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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-KSB

|/x/ | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended September 30, 2001, or

|/ / | 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

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

Delaware(State of Incorporation)

84-1342898(IRS Employer ID. No.)60-D Commerce Way, Totowa, New Jersey 07512(Address of Principal Executive Offices) (Zip Code)


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

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

Title of Each Class

Name of Each Exchange
On Which Registered


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

Common Stock, par value $0.001 per share(Title of Class)

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

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

The
issuer's revenues for its most recent fiscal year were $1,117,607.

The
aggregate market value of the common equity held by non-affiliates, computed by reference to the price at which the issuer's common stock was sold, based on the
average of bid and asked prices on December 14, 2001, was $7,128,528.

As
of December 14, 2001 there were 18,046,320 shares of common stock outstanding and no other outstanding classes of a common equity security.

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

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FORWARD-LOOKING STATEMENTS

This document contains forward-looking statements within the meaning of the federal securities laws, including Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These include statements about our expectations, beliefs, intentions or strategies for the future, which we
indicate by words or phrases such as "anticipate," "expect," "intend," "plan," "will," "we believe," "the Company believes," "management believes" and similar language. The forward-looking statements
are based on our current expectations and are subject to certain risks, uncertainties and assumptions, including those set forth in the discussion under "Risk Factors" described in that section, and
"Management's Discussion and Analysis." Our actual results may differ materially from results anticipated in these forward-looking statements. We base our forward-looking statements on information
currently available to us, and we assume no obligation to update them.

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PART I

Exchange Rates.All dollar amounts herein are stated in US dollars except where otherwise indicated. The following
table reflects the rate of exchange for Canadian dollars per US$1.00 in effect at the end of fiscal year 2001 and the average rate of exchange during the fiscal year, based on the Bank of Canada
average noon spot rate of exchange:

Fiscal Year Ending
September 30, 2001Rate at end of fiscal year:

1.5790Average rate for fiscal year:

1.5352


Item 1Description of Business

INCORPORATION AND HISTORY

Our Canadian operating company, MDU Communications Inc. ("MDU Canada"), was incorporated in March 1998. In November 1998, MDU Canada's
shareholders sold all of their MDU Canada stock to Alpha Beta Holdings, Ltd., an inactive U.S. public reporting company, in exchange for Alpha Beta stock, and renamed it "MDU Communications
International, Inc." Alpha Beta was 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. In March 2000, we formed MDU Communications (USA) Inc., a Washington corporation ("MDU
USA") to conduct business in the U.S. We now operate as a holding company with MDU Canada and MDU USA as our wholly owned subsidiaries.

In
early 2001, the Company made a fundamental re-assessment of its business plan and determined that the most profitable markets lay in densely populated areas of the
United States. The Company changed its corporate focus and business strategy from serving the entire North American MDU market, to several key U.S. markets, beginning with the Northeast United States.
To further this change in corporate focus, on January 31, 2001 and April 27, 2001, we respectively completed a two-stage agreement with Star Choice Television
Network, Inc. ("Star Choice"), one of our Canadian partners, for the sale of certain satellite television assets for a total adjusted selling price of $7.0 million. 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.

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 atwww.mduc.com.

BUSINESS OF THE COMPANY

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

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The Company earns its revenue through the sale of digital satellite television programming and high-speed Internet services to residents of MDUs. We negotiate
long-term access agreements with the owners and managers of MDU properties allowing us the right to provide digital satellite television and high-speed Internet services, and
potentially other services, to their residents. Under our agreement with our programming provider, DIRECTV, we receive new subscriber activation subsidies in addition to a percentage of the fees
charged to the subscriber each month and a per subscriber monthly digital access fee. We also offer installation services to building owners and managers for the construction of wiring and
installation of equipment to allow telecommunications services including the sale of related equipment. In our private cable systems, our revenues result from the difference between the wholesale
price charged to us by program providers and the price we charge for the programming package. From subscribers to our Internet service, we earn a monthly Internet access service fee.

We
had previously entered into a long-term agreement with Star Choice to establish and maintain distribution systems and sell Star Choice satellite programming packages to
the residents of Canadian MDU properties. With the sale of our Canadian subscriber base to Star Choice, the agreement was mutually terminated as of April 30, 2001. In May of 2000 we entered
into a similar arrangement with DIRECTV, Inc. ("DIRECTV"), a United States provider of satellite television programming, under which we are now providing our digital set-top
services to MDUs in the United States. DIRECTV is the largest satellite broadcaster operating in the United States.

We
began offering high-speed (broadband) Internet access services in July of 2000. In May of 2000, we entered into a non-exclusive Master Purchase Sales
Agreement with 3Com Corporation to become part of their preferred Visitor Based Network (VBN) in order to provide broadband Internet products, systems and value added services, through our new
high-speed Internet service to MDUs. Upon dissolution of 3Com's VBN division, this agreement was mutually terminated. In July of 2001, we entered into a Master Lease Agreement to Purchase
Equipment with Cisco Systems, Inc. ("Cisco"). Under this agreement, we receive preferred pricing and discounts for equipment purchased to support our high-speed Internet services.
As part of this agreement, Cisco has extended $500,000 of lease financing to the Company to purchase Internet related equipment and to finance a portion of installation costs.

OUR STRENGTHS

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

Access Agreements

Our access agreements with the owners of MDU properties generally grant us exclusive rights to provide digital satellite television services, and in some cases
television services altogether, for a minimum term of seven to ten years and in many cases a right of first refusal for other new telecommunications services. However, our access agreements generally
do not bind us to deploy our service within any particular time during the term or at all. This gives us the flexibility to deploy only on those properties that, after our preliminary market research,
we determine meet our profitability criteria. These access agreements are in the name of the Company and provide us with revenue streams either directly from property owners in bulk properties or from
individual subscribers in choice or exclusive properties.

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Strategic Alliance With DIRECTV

In May of 2000, we entered into a long-term 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.

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, 2001, revenues from DIRECTV were 10% 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.

Our
agreement with DIRECTV runs for an initial term of five years, with an automatic extension of the entire agreement to coincide with the termination of our longest running property
access agreement. Thereafter, the agreement is renewable at an additional five-year period at the option of both parties. Either party may terminate for the other's breach, bankruptcy or
unapproved assignment of the agreement. The terms of the Agreement provide us with an upfront activation fee, a percentage of the monthly programming fees paid to DIRECTV by subscribers and other
marketing/incentive payments from time to time.

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.

Strategic Alliance With Cisco

In June of 2001, we entered into a non-exclusive Master Purchase Sales Agreement with Cisco to become part of their preferred network in order to
provide broadband Internet products, systems and value added services, through our new high-speed Internet service to our MDUs. Cisco selected us to
participate in a direct purchasing agreement as a result of our mutual interest in developing closer working relationships with application service providers involved in developing emerging market
opportunities. In addition, we recently signed a preferential agreement with Cisco Systems Capital for the purchase of high-speed Internet related equipment and installation, which
includes a half million-dollar lease financing line of credit. Our strategic alliance with Cisco also provides significant name recognition of high quality products and we benefit from the large-scale
national marketing campaigns that are continuously run by Cisco.

MARKET

The United States MDU market represents a large niche market of potential telecommunications customers. There are over 26 million MDU television
households out of a total of 100 million U.S. television households with the most densely populated MDU areas in the Northeast. Our short-term goal is to become a significant
provider of bundled MDU products and services, to the Northeastern U.S. and Texas MDU marketplace. Subsequent growth plans include the California and Florida areas.

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.

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Although many cable companies have begun the process of upgrading to a digital signal, this transition will require significant capital outlays and time to complete, and even then only a portion of
the programming will be digital. Additionally, the relationship between the property owners and managers that control access to these 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:



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 hard-wire cable operators. In addition, our competition includes other DTH providers, wireless cable and off-air broadcasters:

Hardwired 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. In the U.S., the traditional cable companies serve an estimated 78% of the 100 million U.S. television
households. The majority of cable operators currently use analog technologies, which produce inferior quality video and sound compared to digital technologies. Many cable operators have begun the
process of upgrading to a digital signal, however, this transition requires significant capital outlays and time to deploy. Cable operators are also beginning to offer telephony. In the meantime, we
believe that 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 and over 200 video and audio
channels at a comparable price to most cable operators' current service.

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

Wireless Cable Systems (Multi-Channel Multi-Point Distribution Services (MMDS)).MMDS systems are a hybrid of cable
transmission and off-air broadcasting. MMDS was developed as an alternative

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where hard-wired cable systems are unavailable or not possible. MMDS programming is transmitted by local cable operators in a scrambled form through the air via microwave frequencies to a
small microwave dish at the subscriber's property, which converts the signal to a frequency band used by standard cable services. However, this system generally requires a direct
"line-of-sight" from the transmission facility to the subscriber's receiving dish, which limits its range and capability of being received. There are very few MMDS providers
operating in North America and they serve regional markets only.

GOVERNMENTAL REGULATION

Regulation of our Business.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. However, our program provider, DIRECTV, is subject to certain types of federal, state and local regulation.

Federal Regulation of our Satellite Television Business.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.

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

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the 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, it has been suggested that certain telephone-to-telephone services provided by ISPs using the Internet
backbone may be reclassified as "telecommunications services" and subject to regulation. Any such change may affect demand for Internet related services, which we intend to provide. 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 30 employees, all full-time, as of September 30, 2001. None of the Company's employees are represented by a labor union. The
Company has experienced no work stoppages and believes that its employee relations are good.

RISK FACTORS

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

We May Be Unable To Meet Our Future Capital Requirements.

We may require additional capital to finance our continued expansion. Our existing capital and funds from operations may not be sufficient to meet our
anticipated cash needs during the fiscal year ending September 30, 2002. Because of the uncertainties in raising additional capital, there can be no assurance that we will be able to obtain the
necessary capital to finance our operations and growth. Insufficient capital will require us to delay and scale back or eliminate our proposed development activities and could impair our ability to
continue as a going concern.

We Have Incurred Losses Since Inception And May Incur Future Losses.

