Operations.** Mr.
      Silvers, 38, joined MDU Communications in July 2005 and has over fifteen years
      of management and sales experience focused on the telecommunications and service
      industries. Mr. Silvers most recently managed foodservice operations for
      ARAMARK’s Correctional Services division. Prior to ARAMARK, Mr. Silvers provided
      satellite transponder services to cable and broadcast clients with GE Americom.
      While at GE, he completed the largest transaction in the company’s history with
      a two satellite sale to BellSouth. Prior to GE, Mr. Silvers was Vice President
      and General Manager at SkyView World Media. At SkyView, he was responsible
      for
      the distribution, sales, marketing and technical service of SkyView’s East
      Region. SkyView was one of the leading private providers of television services
      to the MDU and ethnic communities with over 100,000 subscribers nationwide.
      Prior to SkyView, Mr. Silvers was an Officer in the U.S. Army where he served
      as
      a Battalion Personnel Officer, Battalion Logistics Officer and an Air Defense
      Artillery Platoon Leader. Mr. Silvers has a Bachelor of Science from the United
      States Military Academy at West Point, NY where he majored in Engineering
      Management.





**Tom
      Tracey, President and Chief Operating Officer (former).** Mr.
      Tracey, 43, began with the Company in May 2005. Mr. Tracey most recently served
      as Vice President of Broadband Services at national Internet service provider
      EarthLink. In this capacity he was responsible for a base of over one million
      subscribers to cable modem, DSL and satellite services with monthly growth
      rates
      in excess of 25,000 subscribers. Mr. Tracey also led and managed the Cable
      Product Management Team in successfully developing and launching the EarthLink
      Broadband Service over Time Warner Cable systems. Additionally, he was
      responsible for leading EarthLink's Next Generation Broadband Team in developing
      and managing fixed wireless and broadband over power lines services. Prior
      to
      joining EarthLink, Mr. Tracey was a Director at Directv, Inc. responsible for
      the launch, implementation and business development of DIRECTV services in
      South
      America, which achieved growth of over one million subscribers. He also served
      in management roles in launching and operating DIRECTV's affiliate and joint
      venture relationships in the United States. He holds a Bachelor of Sciences
      degree from San Diego State University and an MBA from the Anderson School
      at
      UCLA. Mr. Tracey resigned from the Company effective November 11,
      2006.





**Michael
      Stanway, Vice President of Product Engineering (former).** Mr.
      Stanway, 41, joined the Company in 2000 as Manager and then Director of MIS/IT
      Services. Mr. Stanway then assumed the position of Director of Operations and
      then Vice President of Operations. Mr. Stanway has a post-secondary degree
      as a
      Network Specialist with Microsoft and Novell certifications.   Mr. Stanway
      resigned as an officer effective August 30, 2006, but remains a
      consultant.





**AUDIT
      COMMITTEE AND INDEPENDENT FINANCIAL EXPERT**





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





Under
      the
      new rules of the SEC brought about by the Sarbanes-Oxley Act, companies are
      required to disclose whether their Audit Committees have an "audit committee
      financial expert" as defined in Item 401(h) of Regulation S-B under the Exchange
      Act and whether that expert is "independent" as that term is used in Item
      7(d)(3)(iv) of Schedule 14A under the Exchange Act. Board member Carolyn Howard
      meets the criteria of an independent financial expert and serves as such on
      behalf of the Company.





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





Section 16(a)
      of the Securities Exchange Act of 1934 requires the Company’s directors,
      executive officers and persons who own beneficially more than 10% of the
      Company’s common stock to file with the Securities and Exchange Commission
      (“SEC”) initial reports of ownership and reports of changes in ownership of
      common stock and other equity securities of the Company. Officers, directors
      and
      greater than 10% stockholders are required by SEC regulation to furnish the
      Company with copies of all Section 16(a) reports they file. To the
      Company’s knowledge, based solely on review of the copies of such reports
      furnished to the Company or advice that no filings were required, during fiscal
      year 2006 all officers, directors and greater than 10% beneficial owners
      complied with the Section 16(a) filing requirements.




54





***CODE
      OF ETHICS***





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





MDU
      Communications International, Inc.


