UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549






FORM
10-K


_________________________




x
            ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the fiscal year ended September 30, 2010, or ̈
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from _______________ to
      ___________________




Commission
File No. 0-26053






MDU
COMMUNICATIONS INTERNATIONAL, INC.


(exact
name of registrant as specified in its charter)




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




60-D
Commerce Way, Totowa, New Jersey   07512


(Address
of Principal Executive Offices) (Zip Code)




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






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




none




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




Common
Stock, par value $0.001 per share




(Title of
Class)




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


Yes 
oNo x





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


Yes 
o No 
x





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.   Yes xNo o




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).   Yes
o No o





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o





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





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





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




The
aggregate market value of the voting and nonvoting common equity (based upon the
closing price on the OTC Bulletin Board on March 31, 2010) held by
non-affiliates was approximately $19 million.





The
number of shares of common stock ($0.001 par value) outstanding as of December
21, 2010 was 5,380,140.







TABLE OF CONTENTS





PagePART
      IITEM
      1.
                  Business
                  
                  3ITEM
      1A.
                  Risk
      Factors
                  
                  7ITEM
      1B.
                  Unresolved
      Staff Comments
                  
                  12ITEM
      2.
                  Properties
                  
                  12ITEM
      3.
                  Legal
      Proceedings
                  
                  13ITEM
      4.
                  Reserved
                  
                  13PART
      IIITEM
      5.
                  Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                  
                  13ITEM
      6.
                  Selected
      Financial Data
                  
                  14ITEM
      7.
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
                  
                  14ITEM
      7A.
                  Quantitative
      and Qualitative Disclosures about Market Risk
                  
                  26ITEM
      8.
                  Financial
      Statements and Supplementary Data
                  
                  27ITEM
      9.
                  Changes
      In and Disagreements with Accountants on Accounting and Financial
      Disclosure
                  
                  48ITEM
      9A.
                  Controls
      and Procedures
                  
                  48ITEM
      9B.
                  Other
      Information
                  
                  49PART
      IIIITEM
      10.
                  Directors,
      Executive Officers and Corporate Governance
                  
                  49ITEM
      11.
                  Executive
      Compensation
                  
                  53ITEM
      12.
                  Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                  
                  57ITEM
      13.
                  Certain
      Relationships and Related Transactions, and Director
      Independence
                  
                  59ITEM
      14.
                  Principal
      Accounting Fees and Services
                  
                  59PART
      IVITEM
      15.
                  Exhibits,
      Financial Statement Schedules
                  
                  60




FORWARD LOOKING STATEMENTS





This
Annual Report on Form 10-K (“Report”) contains certain forward-looking
statements (as such term is defined in the Private Securities Litigation Reform
Act of 1995) and information relating to MDU Communications International, Inc.
that is based on the beliefs of our management, as well as assumptions made by
and information currently available to our management. When used in this Report,
the words “estimate,”  “project,”  “believe,” 
“anticipate,”  “hope,”  “intend,”  “expect,” and similar
expressions are intended to identify forward looking statements, although not
all forward-looking statements contain these identifying words .The words “MDU
Communications,”  “the Company,”  “we,”  “our,” and “us” refer to
MDU Communications International, Inc. together with its subsidiaries,
where appropriate.





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


2


PART I




Item
      1.
            Business





OVERVIEW





MDU
Communications International, Inc. (together with its subsidiaries
mentioned below, the “Company”) is a national provider of digital satellite
television, high-speed Internet, voice over IP (“VoIP”) and other information
and communication services to residents living in the United States
multi-dwelling unit (“MDU”) market—estimated to include 26 million
residences. MDUs include apartment buildings, condominiums, gated communities,
universities and other properties having multiple units located within a defined
area. The Company negotiates long-term access agreements with the owners and
managers of MDU properties allowing it the right to design, install, own and
operate the infrastructure and systems required to provide digital satellite
television, high-speed Internet, VoIP, and potentially other services, to their
residents.





MDU
properties present unique technological, management and marketing challenges to
conventional providers of these services, as compared to single family homes.
The Company’s proprietary delivery and design solutions and access agreements
differentiate it from other multi-family service providers through a unique
strategy of balancing the information and communication needs of today’s MDU
residents with the technology concerns of property managers and owners and
providing the best overall service to both. To accomplish this objective, the
Company has partnered with DIRECTV, Inc. and has been working with large
property owners and real estate investment trusts (REITs) such as AvalonBay
Communities, Post Properties, Roseland Property Company, Related Companies, the
U.S. Army, as well as many others, to understand and meet the technology and
service needs of these groups. The Company operates in only one market
segment.