To date, we have had limited revenues and have not shown a profit in our operations. Through our fiscal year ended September 30, 2001, we have incurred
net losses of $12,217,983. We do not expect to have profitable operations until sometime in fiscal year 2002 or later, and we cannot assure that we will

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ever achieve or attain profitability. If we cannot achieve operating profitability or positive cash flows, we may not be able to meet our working capital requirements, which could have a material
adverse effect on our business.

We Have A Limited Operating History.

We commenced operations in August 1998. Accordingly, we have a limited operating history and our business strategy may not be successful. Our failure to
implement our business strategy or an unsuccessful business strategy could materially adversely affect our business, financial condition and operating losses.

We Depend Upon Our Relationship With DIRECTV.

In May 2000, we entered into a five-year system operator agreement with DIRECTV to install and maintain distribution systems in MDU
properties. Under our agreement with DIRECTV, we may not maintain MDU distribution systems or market direct-to-home satellite broadcast services for others. Consequently, we
are totally dependent upon DIRECTV for set-top programming. During the fiscal year ended September 30, 2001, revenues from DIRECTV were 10% of our total revenues. DIRECTV is not
required to use us on an exclusive basis for marketing its programming to MDUs. Also, adverse events at DIRECTV beyond our control could adversely affect us.

We Face Competition.

We face competition from others who are competing for a share of the MDU subscriber base including other satellite companies, other DIRECTV system operators,
cable companies, and off-air broadcasters. Also, DIRECTV itself could corporately focus on MDUs. Other companies with substantially greater assets and operating histories could enter this
market. Our 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 our business.

We Need To Manage Our Growth.

We have experienced growth, but to manage potential future growth effectively, we must improve our operational, financial and management information systems
and must hire, train, motivate and manage our employees and commissioned salespersons. Our future success will also depend on the ability to increase our customer base and to attract and retain
qualified technical, sales, marketing and management personnel, for whom competition is intense. We may not be able to effectively manage such growth, and failure to do so could have a material
adverse effect on our business, financial condition and results of operations.

We Depend On Key Personnel To Maintain Our Success.

Our success depends substantially on the continued services of our executive officers and key employees, in particular Sheldon Nelson, Dean Taylor, Patrick
Cunningham and Tim Donnelly. The loss of the services of any of our key executive officers or key employees could harm our business. None of our key executive officers or key employees currently has a
contract that guarantees their continued employment by us. There can be no assurance that any of these persons will remain employed by us or that these persons will not participate in businesses that
compete with us in the future.

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We May Issue Preferred Stock.

Our 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 our 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.

Issuance Of Shares Of Common StockIn The Future.

Our certificate of incorporation authorizes the issuance of 50,000,000 shares of common stock. The future issuance of all or part of the remaining authorized
common stock may result in substantial dilution in the percentage of our common stock held by our existing stockholders. Also, any stock we sell in the future may be valued on an arbitrary basis by us
and the issuance of shares of common stock for future services, acquisitions or other corporate actions may have the effect of diluting the value of the shares held by existing shareholders.

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 our existing or future products or services obsolete. Our 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 our services could harm our ability to attract and retain users.

System Disruptions.

Our ability to attract and retain subscribers depends on the performance, reliability and availability of our services and infrastructure. We may experience
periodic service interruptions caused by temporary problems in our own systems or in the systems of third parties upon whom we rely to provide service or support. Fire, floods, earthquakes, power
loss, telecommunications failures, break-ins and similar events could damage these systems and interrupt our services. Service disruptions could adversely affect our revenue and, if they
were prolonged, would seriously harm our business and reputation. We do 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 our business.

Item 2Description of Property

Our headquarters are in Totowa, New Jersey, where we centralize our corporate administrative functions. The office is home to our senior management team, call
center, and subscription management system. During the past fiscal year we divested ourselves from our Canadian office space in Halifax, Toronto, Montreal, Winnipeg, Calgary, Edmonton and Vancouver.
Our only remaining lease is Totowa, New Jersey of 8,372 square feet at a current monthly cost of $8,755, expiring July 31, 2002. We believe that this space is adequate to suit our needs for the
foreseeable future.

Item 3Legal Proceedings

From time to time, we may be subject to legal proceedings, which could have a material adverse effect on our business. At year end there is only one currently
pending legal proceedings.Whistler Cable

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Television Ltd.commenced a lawsuit against us in The Supreme Court of British Columbia on July 14, 1999. Other defendants are Whistler Resort
Management Ltd. and The Owners, Strata Plan No. LMS3230. Plaintiff alleges that its personal property was taken and seeks return of its personal property or damages in the alternative, damages
resulting from breach of the Broadcasting Act, R.S.C. 1991, C.11, an injunction against use of its personal property, interest and costs. This case is in the discovery phase. Given the preliminary
stage of the proceedings, it is not presently possible to estimate or determine whether there will be any loss to the Company resulting from this claim.

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

On May 10, 2001, the Company held its Annual General Meeting of Shareholders in Vancouver, British Columbia, Canada. Four issues were put forth to the
shareholders; election of four directors, amendment to the Company's Certificate of Incorporation to increase the number of authorized shares, approval of the 2001 Stock Option Plan, and ratification
of the appointment of independent auditors.

Robert
Dyck was elected to a term expiring in May 2002, John Edward Boyle and Douglas Hooper were elected to terms expiring in May of 2003 and Sheldon B. Nelson was elected to
a term expiring in May of 2004. There is currently one vacancy on the Board of Directors. All nominated directors each received 9,642,353 votes in favor, 0 votes against and 30,900 votes abstained.

On
the issue of amending the Company's Certificate of Incorporation to increase the number of authorized shares, 4,937,349 votes were registered in favor, 394,242 votes were
registered against and 4,370 abstained. This issue failed as it did not receive affirmation from a majority of shareholders of the outstanding shares number of shares, broker non-votes
excepted.

On
the issue of approval of the 2001 Stock Option Plan for employees and consultants, 5,100,259 voted in favor, 149,070 voted against and 86,632 abstained. This Plan was approved as a
simple majority of the quorum votes voted in favor.

Deloitte &
Touche LLP were appointed as independent auditors for the upcoming fiscal year with 9,659,838 votes in favor, 10,800 votes against and 2,615 abstentions.

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PART II

Item 5Market for Common Equity and Related Stockholder Matters

MARKET FOR COMMON STOCK

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

Quarter Ended

High

LowDecember 31, 1998

$
1.56

$
1.31March 31, 1999

$
2.69

$
1.44June 30, 1999

$
2.38

$
1.06September 30, 1999

$
1.72

$
0.63December 31, 1999

$
1.88

$
0.31March 31, 2000

$
9.00

$
2.13June 30, 2000

$
6.75

$
1.53September 30, 2000

$
2.50

$
0.81December 31, 2000

$
1.50

$
0.25March 31, 2001

$
0.71

$
0.23June 30, 2001

$
0.74

$
0.37September 30, 2001

$
0.48

$
0.26


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

As
of December 14, 2001, the Company had approximately 76 holders of record of its shares of common stock excluding shares held by broker-dealers. 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 Company's Board of Directors and will
depend, among other factors, upon the Company's earnings, financial condition and capital requirements.

"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.

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UNREGISTERED SECURITIES SALES

Preferred Stock

There were no sales or issuances of these securities during the fiscal year ended September 30, 2001.

Common Stock

On April 28, 2001, we purchased Digital Solutions, LLC. As part of the purchase price, the members of Digital Solutions, LLC each received a certain
number of common shares of the Company, totaling
500,000 shares. These shares were issued without registration under the Securities Act of 1933, as amended ("1933 Act").

Warrants

On January 11, 2001 the Company issued a warrant for the purchase of 600,000 shares of common stock exercisable at $0.60 per share for one year pursuant
to promissory note entered into with Lyall Family Trust. This issuance was made without registration under Section 4(2) of the 1933 Act. No commission was paid in connection with this warrant.

On
November 1, 2001 the Company issued a warrant for the purchase of 150,000 shares of common stock exercisable at $0.35 per share for three years pursuant to an investor
relations engagement with Small Caps Online Group, LLC. This issuance was made without registration under Section 4(2) of the 1933 Act. No commission was paid in connection with this warrant.

Options



In October of 2000, we issued five-year options to purchase 25,000 shares of common stock at $1.50 per share to a supplier pursuant to the 1998/99
Suppliers Option Plan earned to September 30, 2000. These options were made to a non-U.S. person without registration under Section 4(2) of the 1933 Act. These shares of
common stock underlying these options were subsequently registered with the Securities and Exchange Commission under a Form SB-2, which became effective July 19, 2000. There are an
additional 25,000 issuable to this supplier under the Plan



In October of 2000, the Board of Directors accepted the recommendation of its compensation committee to re-price, at $2.00 per share, the exercise
price of all options previously granted at $5.00 per share under the 2000 Incentive Stock Option Plan. Grants of options to purchase 7,000 common shares were also issued to employees. On
April 11, 2001, the Board of Directors approved the 2001 Stock Option Plan to replace the 2000 Incentive Stock Option Plan. The 2001 Stock Option Plan is in
all respects identical to the 2000 Incentive Stock Option Plan, which had not been approved by a vote of the shareholders within one year of its adoption by the Board. The 2001 Option Plan was
approved by a vote of the shareholders at the Annual General Meeting on May 10, 2001, and all currently outstanding options were re-granted under the new Plan.



In March of 2001, the Board of Directors accepted the recommendation of its compensation committee to re-price, at $0.60 per share, the exercise
price of all options previously granted at $2.00 per share under the 2001 Stock Option Plan. Grants of options to purchase 150,000, 33,333 and 255,360 common shares were made to three former employees
on April 11, 2001 and May 10, 2001 respectively.

12

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At the Annual General Meeting in May of 2001, the shareholders of the Company approved the 2001 Stock Option Plan. On June 5, 2001 a consultant was granted 100,000 fully vested options to
purchase common shares at $0.60 per share and exercisable for three years from the date of issue. In August 2001, the Board of Directors approved option grants from the 2001 Stock Option Plan
in the amount of 1,009,500 to management and other employees.

Convertible Promissory Notes

During the past fiscal year, one convertible promissory note in the principal amount of $150,000 was issued to one non-U.S. investor. The note,
dated January 11, 2001, bore interest at 12% per annum and was repayable (or convertible at our option) up through December 31, 2001. On April 6, 2001 the note was paid in full
with interest. No commissions were paid in connection with this issuance.