60-D
      Commerce Way


Totowa,
      New Jersey 07512


Attn:
      Corporate Secretary





**Item
      11.**  **Executive
      Compensation**





**COMPENSATION
      OF EXECUTIVE OFFICERS**





The
      following table sets forth certain information as of September 30, 2006,
      regarding compensation paid during each of the Company’s last three fiscal years
      to our chief executive officer and other executive officers whose total annual
      salary and bonuses exceeded $100,000 (the “named executive officers”):





**SUMMARY
      COMPENSATION TABLE**




**Annual
                Compensation**
            
            **Long
                Term Compensation Awards****Name
                and Principal Position**
            
            **Fiscal
                Year**
            
            **Salary**
            
            **Bonus**
            
            **Other**
              **Compensation****2******
            
            **Securities
                Underlying**
              **Options
                (shares, cumulative)****3**Sheldon
                Nelson,
            
            
            2006
            
            $
            256,718
            
            $
            26,936
            
            $
            -0-
            
            
            1,400,000Chief Executive Officer
            
            
            2005
            
            $
            269,743
            
            $
            200,000
            
            $
            -0-
            
            
            1,400,0002004
            
            $
            200,000
            
            $
            30,000
            
            $
            -0-
            
            
            800,000Tom
                Tracey,
            
            
            2006
            
            $
            226,843
            
            $
            8,221
            
            $
            6,000
            
            
            -0-Chief
                Operating Officer, Pres.
            
            
            2005
            
            $
            82,212**1**
            
            $
            35,000
            
            $
            2,306
            
            
            500,000Patrick
                Cunningham,
            
            
            2006
            
            $
            176,374
            
            $
            3,750
            
            $
            -0-
            
            
            450,000VP
                of Sales and Business Dev.
            
            
            2005
            
            $
            173,070
            
            $
            45,706
            
            $
            2,000
            
            
            450,0002004
            
            $
            160,000
            
            $
            6,000
            
            $
            6,000
            
            
            350,000Bradley
                Holmstrom,
            
            
            2006
            
            $
            160,818
            
            $
            33,000
            
            $
            -0-
            
            
            425,000General
                Counsel
            
            
            2005
            
            $
            157,744
            
            $
            63,907
            
            $
            -0-
            
            
            425,0002004
            
            $
            138,900
            
            $
            10,000
            
            $
            1,500
            
            
            325,000Michael
                Stanway,
            
            
            2006
            
            $
            116,000
            
            $
            -0-
            
            $
            -0-
            
            
            225,000VP
                of Product Engineering
            
            
            2005
            
            $
            110,609
            
            $
            7,875
            
            $
            -0-
            
            
            225,0002004
            
            $
            105,600
            
            $
            -0-
            
            $
            -0-
            
            
            225,000Carmen
                Ragusa, Jr.,
            
            
            2006
            
            $
            160,000
            
            $
            8,000
            
            $
            -0-
            
            
            200,000VP
                of Finance and Admin.
            
            
            2005
            
            $
            145,006
            
            $
            10,000
            
            $
            -0-
            
            
            200,0002004
            
            $
            54,034**1**
            
            $
            -0-
            
            $
            -0-
            
            
            100,000John
                Silvers,
            
            
            2006
            
            $
            141,215
            
            $
            -0-
            
            $
            6,000
            
            
            9,999**4**VP
                of Operations
            
            
            2005
            
            $
            32,307**1**
            
            $
            -0-
            
            $
            1,385
            
            
            -0-Joe
                Nassau,
            
            
            2006
            
            $
            142,370
            
            $
            -0-
            
            $
            -0-
            
            
            9,999**4**VP
                of Subscriber Operations
            
            
            2005
            
            $
            32,307**1**
            
            $
            -0-
            
            $
            -0-
            
            
            -0-







(1)
      Partial year salary.


(2)
      Auto
      allowance.


(3)
      Includes total options granted since commencement of employment, not reduced
      by
      exercise.


(4)
      Share grants.




55





There
      were no grants of stock options to any named executive officer during the fiscal
      year ended September 30, 2006.