Item 6Management's Discussion and Analysis

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. Our consolidated financial statements and their respective notes have been stated in U.S. dollars. This report contains forward-looking
statements that involve risks and uncertainties. The Company's actual results could differ materially from those indicated in the forward-looking statements.

OVERVIEW

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

MDU
Communications International, Inc. concentrates exclusively on delivering state-of-the-art digital satellite television and
high-speed Internet solutions to the United States multi-dwelling unit (MDU) residential marketestimated to include 26 million residences. We seek to differentiate
ourselves from other service providers through a unique strategy of balancing the information and communication needs of today's MDU residents with the technology concerns of property managers and
owners and providing the best overall service to both. To accomplish this objective, we have partnered with such groups as DIRECTV, Inc. and Cisco Systems, Inc. and have been working
with large property owners and real estate investments trusts (REITs) such as AvalonBay Communities, Trammell Crow Residential, Roseland Property Company, KSI Services, as well as many others, to
understand and meet the technology needs of these groups.

The
Company earns its revenue through the sale of digital satellite television programming and high-speed Internet services to residents of MDUs. We negotiate
long-term access agreements with the owners and managers of MDU properties allowing us the right to provide digital satellite television and high-speed Internet services, and
potentially other services, to their residents. Under our agreement with our programming provider, DIRECTV, we earn an upfront subsidy, a percentage of the fees charged to the subscriber each month
anda per subscriber monthly digital access fee. We also offer installation services to building owners and managers for the construction of wiring and installation of equipment to allow
telecommunications services including the sale of related equipment. In our private cable systems, our earnings result from the difference between the wholesale price charged to us by program
providers and the price we charge for the programming package. From subscribers to our Internet service, we earn a monthly Internet access service fee.

In
early 2001, the Company made a fundamental re-assessment of its business plan and determined that economically, the most profitable markets lay, not in the Canadian
market, but in densely populated areas of the United States. An assessment of the competitive climate also confirmed that many of the large MDU geographic markets presented additional business
opportunities. The Company began to focus its business strategy on several key U.S. markets, beginning with the Northeast United States.

13

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To further this change in corporate focus, on January 31, 2001 and April 27, 2001, we completed a two-stage agreement with Star Choice, one of our Canadian
partners, for the sale of certain satellite television assets for a selling price of $7.0 million. As a result, May 30, 2001, the Company relocated its operations and certain key
employees to the U.S.

By
the end of the fiscal year, we accomplished several critical advancements in our strategy for U.S. expansion into the MDU market. As of May 2001, the Company headquarters
and key employees moved from Vancouver, British Columbia, Canada to the New York Metro Area in an effort to establish a presence in the most significant cluster of 8 million MDUs in the United
States. To further this presence, the Company acquired New England-based Digital Solutions, LLC, giving it an immediate presence in the New England area with over 3,100 new subscribers and 700
subscribers-in-progress. The acquisition also gave the Company an important joint venture relationship with AvalonBay Communities, Inc. The Company also solidified
relationships with property owners such as Roseland Property Company, Trammell Crow Residential and KSI Services, Inc. We also identified Texas as a profit center and completed an acquisition
of DigiSat TV, a sole proprietorship in the Houston, Texas, giving the Company 265 new subscribers and over 3,000 suites passed by wire.

The
Company's subscriber growth during the fourth quarter has been significant. As of September 30, 2001 the Company had a total of 6,067 U.S. subscribers to its services, had
deployed service into 151 U.S. properties representing 19,241 units and had a backlog of 89 properties under letter of intent or access agreement representing 17,642 units of which 7,899 are bulk or
exclusive units.

RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000

Change in Reporting and Functional Currency.Effective September 30, 2001, the Company
adopted the U.S. Dollar as its functional and reporting currency since a majority of the Company's revenues, expenses, assets and liabilities are in the United States and the increasing focus of the
Company's operations are in that country. Previously the Company's functional and reporting currency was Canadian Dollars. Comparative financial statements were restated as if the U.S. Dollar had been
the reporting currency in prior years.

Sale of Canadian Subscribers.On January 31, 2001 the Company completed an agreement
with Star Choice Television Network, Inc., a subsidiary of Star Choice Communications Inc., for Star Choice to purchase certain satellite television assets for a purchase price of
$3,681,100. Under the agreement, Star
Choice also received the telecommunications equipment required to service the related subscribers. This equipment had an original cost of $3,348,300 and a net book value of $2,784,744 at
January 31, 2001. Net intangible assets carried at $59,672 at January 31, 2001 related to sold subscribers and accordingly, were written off. The transaction resulted in a gain of
$836,984 which was reduced by cumulative foreign exchange losses relating to these assets.

On
April 27, 2001 the Company completed a second agreement with Star Choice Television Network, Inc. for Star Choice to purchase certain satellite television assets for
a purchase price of approximately $3,276,227. Under the agreement, Star Choice also received the telecommunications equipment required to service the related subscribers. This equipment had an
original cost of approximately $1,431,732 and a net book value of approximately $1,236,500 at April 27, 2001. The transaction resulted in a gain of $2,039,727which was reduced by cumulative
foreign exchange losses relating to these assets.

Net Loss.The Company reported a net loss of $2,426,455 for the year ended September 30,
2001 compared to a net loss of $8,040,790 for the year ended September 30, 2000. The reduction in the net loss is due to three main reasons: the gain on sale of the Canadian subscribers of
$2,401,695; the higher general and administrative costs for wages, relocation and travel, and; lower non-cash charges (described below) of $195,302 in the year ended September 30,
2001 compared to $4,051,505 for the year ended September 30, 2000.

14

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Revenues.Our revenue for the year ended September 30, 2001 of $1,117,607 increased by
$169,738 over the year ended September 30, 2000. Revenue from United States operations increased to 51% of total revenue from 1% in the prior year and will represent substantially all of our
revenue in the future. Revenues from Western and Eastern Canadian subscribers ceased in February and May 2001 respectively due to the sale to Star Choice.

Sales
of installation services represented 21% of total revenue compared to nil in the prior fiscal year. Installation services consist of offerings to building owners and managers
for the construction of satellite and Internet systems and may include associated wiring, labor and equipment.

Direct Costs.Direct cost of sales decreased to $358,257 in the year ended September 30,
2001 compared to $496,093 in the year ended September 30, 2000. This 28% decline is due to a larger mix of direct to home satellite subscribers where the net revenue is recorded with no cost of
sales. In the year ended September 30, 2000, there was a higher mix of SMATV subscribers under which revenue as recorded on a gross basis with the relevant cost of sales also shown.

In
the year ended September 30, 2001, the costs of sales relating to sales of installation services was 28% of total cost of sales compared to nil in the prior fiscal year.

Sales Expenses.Sales expenses consist mainly of salaries, commissions, marketing materials,
trade shows, advertising and promotion. Sales expenses declined to $837,947 from $1,468,753 in the years ended September 30, 2001 and 2000 respectively. This 43% decline in sales expenses was
mainly due to the discontinuation of direct marketing as a sales strategy.

General and Administrative Expenses (G&A).General and administrative expenses increased 7% to
$4,518,148 for the year ended September 30, 2001 from $4,207,576 for the year ended September 30, 2000. Stock option compensation and non-cash charges (excluding
amortization) of $127,821 and $1,070,456 are included in General and Administrative expenses in the years ended September 30, 2001, and 2000 respectively. The balance of G&A expenses of
$4,390,327 and $3,137,120 for the years ended September 30, 2001, and 2000 respectively, is mainly comprised of the following:

Year ended
September 30, 2001

% of
G&A

Year ended
September 30, 2000

% of
G&AWages

1,818,440

41
%
1,040,697

33
%Professional fees

277,985

6
%
518,774

17
%Amortization

549,194

13
%
496,524

16
%Office

460,684

10
%
397,819

13
%Travel

316,196

7
%
220,069

7
%


The
dollar increase in general and administrative expenses relate to higher wages, consulting, occupancy, office and travel expenses as well as the $288,551 in transition and
relocation expenses in the relocation of our business to the United States.

Stock Option Compensation Charges.We account for our stock based employee compensation plans
under APB No. 25 whereby compensation cost is recorded for the excess, if any, of the quoted market price of the common stock over the exercise price at the date of the grant for all employee
and director common stock options issued. Stock options issued to third party consultants and others are accounted for under Statement of Financial Accounting Standard No. 123 "Accounting for
Stock-Based Compensation" whereby compensation charges are recorded based on the fair value of the options granted. For the year ended September 30, 2001, we recorded $135,302 in stock option
compensation costs. Consultants were granted, or had terms extended for 538,693 options to purchase common shares
with $127,821 in fair value. Fair value of $7,481 for 25,000 options under the supplier plan to be granted after September 30, 2001 was accrued in selling expense.

15

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For the year ended September 30, 2000, $1,125,578 of fair value for non-cash stock option compensation and consulting charges. In the year, we granted 90,276
options to officers and employees at an exercise price of $1.00 as a performance incentive, resulting in compensation cost of $351,865. In addition, we granted 170,000 options to consultants at an
exercise price of $5.00 being the market value at date of grant and recorded the fair value of these options, in the amount of $718,591, as consulting expense. Further, stock option compensation
charges in the amount of $55,121 were recorded as sales expense based on the fair value of stock options issued or issuable to a supplier at September 30, 2000.

In
October of 2000, the Board of Directors accepted the recommendation of its compensation committee to re-price, at $2.00 per share, the exercise price of all options
previously granted at $5.00 per share under the 2000 Incentive Stock Option Plan. On March 9, 2001, the Board of Directors approved the re-pricing, at $0.60 per share, of all
options previously granted to employees at $2.00 per share under the 2000 Incentive Stock Option Plan. 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 Incentive Stock Option Plan. As a result, the Company adopted
variable-plan accounting and therefore increases in the share price are recorded as compensation expense in the period the increase occurs. There was no impact on the results of operations
for the year ended September 30, 2001 due to the decline in the market price of the Company's stock in 2001. Changes in the market price of the Company's stock in future periods may impact
future operating results.

Other Non-Cash Charges.Included in the year ended September 30, 2001 is
non-cash interest expense of $60,000 related to a beneficial conversion right on convertible debt.

RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999

Net Loss.The Company reported a net loss of $8,040,790 for the year ended September 30,
2000 (1999$1,684,560). The increased net loss from 1999 was due primarily to two factors. Firstly, included in the net loss are non-cash charges of $4,051,505 (described
below) (1999$347,949). Secondly, sales expenses and general and administrative (G&A) expenses increased as we built out our operations. After the non-cash charges above, our
largest expense was wages. During the year ended September 30, 2000, we increased our permanent full-time staff from 32 to 113 employees. The increase in sales and G&A costs
supported the expansion of operations into the United States and eastern Canada. The
increase in sales and G&A costs also supported our delivery of new services in the Internet and security-monitoring markets. Finally, the increase in sales and G&A costs enabled us to build a customer
service function to support our increasing subscriber base. As at September 30, 2000, we had approximately 15,341 digital satellite subscribers (199911,600), 82 Internet
subscribers (1999nil), and 75 (1999nil) security subscribers, in 217 (1999135) properties throughout Canada and the United States. 156 (1999nil) of
the digital satellite subscribers are United States residents subscribing to DIRECTV.

Revenues.Our revenue for the year ended September 30, 2000 of $947,869
(1999$377,975) was comprised of 39% net programming revenue, 37% SMATV and Private Cable revenue and 24% from digital access fees and other revenue (1999  69%
SMATV and Private Cable revenue, 20% net programming revenue from Star Choice and 11% from digital access fees). The increase in revenue from 1999 is primarily due to an increase in the number of
subscribers. SMATV and Private Cable revenue represented approximately 10,456 (19998,700) subscribers. The net programming revenue represented approximately 4,885 (19992,900)
subscribers.

Revenue
from operations in the United States was less than 1% of total revenue for the year ended September 30, 2000.

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Direct Costs.Direct costs of $496,093 are primarily comprised of SMATV and Private Cable
programming and maintenance costs.

Sales Expenses.Salaries, wages, commissions and benefits make up 70% (199935%) of
the $1,468,753 (1999$901,347) total sales expenses. The 100% increase in salaries, wages, commissions and benefits from 1999 was primarily due to increased employee levels to support the
sales and marketing function. The increase in staff levels not only corresponded to an increase in sales from 1999, but also reflected the expansion of our operations into the United States and
eastern Canada in 2000. The remaining 30% (199965%) balance of sales expense is primarily travel, advertising and telephone expense.

General and Administrative Expenses (G&A).Stock option compensation and non-cash
charges (excluding amortization) comprise $1,070,457 (1999 - $270,480) or 51% (1999 - 42%) of the total $4,207,576 (1999 - $913,145) G&A expenses
for the year-ended September 30, 2000. These non-cash charges are described in detail below. The $3,137,119 (1999 - $642,665) balance of the G&A expenses,
excluding non-cash charges is primarily comprised of the following:

Year ended
September 30, 2000

% of
G&A

Year ended
September 30, 1999

% of
G&AWages

1,392,562

44
%
196,393

31
%Professional fees

518,774

17
%
86,783

14
%Amortization

496,524

16
%
130,234

20
%Office

397,819

13
%
36,086

6
%Travel

220,069

7
%
25,896

4
%


The
overall increase in G&A expenses from 1999 relates to the increase in business activity, the build out of our Customer Service, Finance, Information Technology and Administration
functions, and the expansion of our operations into the United States and eastern Canada. Specifically, the increase in wages from 1999 corresponds to an increase in our permanent
full-time staff from 32 to 113 employees. The increase in professional fees relate primarily to legal and accounting fees attributable to regulatory filings. The increase in amortization
from 1999 corresponds to the increase in telecommunications equipment related to subscriber acquisitions. The increase in office, travel and all other G&A expenses corresponds primarily to the
increased staff levels and the opening of three new offices in the United States and a new office Toronto.

Stock Option Compensation Charges.For the year ended September 30, 2000, $1,070,457 of
G&A expense represented fair value of non-cash stock option compensation. In the year, we granted 90,276 options to officers and employees at an exercise price of $1.00 as a performance
incentive, resulting in
compensation cost of $351,865. In addition, we granted 170,000 options to consultants at an exercise price of $5.00 being the market value at date of grant and recorded the fair value of these
options, in the amount of $700,565, as consulting expense. Further, stock option compensation charges in the amount of $55,121 were recorded as sales expense based on the fair value of stock options
issued or issuable to a supplier for its performance to September 30, 2000. For the year ended September 30, 1999, $270,480 of G&A expense represented fair value of stock option
compensation. Stock option compensation charges in the amount of $77,469 were recorded as sales expense for the year ended September 30, 1999 based on the fair value of stock options issued to
suppliers, calculated on the date the supplier completed the performance required to earn the options.

Other Non-Cash Charges.Included in the year ended September 30, 2000 is a
non-cash financing expense of $2,925,927 representing the fair value of a two-year warrant granted to Gibralt Capital Corporation. The warrant was for the purchase of 750,000
shares of the Company's common stock at an exercise price of $2.50 per share. The fair value of the warrant was determined using a Black Scholes option-pricing model. The warrant was issued in
consideration of Gibralt Capital Corporation's

17

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termination of a financing agreement and its agreement to negotiate in good faith a new financing agreement with terms more favorable to the Company. There was no corresponding financing expense in
the prior years. Also included in the year ended September 30, 2000 is $18,026 in consulting expenses related to 50,000 shares issued upon the termination of our agency agreement with Canaccord
Capital Corporation.

Adjustment for beneficial conversion.During year ended September 30, 2000, we issued
3,637,200 shares of Series A convertible preferred stock at an issue price of $2.50 per share in exchange for cash proceeds of $7,725,000 and services in connection with the private placement
with a fair value of $1,368,000, for total gross proceeds prior to expenses of the issue, of $9,093,000. The Series A convertible preferred stock were immediately convertible, at the option of
the holder. The Series A convertible preferred stock has a beneficial conversion feature totaling $7,725,000, measured as the difference between the conversion price most beneficial to the
investor of $2.17, and the fair value of the underlying common stock at the time of issuance, limited to the amount of cash proceeds received. In addition, on February 3, 2000, we completed a
private placement consisting of 699,999 units at $0.75 per unit, for gross proceeds of $525,000, based on subscriptions received in December 1999 and January 2000. Each unit consists of
one common share and one common share purchase warrant exercisable for two years at $1.00 per share. The warrants also have a beneficial conversion feature totaling $243,583, measured as the
difference between the conversion price of $1.00 and the fair value of the underlying common stock at the date we had a contractual obligation to issue the units, limited to the amount of the gross
proceeds received and allocated to the warrants. Each beneficial conversion feature is recognized on the Consolidated Statement of Operations as an increase in the loss applicable to common
shareholders and in the calculation of basic loss per share for the year ended September 30, 2000, resulting in a net loss attributable to common shareholders and basic loss per common share
for the year ended September 30, 2000 in the amounts of $16,009,373 and $1.30, respectively.

OUTLOOK

Although we have incurred operating losses since our inception, with consolidated operations in the most profitable U.S. markets, we expect to achieve
profitable operations in fiscal 2002. Although the Company believes that it can reach profitability with existing financial resources, to aggressively reach business plan forecasts, the funding of our
operating expenses and working capital and capital commitments at current levels of deployment, may be dependent upon our ability to obtain additional financing. We have retained investment bankers to
assist with financing through a private placement or convertible securities offering, however, there is no assurance that the Company will be successful in these endeavors.

LIQUIDITY AND CAPITAL RESOURCES

Cash Position.At September 30, 2001, we had cash and cash equivalents of $785,452
compared to $2,147,244 at September 30, 2000. In summary, the decrease in our cash position is due to the net loss, the acquisition of Digital Solutions LLC, offset by proceeds from the sale of
assets.

Operating Activities.Net cash of $4,329,173 and $4,173,820 was used in operating activities
during the years ended September 30, 2001 and 2000 respectively. The primary use of cash in operations was from our net loss of $2,426,455 which includes the gain on sale of assets of
$2,401,695, partially offset by $744,496 of non-cash charges, represented by $549,194 in amortization and $195,302 in stock option compensation charges and non-cash interest
expense. In fiscal 2000 the primary use of cash in operations was from our net loss of $8,040,790, which was partially offset by $4,548,029 in non-cash charges. Changes in operating assets
and liabilities used $225,050 in 2001 compared to $681,059 in 2000.

18

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Investing Activities.Net cash of $2,898,158 was generated in investing activities during the
year ended September 30, 2001 compared to $1,983,745 used in the year ended September 30, 2000. Purchases of property and equipment during the year ended September 30, 2001 of
$2,352,213 (2000-$1,983,745) related primarily to the addition of subscribers in our digital satellite business. In the year ended September 30, 2001 we used $1,719,168 in the
acquisition of Digital Solutions LLC. We also received proceeds of $6,969,539 relating to the sale of assets in 2001 (nil in 2000).

Financing Activities.We generated net cash of $69,223 and $8,275,271 from financing activities
during the year ended September 30, 2001 and 2000 as follows:



Working Capital.As at September 30, 2001 we had working capital of $748,380
(2000-$1,877,948). Our projected operating losses and capital costs to add new subscribers and grow our business may require us to obtain further financing through private placements of
equity or convertible securities.

Market Risk.We are exposed to market risk related to changes in interest and foreign exchange
rates, each of which could adversely affect the value of our current assets and liabilities. We have not entered into any forward currency contracts or other financial derivatives to hedge foreign
exchange risk, hence, we are subject to such risk from foreign currency transactions and translation gains and losses. With a significant portion of our cash denominated in Canadian dollars, a sudden
or significant change in foreign exchange rates could have a material effect on the our future cash flows. If the

19

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Canadian dollar were to decrease in value by 5% against the US dollar an unrealized foreign currency translation loss of less than $50,000 would occur.

We
do not currently have an interest-bearing investment portfolio or liabilities subject to variable interest rates. As a result, any change in the prime interest rate would not have
a material impact on our future operating results or cash flows based on the terms of existing liabilities. With our current capital structure the company is not subject to material interest rate
risk.