The
      following table sets forth certain information as of September 30, 2006,
      regarding the exercise of stock options made during the fiscal year and the
      valuation of unexercised stock options at September 30, 2006 to named executive
      officers:





**AGGREGATED
      OPTION EXERCISES**


**IN
      FISCAL YEAR ENDED SEPTEMBER 30, 2006 AND YEAR ENDED OPTION
      VALUES**





**Executive
                Officer**
            
            **Shares
                Acquired on Exercise**
            
            **Value
                of Shares after Exercise on**
              **Exercise
                Date**
            
            **Number
                of Securities Underlying Unexercised Options at Fiscal Year
                End**
            
            **Value
                of Unexercised In the Money Options at Fiscal Year
                End****Exercisable**
            
            **Unexercisable**
            
            **Exercisable**
            
            **Unexercisable**Sheldon
                Nelson,
            
            
            -0-
            
            $
            0
            
            
            375,000
            
            
            300,000
            
            $
            30,750
            
            $
            0Chief
                Executive OfficerTom
                Tracey,
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            $
            0
            
            $
            0Chief
                Operating Officer, Pres.Patrick
                Cunningham,
            
            
            -0-
            
            $
            -0-
            
            
            213,768
            
            
            54,167
            
            $
            48,353
            
            $
            0VP
                of Sales and Business Dev.Bradley
                Holmstrom,
            
            
            -0-
            
            $
            -0-
            
            
            290,213
            
            
            56,250
            
            $
            70,300
            
            $
            0General
                CounselMichael
                Stanway,
            
            
            30,000
            
            $
            26,700**1**
            
            
            165,000
            
            
            -0-
            
            $
            67,650
            
            $
            0VP
                of Product EngineeringCarmen
                Ragusa, Jr.,
            
            
            -0-
            
            
            -0-
            
            
            125,000
            
            
            75,000
            
            $
            0
            
            $
            0VP
                of Finance and Admin.







1.
            Value
                of exercised options at $0.89/share on day of exercise, less exercise
                price of $0.33/share.


56


**COMPENSATION
      OF DIRECTORS**





*Cash.* Each
      director who is not an employee or full time consultant of the Company is paid
      $1,000 per month and an attendance fee of $1,000, plus out-of-pocket expenses
      for each Board or committee meeting attended. Ms. Howard also receives an
      additional $3,000 per year for her work as the independent financial expert
      on
      the Company’s Audit Committee.





*Stock.* In
      2000,
      Messrs. Boyle and Hooper each received a total of five-year options to
      purchase 100,000 shares of common stock as compensation for two years of Board
      service. These options were at an exercise price of $0.33 per share and have
      been exercised.  In 2004, Messrs. Boyle and Hooper each received
      additional five-year, fully-vested options to purchase 100,000 shares of common
      stock as additional compensation for two additional years of Board service.
      These options are at an exercise price of $1.28 per share.  In 2003, Edward
      Huguez was granted a five-year option to purchase 100,000 shares of common
      stock
      as additional compensation for two years of Board service. These options are
      currently priced at $0.65 per share. In the fiscal year ending September 30,
      2005, Mr. Cox and Ms. Howard were each granted a five-year option to purchase
      100,000 shares of common stock as additional compensation for two years of
      Board
      service. These options are currently priced at $1.83 per share. In lieu of
      additional options as compensation for Messrs. Boyle and Hooper’s continued
      service on the Board, they were each approved a grant of 20,000 shares of common
      stock for their service from May 2005 through May 2006 and 20,000 shares of
      common stock for their service from May 2006 through May 2007. These shares
      have
      not yet been issued.





**EMPLOYMENT
      CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS
      AT
      SEPTEMBER 30, 2006**





*Sheldon
      Nelson.* The
      Company has a Management Employment Agreement with its Chief Executive Officer,
      Sheldon Nelson, with a current annual salary of $260,000 terminable by the
      Company upon four (4) weeks notice and a termination payment equal to
      twenty-four (24) months salary. Upon a change in control, either party may
      terminate the Agreement with the Company paying a termination payment equal
      to
      thirty-six (36) months salary.





*Patrick
      Cunningham.* The
      Company has a Management Employment Agreement with its Vice President of Sales
      and Business Development, Patrick Cunningham, with a current annual salary
      of
      $175,000 terminable by the Company upon four (4) weeks notice and a termination
      payment equal to twelve (12) months salary. Upon a change in control, either
      party may terminate the Agreement with the Company paying a termination payment
      equal to twenty four (24) months salary.