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

DIRECTV.In May of 2000, the Company entered into a long-term System Operator
Agreement with DIRECTV, which allowed us to enter the United States market. The Company's contract with DIRECTV gives the Company a share of net subscriber receipts, depending upon the number of
active subscribers, from the sale of DIRECTV programming services, plus a subsidy for subscriber acquisition costs for each net subscriber addition.

The
Company will incur only the costs associated with the implementation of its services, and will not share any of DIRECTV's programming or broadcasting costs. Under the agreement,
the Company may not solicit sales or provide equipment for any other direct-to-home digital satellite television services in the United States. However, the Company is not
prohibited from contracting with other program providers in connection with its private cable services. Consequently, the Company is totally dependent on DIRECTV for its digital set-top
programming in the United States.

The
agreement has an initial term of five years, with an automatic extension of the agreement to coincide with the termination of the longest running property access agreement.
Thereafter, the agreement is renewable for an additional five-year period at the option of both parties. Either party may terminate for the other's breach, bankruptcy or unapproved
assignment of the agreement. Under this
agreement, the Company will establish and maintain multiple dwelling unit distribution systems in non-rural states of the United States, as defined in the agreement, and act as a
commissioned sales agent for the marketing of DIRECTV programming to residents of multiple dwelling unit properties.

DIRECTV
is not required to use the Company on an exclusive basis and could either contract with others to install distribution systems and market programming in multiple dwelling
units or undertake such activities directly through retail stores, as it does for single-family television households.

Star Choice.In August 1998, the Company entered in a ten-year System
Operation Agreement with two five-year renewal options, with Star Choice Communications, Inc. ("Star Choice"). The agreement allowed us to establish and maintain distribution
systems in multi-unit dwellings throughout Canada and act as a commissioned sales representative for Star Choice to market Star Choice programming to the residents of
multi-unit dwellings in which the Company has installed systems. The allowable territory in which the Company operated under the agreement was reduced as part of the sale of Western
Canadian subscribers and thereafter, the agreement was terminated on April 27, 2001 upon the sale of certain Eastern Canadian subscribers to Star Choice.

3Com.In May 2000, the Company entered into a Master Purchase Sales Agreement with 3Com
Corporation to become part of its preferred Visitor Based Network. Under this agreement, the Company received preferred pricing and discounts for equipment purchased to support the Company's
high-speed Internet services. Upon dissolution of 3Com's VBN division, this agreement was mutually terminated.

Cisco.In July 2001, the Company entered into a Master Lease Agreement to Purchase
Equipment with Cisco Systems, Inc. Under this agreement, the Company will receive preferred pricing

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and discounts for equipment purchased to support the Company's high-speed Internet services. As part of this agreement, Cisco has extended lease financing to the Company to purchase
Internet related equipment and repay monthly over three years from the date that the goods were accepted. The total credit available under the agreement is $500,000, 30% of which will be installation
costs capitalized under the lease. As at September 30, 2001, there was no outstanding obligation under the lease financing.

Future Capital Requirements.The Company's funding of its continuing operating expenses,
working capital needs and capital commitments at current levels, is dependent upon its ability to raise additional financing. The Company is currently pursuing opportunities to raise financing through
private placements of both equity and debt securities and has engaged investment bankers to assist it in raising financing through a convertible security offering, however there is no assurance that
the company will be successful in these discussions, or they may be negotiated on terms which are unfavourable or
dilutive to existing stockholders. Should the Company not raise financing, the Company would have to scale back general operations by re-evaluating its planned expenditures and allocating
its total resources in such manner as the board of directors and management deems to be in the Company's best interest.

We
have reduced our staff and continue to maintain tight control over deployment and expenditures while pursuing realistic alternatives.

Item 7Financial Statements

21

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Independent Auditors' Report

To
the Shareholders of
MDU Communications International, Inc.

We
have audited the accompanying consolidated balance sheets of MDU Communications International Inc. and subsidiaries as of September 30, 2001 and 2000 and the related
consolidated statements of operations and comprehensive loss, shareholders' equity, and cash flows for each of the years in the two year period ended September 30, 2001. These financial
statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at September 30, 2001 and 2000, and the
results of its operations and its cash flows for each of the years in the two year period ended September 30, 2001, in conformity with accounting principles generally accepted in the United
States of America.

The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company's recurring losses from operations and limited financial resources raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

/s/
DELOITTE & TOUCHE LLP
Chartered Accountants
Vancouver, British Columbia
November 18, 2001

22

---



MDU COMMUNICATIONS INTERNATIONAL, INC.  Consolidated Balance Sheets  (Expressed in United States dollars)

|                                                                                                                                     |                               | September 30,                                                    |            
|------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------- | ---------------------------------------------------------------- | -----------
|
|ASSETS                                                                                                                               |                               |                                                                  |            
|CURRENT                                                                                                                              |                               |                                                                  |            
|                                                                                                                                     | Cash and cash equivalents     |                                                                  | $          
|                                                                                                                                     | Prepaid expenses and deposits |                                                                  |            
|                                                                                                                                     | Accounts receivable           |                                                                  |            
|                                                                                                                                     |                               | Trade, net of a provision of $16,500 (September 30, 2000$2,752) |            
|                                                                                                                                     |                               | Sales tax and other                                              |            
|                                                                                                                                     |                               |                                                                  |            
|TOTAL CURRENT ASSETS                                                                                                                 |                               |                                                                  | 1,186,940  
|PROPERTY AND EQUIPMENT, net (Note 6)                                                                                                 |                               |                                                                  | 2,053,352  
|INVESTMENT IN JOINT VENTURE (Note 5)                                                                                                 |                               |                                                                  | 199,221    
|INTANGIBLE ASSETS, net (Note 7)                                                                                                      |                               |                                                                  | 1,538,518  
|                                                                                                                                     |                               |                                                                  |            
|TOTAL ASSETS                                                                                                                         |                               | $                                                                | 4,978,031  
|                                                                                                                                     |                               |                                                                  |            
|LIABILITIES                                                                                                                          |                               |                                                                  |            
|CURRENT                                                                                                                              |                               |                                                                  |            
|                                                                                                                                     | Accounts payable              |                                                                  | $          
|                                                                                                                                     | Other accrued liabilities     |                                                                  |            
|                                                                                                                                     |                               |                                                                  |            
|TOTAL CURRENT LIABILITIES                                                                                                            |                               |                                                                  | 438,560    
|                                                                                                                                     |                               |                                                                  |            
|DEFERRED REVENUE                                                                                                                     |                               |                                                                  | 255,925    
|                                                                                                                                     |                               |                                                                  |            
|CONTINUING OPERATIONS (Note 2)                                                                                                       |                               |                                                                  |            
|COMMITMENTS AND CONTINGENCIES (Note 10)                                                                                              |                               |                                                                  |            
|SHAREHOLDERS' EQUITY                                                                                                                 |                               |                                                                  |            
|Common stock, par value $0.001;50,000,000 shares authorized,18,046,320 shares issued and outstanding (September 30, 200016,904,620) |                               |                                                                  | 18,047     
|Convertible preferred stock, par value $0.001; 5,000,000 shares authorized,7,200 issued and outstanding (September 30, 2000565,200) |                               |                                                                  | 7          
|Additional paid-in capital                                                                                                           |                               |                                                                  | 16,483,476 
|Accumulated deficit                                                                                                                  |                               |                                                                  | (12,217,983
|Accumulated other comprehensive loss                                                                                                 |                               |                                                                  |           
|                                                                                                                                     |                               |                                                                  |            
|TOTAL SHAREHOLDERS' EQUITY                                                                                                           |                               |                                                                  | 4,283,546  
|                                                                                                                                     |                               |                                                                  |            
|TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                           |                               | $                                                                | 4,978,031  
|                                                                                                                                     |                               |                                                                  |            

See
accompanying Notes to the Consolidated Financial Statements.

24

---

MDU COMMUNICATIONS INTERNATIONAL, INC.  Consolidated Statements of Operations  (Expressed in United States dollars)

|                                                                                                   |                               | For the year
ended
September 30,
2001 |            | For the year
ended
September 30,
2000 |  
|-------------------------------------------------------------------------------------------------- | ----------------------------- | ------------------------------------- | ---------- | ------------------------------------- | -
|REVENUE                                                                                            |                               | $                                     | 1,117,607  |                                       | $
|DIRECT COSTS                                                                                       |                               |                                       | 358,257    |                                       |  
|                                                                                                   |                               |                                       |            |                                       |  
|GROSS PROFIT                                                                                       |                               |                                       | 759,350    |                                       |  
|                                                                                                   |                               |                                       |            |                                       |  
|SALES EXPENSE                                                                                      |                               |                                       | 837,947    |                                       |  
|                                                                                                   |                               |                                       |            |                                       |  
|GENERAL AND ADMINISTRATIVE EXPENSES                                                                |                               |                                       |            |                                       |  
|                                                                                                   | Advertising and promotion     |                                       |            | 9,077                                 |  
|                                                                                                   | Depreciation and amortization |                                       |            | 549,194                               |  
|                                                                                                   | Consulting                    |                                       |            | 276,005                               |  
|                                                                                                   | Foreign exchange gain         |                                       |            | (23,565                               | )
|                                                                                                   | Investor Relations            |                                       |            | 62,605                                |  
|                                                                                                   | Occupancy                     |                                       |            | 224,846                               |  
|                                                                                                   | Office                        |                                       |            | 460,684                               |  
|                                                                                                   | Professional fees             |                                       |            | 277,985                               |  
|                                                                                                   | Repairs and maintenance       |                                       |            | 16,786                                |  
|                                                                                                   | Telephone                     |                                       |            | 177,588                               |  
|                                                                                                   | Travel                        |                                       |            | 316,196                               |  
|                                                                                                   | Vehicle                       |                                       |            | 63,757                                |  
|                                                                                                   | Wages                         |                                       |            | 1,818,440                             |  
|                                                                                                   | Relocation                    |                                       |            | 288,551                               |  
|                                                                                                   |                               |                                       |            |                                       |  
|                                                                                                   |                               |                                       | 4,518,148  |                                       |  
|                                                                                                   |                               |                                       |            |                                       |  
|GAIN ON SALE OF NET ASSETS (Note 12)                                                               |                               |                                       | 2,401,695  |                                       |  
|                                                                                                   |                               |                                       |            |                                       |  
|NET OPERATING LOSS                                                                                 |                               |                                       | (2,195,051 | )                                     |  
|                                                                                                   |                               |                                       |            |                                       |  
|FINANCING EXPENSE                                                                                  |                               |                                       | (181,734   | )                                     |  
|INTEREST INCOME                                                                                    |                               |                                       | 70,025     |                                       |  
|INTEREST EXPENSE                                                                                   |                               |                                       | (140,165   | )                                     |  
|EQUITY EARNINGS IN JOINT VENTURE (Note 5)                                                          |                               |                                       | 20,470     |                                       |  
|                                                                                                   |                               |                                       |            |                                       |  
|NET LOSS                                                                                           |                               | $                                     | (2,426,455 | )                                     | $
|                                                                                                   |                               |                                       |            |                                       |  
|Adjustment for beneficial conversion feature of convertible preference shares                      |                               | $                                     |           |                                       | $
|Adjustment for beneficial conversion feature of warrants                                           |                               |                                       |           |                                       |  
|                                                                                                   |                               |                                       |            |                                       |  
|Net loss attributable to common shareholders                                                       |                               | $                                     | (2,426,455 | )                                     | $
|                                                                                                   |                               |                                       |            |                                       |  
|Basic and diluted loss per common share                                                            |                               | $                                     | (0.14      | )                                     | $
|                                                                                                   |                               |                                       |            |                                       |  
|Weighted-average common shares outstanding used to compute basic and diluted loss per common share |                               |                                       | 17,580,952 |                                       |  
|                                                                                                   |                               |                                       |            |                                       |  

See
accompanying Notes to the Consolidated Financial Statements.

25

---



MDU COMMUNICATIONS INTERNATIONAL, INC.
Consolidated Statement of Shareholders' Equity (Deficit)
(Expressed in United States Dollars)

|                                                                                                                                |  |            |   |   |        | Convertible
Preferred stock |            | Additional paid-in capital |   | Share Subscriptions Received |   |   |            |   |            |   |  
|------------------------------------------------------------------------------------------------------------------------------- |  | ---------- | - | - | ------ | --------------------------- | ---------- | -------------------------- | - | ---------------------------- | - | - | ---------- | - | ---------- | - | -
|
|
|
|Balance, September 30, 1999                                                                                                     |  | 9,221,335  |   | $ | 9,221  |                             |           |                            | $ |                             |   | $ | 1,464,638  |   | 1,090,000  |   | $
|Issued for subscriptions                                                                                                        |  | 1,090,000  |   |   | 1,090  |                             |           |                            |   |                             |   |   | 1,184,438  |   | (1,090,000 | ) |  
|Issued for cash                                                                                                                 |  | 1,887,749  |   |   | 1,888  |                             |           |                            |   |                             |   |   | 954,400    |   |           |   |  
|Issued for services                                                                                                             |  | 100,000    |   |   | 100    |                             |           |                            |   |                             |   |   | 36,054     |   |           |   |  
|Cancelled                                                                                                                       |  | (50,000    | ) |   | (50    | )                           |           |                            |   |                             |   |   | (18,026    | ) |           |   |  
|Exercise of stock options                                                                                                       |  | 125,000    |   |   | 125    |                             |           |                            |   |                             |   |   | 125,000    |   |           |   |  
|Conversion of notes payable to shares                                                                                           |  | 997,736    |   |   | 998    |                             |           |                            |   |                             |   |   | 605,783    |   |           |   |  
|Grant of employee stock options                                                                                                 |  |           |   |   |       |                             |           |                            |   |                             |   |   | 351,865    |   |           |   |  
|Grant of consultants' and supplier stock options                                                                                |  |           |   |   |       |                             |           |                            |   |                             |   |   | 747,147    |   |           |   |  
|Issue of preferred stock (net of expenses of issue $2,206,013)                                                                  |  |           |   |   |       |                             | 3,637,200  |                            |   | 3,637                        |   |   | 6,012,707  |   |           |   |  
|Beneficial conversion feature related to convertible preferred stock and warrants issued in connection with a private placement |  |           |   |   |       |                             |           |                            |   |                             |   |   | 7,968,583  |   |           |   |  
|Accretion of beneficial conversion feature related to convertible preferred stock and warrants                                  |  |           |   |   |       |                             |           |                            |   |                             |   |   | (7,968,583 | ) |           |   |  
|Issue of share purchase warrants                                                                                                |  |           |   |   |       |                             |           |                            |   |                             |   |   | 4,474,931  |   |           |   |  
|Conversion of preferred shares                                                                                                  |  | 3,532,800  |   |   | 3,533  |                             | (3,072,000 | )                          |   | (3,072                       | ) |   | (461       | ) |           |   |  
|Translation adjustments                                                                                                         |  |           |   |   |       |                             |           |                            |   |                             |   |   |           |   |           |   |  
|Net loss                                                                                                                        |  |           |   |   |       |                             |           |                            |   |                             |   |   |           |   |           |   |  
|                                                                                                                                |  |            |   |   |        |                             |            |                            |   |                              |   |   |            |   |            |   |  
|Balance, September 30, 2000                                                                                                     |  | 16,904,620 |   |   | 16,905 |                             | 565,200    |                            |   | 565                          |   |   | 15,938,476 |   |           |   |  
|Translation adjustments                                                                                                         |  |           |   |   |       |                             |           |                            |   |                             |   |   |           |   |           |   |  
|Grant of consultant and supplier stock options                                                                                  |  |           |   |   |       |                             |           |                            |   |                             |   |   | 149,744    |   |           |   |  
|Conversion of preferred shares                                                                                                  |  | 641,700    |   |   | 642    |                             | (558,000   | )                          |   | (558                         | ) |   | (69        | ) |           |   |  
|Issue of share purchase warrants (Note 9)                                                                                       |  |           |   |   |       |                             |           |                            |   |                             |   |   | 69,223     |   |           |   |  
|Beneficial conversion feature related to the convertible debt (Note 8)                                                          |  |           |   |   |       |                             |           |                            |   |                             |   |   | 91,602     |   |           |   |  
|Issue of shares to purchase Digital Solutions                                                                                   |  | 500,000    |   |   | 500    |                             |           |                            |   |                             |   |   | 234,500    |   |           |   |  
|Net loss                                                                                                                        |  |           |   |   |       |                             |           |                            |   |                             |   |   |            |   |           |   |  
|                                                                                                                                |  |            |   |   |        |                             |            |                            |   |                              |   |   |            |   |            |   |  
|Balance, September 30, 2001                                                                                                     |  | 18,046,320 |   | $ | 18,047 |                             | 7,200      |                            | $ | 7                            |   | $ | 16,483,476 |   |           |   | $
|                                                                                                                                |  |            |   |   |        |                             |            |                            |   |                              |   |   |            |   |            |   |  

See accompanying Notes to the Consolidated Financial Statements.

26

---



MDU COMMUNICATIONS INTERNATIONAL, INC.  Consolidated Statement of Cash Flows  (Expressed in United States Dollars)

|                                                     |                                                                                       | For the year
ended
September 30,
2001         |            | For the year
ended
September 30,
2000 |           
|---------------------------------------------------- | ------------------------------------------------------------------------------------- | --------------------------------------------- | ---------- | ------------------------------------- | ----------
|OPERATING ACTIVITIES                                 |                                                                                       |                                               |            |                                       |           
|                                                     | Net loss                                                                              |                                               | $          | (2,426,455                            | )         
|                                                     | Adjustments to reconcile net loss for the period to cash used in operating activities |                                               |            |                                       |           
|                                                     |                                                                                       | Depreciation and amortization                 |            |                                       | 549,194   
|                                                     |                                                                                       | Gain on sale of assets (Note 12)              |            |                                       | (2,401,695
|                                                     |                                                                                       | Non-cash wages expense                        |            |                                       |          
|                                                     |                                                                                       | Non-cash selling expense                      |            |                                       | 7,481     
|                                                     |                                                                                       | Non-cash financing expense                    |            |                                       |          
|                                                     |                                                                                       | Non cash interest expense on convertible note |            |                                       | 60,000    
|                                                     |                                                                                       | Non-cash consulting expense                   |            |                                       | 127,821   
|                                                     |                                                                                       | Equity earnings in joint venture              |            |                                       | (20,470   
|                                                     | Change in operating assets and liabilities:                                           |                                               |            |                                       |           
|                                                     |                                                                                       | Prepaid expenses and deposits                 |            |                                       | 125,543   
|                                                     |                                                                                       | Accounts receivable                           |            |                                       | (89,081   
|                                                     |                                                                                       | Accounts payable                              |            |                                       | (317,725  
|                                                     |                                                                                       | Wages payable                                 |            |                                       |          
|                                                     |                                                                                       | Other accrued liabilities                     |            |                                       | (184,826  
|                                                     |                                                                                       | Deferred revenue                              |            |                                       | 241,039   
|                                                     |                                                                                       |                                               |            |                                       |           
|Net cash used in operating activities                |                                                                                       |                                               | (4,329,173 | )                                     |           
|                                                     |                                                                                       |                                               |            |                                       |           
|INVESTING ACTIVITIES                                 |                                                                                       |                                               |            |                                       |           
|                                                     | Purchase of property and equipment                                                    |                                               |            | (2,352,213                            | )         
|                                                     | Proceeds on sale of assets (Note 12)                                                  |                                               |            | 6,969,539                             |           
|                                                     | Acquisition of Digital Solutions, net of cash acquired (Note 4)                       |                                               |            | (1,719,168                            | )         
|                                                     |                                                                                       |                                               |            |                                       |           
|Net cash provided by (used in) investing activities  |                                                                                       |                                               | 2,898,158  |                                       |           
|                                                     |                                                                                       |                                               |            |                                       |           
|FINANCING ACTIVITIES                                 |                                                                                       |                                               |            |                                       |           
|                                                     | Proceeds from convertible notes payable                                               |                                               |            | 150,000                               |           
|                                                     | Prepayment of notes payable                                                           |                                               |            | (150,000                              | )         
|                                                     | Proceeds from issue of common stock                                                   |                                               |            |                                      |           
|                                                     | Proceeds from issue of preferred stock                                                |                                               |            |                                      |           
|                                                     | Proceeds from issue of warrants                                                       |                                               |            | 69,223                                |           
|                                                     |                                                                                       |                                               |            |                                       |           
|Net cash provided by financing activities            |                                                                                       |                                               | 69,223     |                                       |           
|                                                     |                                                                                       |                                               |            |                                       |           
|NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |                                                                                       |                                               | (1,361,791 | )                                     |           
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD       |                                                                                       |                                               | 2,147,244  |                                       |           
|                                                     |                                                                                       |                                               |            |                                       |           
|CASH AND CASH EQUIVALENTS, END OF PERIOD             |                                                                                       | $                                             | 785,453    |                                       | $         
|                                                     |                                                                                       |                                               |            |                                       |           
|SUPPLEMENTAL CASH FLOW DISCLOSURE                    |                                                                                       |                                               |            |                                       |           
|                                                     | Interest paid                                                                         |                                               | $          | 8,676                                 |           
|                                                     |                                                                                       |                                               |            |                                       |           

SUPPLEMENTAL
CASH FLOW DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

During
the year ended September 30, 2001, 500,000 common shares valued at $235,000 were issued on the acquisition of Digital Solutions.