*Brad
      Holmstrom.* The
      Company has a Management Employment Agreement with its General Counsel, Brad
      Holmstrom, with a current annual salary of $160,000 terminable by the Company
      upon four (4) weeks notice and a termination payment equal to four (4) months
      salary. Upon a change in control, either party may terminate the Agreement
      with
      the Company paying a termination payment equal to twelve (12) months
      salary.





*Carmen
      Ragusa, Jr.* The
      Company has a Management Employment Agreement with its Vice President of Finance
      and Administration, Carmen Ragusa, Jr., with a current annual salary of $160,000
      terminable by the Company upon four (4) weeks notice and a termination payment
      equal to four (4) months salary. Upon a change in control, either party may
      terminate the Agreement with the Company paying a termination payment equal
      to
      twelve (12) months salary.


57





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





The
      following table sets forth information with respect to beneficial ownership
      of
      our outstanding common stock (only outstanding voting security) as of December
      19, 2006 by each person or group known to the Company to be the beneficial
      owner
      of more than 5% of the Company’s common stock based upon Forms SC 13G and Forms
      SC 13G/A filed with the Securities and Exchange Commission:




**Name
                and Address of Beneficial Owner of Common Stock**
            
            **Amount
                and Nature of Beneficial Ownership**
            
            **Percent
                of Class**Capital
                Group International, Inc. and
              Capital
                Guardian Trust Co.
              11100
                Santa Monica Blvd., Los Angeles, CA 90025
            
            
            8,527,690
            
            
            17.0
            %SC
                Fundamental, et. al.
              747
                Third Ave., New York, NY 10017
            
            
            2,863,000
            
            
            5.7
            %Fuller
                & Thaler, et. al.
              411
                Borel Ave., Suite 402, San Mateo, CA 94402
            
            
            3,152,401
            
            
            6.3
            %Scopia
                Management Inc., et. al.
              450 Seventh
                Ave., New York, NY 10123
            
            
            2,544,532
            
            
            5.1
            %





The
      following table sets forth information with respect to beneficial ownership
      of
      our outstanding common stock (only outstanding voting security) as of December
      19, 2006, including; (i) each executive officer named in the Summary
      Compensation; (ii) each of the Company’s directors, and; (iii) all of the
      Company’s executive officers and directors as a group:





**Name
                and of Beneficial Owner of Common Stock**
            
            **Amount
                and Nature of Beneficial Ownership**
            
            **Percent
                of Class**Sheldon
                B. Nelson**1**
            
            
            1,999,360
            
            
            3.7Tom
                Tracey**2**
            
            
            219,136
            
            
            *Patrick
                Cunningham**3**
            
            
            493,019
            
            
            1.0Brad
                Holmstrom**4**
            
            
            395,729
            
            
            0.8Michael
                Stanway**5**
            
            
            209,819
            
            
            *Carmen
                Ragusa, Jr.**6**
            
            
            184,079
            
            
            *Joe
                Nassau**2**
            
            
            47,783
            
            
            *John
                Silvers**2**
            
            
            33,476
            
            
            *J.E.
                (Ted) Boyle**7**
            
            
            190,000
            
            
            *Douglas
                Hooper**8**
            
            
            160,000
            
            
            *Steve
                Cox**9**
            
            
            100,000
            
            
            *Carolyn
                Howard**10**
            
            
            276,425
            
            
            0.5All
                executive officers and directors as group (10 persons)
            
            
            4,308,826
            
            
            8.1**11**





*
      less
      than 0.5%







(1)
            Includes
                957,016 shares held of record by 567780 BC Ltd., a British Columbia
                corporation wholly owned by the Sheldon Nelson Family Trust whose
                trustees
                are Sheldon Nelson and his sister, Nicole Nelson, 667,433 shares
                held
                personally and 375,000 shares subject to options exercisable within
                the
                next sixty days.(2)
            Includes
                shares of common stock only(3)
            Includes
                397,186 shares of common stock and 95,833 exercisable options, within
                the
                next sixty days, to purchase shares of common stock.(4)
            Includes
                226,308 shares of common stock and 168,750 exercisable options, within
                the
                next sixty days, to purchase shares of common stock.(5)
            Includes
                44,819 shares of common stock and 165,000 exercisable options, within
                the
                next sixty days, to purchase shares of common stock.(6)
            Includes
                59,079 shares of common stock and 125,000 exercisable options, within
                the
                next sixty days, to purchase shares of common stock.(7)
            Includes
                50,000 shares of common stock and 100,000 exercisable options purchase
                shares of common stock and 40,000 shares of common stock to be issued.(8)
            Includes
                20,000 shares of common stock and 100,000 exercisable options to
                purchase
                shares of common stock and 40,000 shares of common stock to be
                issued.(9)
            Includes
                100,000 exercisable options to purchase shares of common
                stock.(10)
            Includes
                176,425 shares of common stock and 100,000 exercisable options to
                purchase
                shares of common stock.(11)
            Based
                on 52,644,536 shares, which includes 51,243,953 outstanding shares on
                December 19, 2006, and above mentioned
                options.