See
accompanying Notes to the Consolidated Financial Statements.

27

---



MDU COMMUNICATIONS INTERNATIONAL, INC.  Notes to Consolidated Financial Statements  (expressed in the United States dollars)

1.  BASIS OF PRESENTATION

MDU Communications International, Inc. provides delivery of satellite television programming, home entertainment and information technology to residents
of multi-dwelling units such as apartment buildings, condominiums, gated communities, hotels and motels. MDU sold the majority of its Canadian operations and redeployed in the United States, also
moving its headquarters and as such, effective September 30, 2001 has adopted the United States dollars as its functional and reporting currency.

2.  CONTINUING OPERATIONS

The financial statements have been prepared on the going concern basis of accounting which contemplates realization of assets and liquidation of liabilities in
the ordinary course of business. During the year ended September 30, 2001, the Company recorded a net loss of $2,426,455 and used net cash in operations of $4,329,173. At September 30,
2001, the Company has working capital of $748,380 and an accumulated deficit of $12,217,983.

The
Company's funding of its continuing operating expenses, working capital needs and capital commitments at current levels, is dependent upon its ability to raise additional
financing. The Company is currently pursuing opportunities to raise financing through private placements of both equity and debt securities and has engaged investment bankers to assist it in raising
financing through a convertible security offering, however there is no assurance that the company will be successful in these discussions. Should the Company not raise financing, the Company would
have to scale back general operations.

The
Company's ability to continue as a going concern may be dependent on its ability to raise additional funds as required and ultimately to achieve profitable operations. The
financial statements
do not include any adjustments that might result from the outcome of the above noted uncertainties. Adjustments, if any, would affect the carrying value and classification of assets and liabilities
and the amount of net loss and accumulated deficit.

3.  SIGNIFICANT ACCOUNTING POLICIES

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

(a) Principles of Consolidation



(b) Development Stage Enterprise



28

---



(c) Use of Estimates



(d) Property and Equipment



Telecommunications equipment, installed

14.5
%Computer equipment

20
%Furniture and fixtures

20
%Vehicles

20
%




(e) Long-lived Assets



(f)  Investment in Joint Venture



(g) Intangible Assets



29

---



(h) Revenue Recognition



(i)  Loss per Common Share



(j)  Foreign Exchange



30

---



(k) Stock-based Compensation



(l)  Cash and Cash Equivalents



(m) Comprehensive Income



(n) Fair Value of Financial Instruments



31

---

(o) Credit Concentration



(p) Recent Accounting Pronouncements



(q) Advertising



4.  ACQUISITION OF DIGITAL SOLUTIONS, LLC

On April 30, 2001 the Company acquired Digital Solutions, LLC, ("Digital Solutions") a New England based digital satellite television service provider,
for $1.75 million and 500,000 shares of common stock of the Company with a fair value of $235,000. As at April 30, 2001, Digital Solutions had 3,142 subscribers in 31 properties. In
addition, Digital Solutions had two properties in the process

32

---

of installation, representing an additional 700 subscribers. The acquisition was accounted for under the purchase method and the assets, liabilities, revenues and expenses related to Digital Solutions
were consolidated with the accounts of the Company effective April 30, 2001.

Allocation
of excess of acquisition costs over the fair value of net assets assumed are set forth below:

Cash

$
30,833Other current assets


52,605Investment in Joint Venture


103,011Property and equipment


233,604Intangible assets


1,675,380Less: Current liabilities


(110,433
)Acquisition cost

$
1,985,000


Intangible
assets acquired are being amortized over five years.

The
following table presents the unaudited pro forma results of operations for informational purposes, assuming that the Company had acquired Digital Solutions at the beginning of the
fiscal years ended September 30, 2001 and 2000:

2001

2000Total revenue

$
1,315,334

$
1,418,328Net loss


(2,645,709
)

(16,423,101
)Net loss per common share

$
(0.15
)
$
(1.33
)


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.

5.  INVESTMENT IN AVALONBAY JOINT VENTURE

As part of the acquisition of Digital Solutions, the Company assumed all obligations and benefits of Digital Solutions' interest in a joint venture agreement
with AvalonBay Cable I, Inc., an affiliate of AvalonBay Communities, Inc., for the purpose of managing, owning and otherwise operating systems and equipment to provide digital satellite
television services to certain of AvalonBay's residential communities. As at September 30, 2001 the investment in the joint venture of $199,221 is comprised of the fair value of acquired assets
of $103,011, plus additional contributions of $88,249 less distributions of $12,509, plus the Company's 50% share of the joint venture's cumulative net income from the date of acquisition of Digital
Solutions, which amounted to $20,470.

Details
of the assets, liabilities, operating results and cash flows of the joint venture are as follows:

September 30,
2001Current assets

$
71,761Total assets


429,121Current liablities


2,021Deferred revenue


30,681Venturers' equity


396,419


33

---



From acquisition
on April 30, 2001
to September 30,
2001Revenues

$
136,051Expenses


95,112Net earnings


40,939Cash flows from operating activities

$
29,581Cash flows from investing activities

$
Cash flows used in financing activities

$
(18,464
)


6.  PROPERTY AND EQUIPMENT

September 30,2001

2000Telecommunications equipment, installed

$
1,517,207

$
3,817,225Telecommunications equipment, not yet placed in service


326,642


253,530Computer equipment


328,265


320,110Furniture and fixtures


94,940


115,744Vehicles


49,954


2,317,008


4,506,609Less: Accumulated amortization


(263,656
)

(584,426
)$
2,053,352

$
3,922,183


7.  INTANGIBLE ASSETS

September 30,2001

2000Building access agreements and subscriber lists

$
1,675,380

$
99,1501,675,380


99,150Less: Accumulated amortization


(136,862
)

(34,703
)$
1,538,518

$
64,447


8.  CONVERTIBLE DEBT

On January 11, 2001 the Company issued convertible debt for cash proceeds of $150,000. The debt was convertible into common shares of the Company at a
conversion price of $0.25 per common share anytime during the period from April 10, 2001 to December 31, 2001. In addition, the lender received 600,000 share purchase warrants, each
entitling the holder to acquire one common share at an exercise price of $0.60 per share. The proceeds of $150,000 have been allocated on a pro rata basis, as described in APB 14, "Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants", between the estimated fair value of the debt and share purchase warrants resulting in an initial value of the debt and share purchase
warrants in the amounts of $80,777 and $69,223 respectively. The difference between the recorded value of the debt at issue date and its maturity value was accreted as additional interest expense over
the term of the debt. This results in a beneficial

34

---

conversion right calculated as the difference between the conversion price and the quoted trading price of the Company's stock on the date of issue. This beneficial conversion right, in the amount of
$60,000 was recognized as additional interest expense in the year ended September 30, 2001.

On
April 6, 2001 the Company repaid the convertible note in full.

9.  SHARE CAPITAL



35

---







Year ended September 30,2001

2000Additional capital costs of telecommunications equipment

$


$
67,516Sales expense


32,737


90,322$
32,737

$
157,838






36

---



Year ended September 30,2001

2000Pro forma net loss

$
(8,012,295
)
$
(14,042,632
)Pro forma net loss attributable to common shareholders

$
(8,012,295
)
$
(22,011,215
)Pro forma loss per common share attributable to common shareholders

$
(0.46
)
$
(1.76
)




37

---



Options
Available
for Issuance

Number of
Options
Outstanding

Weighted-
Average
Exercise Price
per ShareOutstanding at September 30, 1999

441,250

473,885

$
1.18Authorized

3,400,000Granted (weighted-average fair value of $3.33 per share)

(3,429,475
)
3,429,475


4.74Exercised



(125,000
)

1.00Expired

180,000

(180,000
)

5.00Cancelled

(65,135
)



Outstanding at September 30, 2000

526,640

3,598,360


4.29Granted (weighted-average fair value of $0.48 per share)

(1,141,500
)
1,141,500


0.62Exercised






Expired

1,451,264

(1,451,264
)

1.48Outstanding at September 30,2001

836,404

3,288,596

$
0.75




Exercise
Prices

Number
Outstanding

Weighted-
Average
Remaining
Contractual
Life (years)

Number
Exercisable$
0.60

2,913,596

3.74

1,784,6541.50

198,885

2.06

198,8851.75

12,375

3.45

12,3752.00

13,740

3.45

13,7402.50

150,000

3.61

150,0003,288,596



2,159,654




38

---







Number of
Warrants

Weighted-
Average
Exercise
Price

Fair
Value

Expiry DateIssued:Gibralt Capital Corporation

750,000


2.50


2,925,927

March 1, 2002(Note 9(c)(ii))Private placement units(Note 9(c)(iii))

699,999


1.00


243,583

February 3, 2002Private placement units(Note 9(c)(iii))

1,482,750


0.75


211,835

November 25, 2001Convertible note payable

600,000


0.60


69,223

January 11, 2002Outstanding at September 30, 2001

3,532,749

$
1.22

$
3,450,568








39

---



Year ended September 30,2001

2000Expeced life (years)

1 to 5

1 to 5Expected volatility

160
%
215
%Risk-free interest rate

4.7
%
5.6
%


10. COMMITMENTS AND CONTINGENCIES



Amount2002

$
101,4132003


7,7012004 and thereafter


$
109,114




40

---



11. STRATEGIC ALLIANCE







41

---



12. GAIN ON SALE OF CANADIAN SUBSCRIBERS

On January 31, 2001 the Company completed an agreement with Star Choice Television Network, Inc., a subsidiary of Star Choice
Communications Inc., for Star Choice to purchase certain satellite television assets for a purchase price of $3,681,100. Under the agreement, Star Choice also received the telecommunications
equipment required to service the related subscribers. This equipment had an original cost of $3,348,300 and a net book value of $2,784,744 at January 31, 2001. Net intangible assets carried at
$59,672 at January 31, 2001 related to sold subscribers and accordingly, were written off. The transaction resulted in a gain of $836,984 which was reduced by cumulative foreign exchange losses
relating to these assets.