58




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





On
      November 1, 2005, Director Steve Cox entered into a Consulting Agreement with
      the Company to provide Business Development services for a period of six months
      at a base rate of $5,000 per month. Should these business development
      initiatives have resulted in a strategic funding, Mr. Cox would
      have received an “investment fee” equal to 2% of the first $5 million and
      1% of any amount in excess of $5 million. This Agreement terminated after the
      initial term of six months and no investment fee was paid to Mr. Cox. Mr. Cox
      resigned from the Board as of November 30, 2006.





On
      October 15, 2006, the Company entered into a Consulting Agreement with Howard
      Interests for business advisory services, the principal of which is the spouse
      of Board member Carolyn Howard. The Consulting Agreement is a six month
      agreement, with options for renewal, and a monthly payment required of
      $5,000.





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





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





**Fiscal
                year ended**
              **September 30,
                2006**
            
            **Fiscal
                year ended**
              **September 30,
                2005**Audit
                Fees
            
            $
            124,299
            
            $
            148,417Audit
                Related Fees
            
            
            —
            
            
            —Tax
                Fees
            
            $
            49,599
            
            
            23,612All
                Other Fees
            
            $
            —
            
            $
            —





The
        Audit
        Committee’s policy is to pre-approve all auditing and permitted non-audit
        services other than deminimus non-audit services as defined in Section 10A(i)(1)
        of the Exchange Act which will be approved prior to the completion of the
        registered public accounting firm’s audit. The Audit Committee has reviewed
        summaries of the services provided and the related fees and has determined
        that
        the provision of non-audit services is compatible with maintaining the
        independence of J.H. Cohn LLP.




59




**PART
      IV**





**Item
      15.            Exhibits**





**INDEX
      TO EXHIBITS**





Exhibits2.1
            
            Acquisition
                Agreement dated November 2, 1998 between Alpha Beta Holdings, Ltd.
                and MDU
                Communications Inc. (1)3.1
            
            Certificate
                of Incorporation (1)3.2
            
            Amendment
                to Certification of Incorporation (4)3.3
            
            Bylaws
                (1)3.4
            
            Amendment
                to Bylaws (2)4.1
            
            Form
                of Warrant to Purchase Common Stock, dated November 24, 2004, to
                various
                purchasers in the Company’s November 24, 2004 private placement of units
                (5)4.2
            
            Form
                of Stock and Warrant Purchase Agreement, dated November 24, 2004,
                with
                various purchasers in the Company’s November 24, 2004 private placement of
                units (5)4.3
            
            Form
                of Registration Rights Agreement, dated November 24, 2004, related
                to the
                Company’s November 24, 2004 private placement of units (5)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





60


**SIGNATURES**





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


MDU
                COMMUNICATIONS INTERNATIONAL, INC.By:
            /s/  SHELDON
                NELSONSheldon
                Nelson*Chief
                Financial Officer*
              December
                29, 2006





MDU
                COMMUNICATIONS INTERNATIONAL, INC.By:
            /s/  CARMEN
                RAGUSA, JR.Carmen
                Ragusa, Jr.*Vice
                President of Finance*
              December
                29, 2006




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
                29, 2006/s/  DOUGLAS
                G. HOOPERDouglas
                G. Hooper
            
            Director
            
            December
                29, 2006/s/  JOHN
                EDWARD BOYLEJohn
                Edward Boyle
            
            Director
            
            December
                29, 2006/s/  CAROLYN
                C. HOWARDCarolyn
                C. Howard
            
            Director
            
            December
                29, 2006








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