On
April 27, 2001 the Company completed an agreement with Star Choice Television Network, Inc., a subsidiary of Star Choice Communications Inc., for Star Choice
to purchase certain satellite television assets for a purchase price of approximately $3,276,227. Under the agreement, Star Choice also received the telecommunications equipment required to service
the related subscribers. This equipment had an original cost of approximately $1,431,732 and a net book value of approximately $1,236,500 at April 27, 2001. The transaction resulted in a gain
of $2,039,727 which was reduced by cumulative foreign exchange losses relating to these assets.

13. INCOME TAXES

The Company's effective income tax rate of nil differs from the recovery which would have been recorded using the statutory federal U.S. rate of 35%
principally as a result of the tax benefit relating to income tax losses arising in the current and prior year which have been fully offset by a valuation allowance.

The
Company has had no income tax expense since inception as a result of significant incurred losses. In addition, the Company has provided a full valuation allowance for net deferred
tax assets at September 30, 2001 and 2000, since realization of these benefits cannot be reasonably assured. Deferred tax assets (liabilities) are comprised of the following:

September 30,2001

2000Gross deferred tax assets (liabilities):Depreciation and amortization

$
32,208

$
277,023Other





14,227Operating loss carry forwards


3,853,518


2,785,086Net deferred tax assets


3,885,726


3,076,336Less: Valuation allowance


(3,885,726
)

(3,076,336
)$


$



At
September 30, 2001 and 2000, the Company had $9,139,203 and $5,543,127 of tax loss carry forwards available to offset future years' taxable income of which $65,159 will
expire on September 30, 2005 and the balance on September 30, 2006 or later.

14. SEGMENTED INFORMATION

The Company operates in one industry segment. The Company's operations are comprised of providing delivery of home entertainment and information technology to
multi-unit dwellings. Revenues for the year ended September 30, 2001 of $570,376 and $547,230 (year ended September 30, 2000 $13,595and $934,274 related to the United States
and Canada, respectively. Property and equipment as at September 30, 2001 of $2,047,706 and $5,646 (September 30, 2000 $199,865and $3,722,317) was held in the United States and Canada,
respectively.

42

---

15. RELATED PARTY TRANSACTIONS

The Company purchased equipment and satellite subscribers on December 31, 1998 for $102,842 from a relative of the Company's President. In addition, the
Company granted stock options to a relative of the Company's President to purchase 100,000 common shares of the Company at an exercise price of $1.50 until December 31, 2003, in exchange for
consultative services. See Note 9 (b) (iii).

43

---



PART III

Item 9Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act

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

Robert
Dyck, 44, joined the Board of Directors in May 2000. He has been president of WRE Development Ltd. since 1978. WRE Development Ltd. owns, develops and
manages residential rental properties throughout the U.S. and Canada. Mr. Dyck is also co-owner of Norquay Management, a residential property management venture. He has overseen the
expansion of a property and development portfolio now valued at more that C$100 million. Mr. Dyck has substantial experience in the supervision of new apartment construction, analysis of
acquisition opportunities for development and investment purposes and review of new technologies to increase the efficiency of the property portfolio.

Douglas
G. Hooper, 41, joined the Board of Directors in May 2000. He is currently an acquisitions and finance consultant, who has extensive experience as a venture capitalist
and mergers and acquisition specialist in the mineral exploration, industrial processing and software industries. He was President & 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 Boyle, 57, joined the Board of Directors in May 2000. From 1998 to 2001 he was President & CEO of Multivision (Pvt.) Ltd., a cable television company.
From 1996 to 1997, Mr. Boyle was President & CEO of PowerTel TV Inc., a digital wireless cable company. As founding President and CEO of ExpressVu Inc.
(1995-1996), Mr. Boyle was responsible for taking one of Canada's first national direct-to-home satellite services from conception to launch readiness while
raising public awareness of DTH. Prior to 1995, Mr. Boyle has also held executive positions with Tee-Comm Electronics, Regional Cablesystems and Canadian Satellite
Communications Inc. (Cancom). As Vice-President of Regional Companies at Cancom, and later as Vice President of Market Development at Regional Cablesystems, he led the licensing or
acquisition of over 1,000 Canadian and American cable systems.

Sheldon
B. Nelson, 39, has served as President, Chief Executive Officer and a director 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.

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 2001 all officers, directors and greater than 10%
beneficial owners complied with the Section 16(a) filing requirements.

44

---

Item 10Executive Compensation

COMPENSATION OF EXECUTIVE OFFICERS

The following table sets forth certain information 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

|                                            |  |                |  |     |                       | Long Term
Compensation
Awards |                         |  |   |           
|------------------------------------------- |  | -------------- |  | --- | --------------------- | ----------------------------- | ----------------------- |  | - | ----------
|
|
|
|
|Sheldon B. Nelson, (1) President and CEO    |  | 2001
2000
1999 |  | $$$ | 143,395
96,108
33,349 |                               | 800,000
575,000
175,000 |  | $ | 29,656


|Dean Taylor, (3) VP of Business Development |  | 2001           |  | $   | 103,930               |                               | 400,000                 |  | $ | 84,771    
|Patrick Cunningham, (4) VP of Operations    |  | 2001           |  | $   | 160,000               |                               | 300,000                 |  | $ | 23,333    
|David Marmour, (5) Director of Operations   |  | 2001           |  | $   | 115,000               |                               | 150,000                 |  | $ | 3,000     

---

45

---

OPTIONS GRANTED IN FISCAL YEAR 2001

|                   |  | Individual Grants
|------------------ |  | -----------------
|
|Sheldon B. Nelson  |  | 50,000           
|Dean Taylor        |  | 325,000          
|Patrick Cunningham |  | 175,000          
|David Marmour      |  | 132,000          

---

COMPENSATION OF DIRECTORS

Each director who is not an employee or full time consultant of the Company is paid C$1,000 per month and an attendance fee of C$1,000, plus
out-of-pocket expenses, for each Board or committee meeting attended. During the fiscal year ended September 30, 2000, Messrs. Boyle, Dyck and Hooper each
received five-year, fully-vested options to purchase 25,000 shares of common stock at $0.60 per share, and during fiscal year ended September 30, 2001 they received
five-year, fully vested options to purchase an additional 25,000 shares at $0.60 per share which will vest on May 12, 2002 if they attend 75% of all Board and Committee meetings
occurring during the 12-month period ending on that date.

Item 11Security Ownership of Certain Beneficial Owners and Management

The following table sets forth information with respect to beneficial ownership of our outstanding stock as of November 30, 2000 by (i) each
person known to the Company to be the beneficial owner of more than 5% of the Company's common stock; (ii) each of the Company's directors; (iii) each executive officer named in the
Summary Compensation Table; and (iv) all of the Company's executive officers and directors as a group.

|                                                               |  | Shares Beneficially Owned(1) | 
|-------------------------------------------------------------- |  | ---------------------------- | 
|
|
|Sheldon B. Nelson(2)                                           |  | 1,400,890                    | 
|Dean Taylor                                                    |  | 150,000                      | 
|Patrick Cunningham                                             |  | 89,800                       | 
|David Marmour                                                  |  | 38,500                       | 
|J.E. (Ted) Boyle                                               |  | 50,000                       | 
|Robert Dyck                                                    |  | 50,000                       | 
|Douglas G. Hooper                                              |  | 50,000                       | 
|All executive officers and directors as a group (7 persons)(4) |  | 1,829,190                    | 

---

46

---

Item 12Certain Relationships and Related Transactions

There have been no such transactions during the past two fiscal years. In 1998 the Company granted stock options to a relative of the Company's President to
purchase 100,000 common shares of the Company at an exercise price of $1.50 until December 31, 2003, in exchange for consultative services.

Item 13Exhibits and Reports On Form 8-K

On February 14, 2001 we filed an 8-K describing the effect of the January 30, 2001 sale of our Western Canadian subscribers to Star
Choice Communications, Inc. An amendment to this 8K was filed on April 12, 2001 to include pro forma financial statements for the most recent year-ended September 30,
2000. On May 15, 2001 we filed an 8-K describing the effect of the sale of our Eastern Canadian Subscribers to Star Choice Communications, Inc. and also the purchase of
Digital Solutions, LLC. An amendment to this 8K was filed on July 30, 2001 to include pro forma financial statements for the most recent year-ended September 30, 2000.

47

---



SIGNATURES

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

| |  | MDU COMMUNICATIONS INTERNATIONAL, INC.
| |  | --------------------------------------
| |  | By:                                   

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 21, 2001
|/s/DOUGLAS G. HOOPERDouglas G. Hooper |  | Director                                 |  | December 21, 2001
|/s/ROBERT DYCKRobert Dyck             |  | Director                                 |  | December 21, 2001
|/s/JOHN EDWARD BOYLEJohn Edward Boyle |  | Director                                 |  | December 21, 2001

48

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