CORPORATE
HISTORY





Our
Canadian operating company, MDU Communications Inc. (“MDU Canada”), was
incorporated in March 1998. In April 1999, we incorporated MDU
Communications International, Inc. in Delaware and MDU Canada became a
wholly owned subsidiary that at its peak had over 15,000 subscribers and seven
offices across Canada. In March 2000, we formed MDU Communications
(USA) Inc., a Washington corporation (“MDU USA”), to conduct business in
the United States.  In early 2001, we made a fundamental re-assessment of
our business plan and determined that the most profitable markets lay in densely
populated areas of the United States. The Company changed its corporate focus
and business strategy from serving the entire North American MDU market, to
several key U.S. markets. To further this change, in 2001 we completed an
agreement with Star Choice Television Network, Inc. for the sale of our
Canadian satellite television assets. As a result, by May 30, 2001 we
relocated our operations and certain key employees to our New York Metro Area
office in Totowa, New Jersey. MDU Communications International, Inc. operates
essentially as a holding company with MDU Canada and MDU USA as its wholly owned
operating subsidiaries. MDU Canada is now inactive. MDU USA operates in fourteen
states with regional offices in the New York, Chicago, Washington, DC, Miami and
Dallas greater metropolitan areas.





REVENUE





The
Company derives revenue through the sale of subscription services to owners and
residents of MDUs resulting in monthly annuity-like revenue streams.  The
Company offers two types of satellite television service, Direct to Home (“DTH”)
and Private Cable (“PC”) programming. The DTH service uses a set-top digital
receiver for residents to receive state-of-the-art digital satellite and local
channel programming. For DTH, the Company exclusively offers DIRECTV®
programming packages.  From the DTH offerings the Company receives the
following revenue, (i) an upfront subscriber commission from DIRECTV for each
new subscriber, (ii) a percentage of the fees charged by DIRECTV to the
subscriber each month for programming, (iii) a per subscriber monthly digital
access fee billed to subscribers for service, access and maintenance and
connection to the property satellite network system, and (iv) occasional other
marketing incentives or subsidies from DIRECTV. Secondly, the Company
offers a Private Cable video service where analog or digital satellite
television programming can be tailored to the needs of an individual MDU
property and received through normal cable-ready televisions. In Private Cable
deployed properties, a bundle of programming services is delivered to the
resident’s cable-ready television without the requirement of a set-top digital
receiver in the residence. Net revenues from Private Cable result from the
difference between the wholesale prices charged by programming providers and the
price charged by the Company to subscribers for the private cable programming
package. The Company provides DTH, Private Cable, Internet services and VoIP on
an individual subscriber basis, but in many properties it provides these
services in bulk (100% of the units), directly to the property owner, resulting
in one invoice and thus minimizing churn, collection and bad debt exposure.
These subscribers are referred to in the Company’s periodic filings as Bulk DTH
or Bulk Choice Advantage (“BCA”) type subscribers in DIRECTV deployed properties
or Bulk PC type subscribers in Private Cable deployed properties. From
subscribers to the Internet service, the Company earns a monthly Internet access
service fee.  Again, in many properties, this service is provided in bulk
and is referred to as Bulk ISP.




3


STRATEGIC
ALLIANCE WITH DIRECTV





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





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





On
December 14, 2007, the Company signed a letter agreement with DIRECTV that
allowed the Company to receive an upgrade subsidy when it completes a high
definition (“HDTV”) system upgrade. This one-time subsidy was treated as
revenue, similar to the “activation fee” referenced above, except that the
entire amount of the subsidy was recognized immediately. This program was
renewed via a letter agreement dated August 15, 2008 that supported the program
through July 31, 2009.





Under the
DIRECTV Agreement, the Company may not solicit sales or provide equipment for
any other DTH digital satellite television service in the United States.
Consequently, we are totally dependent on DIRECTV for our digital set-top
programming in the United States. During the fiscal year ended
September 30, 2010, revenues from all DIRECTV services were approximately
63% 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 itself
or through retail stores, as it does for single-family television
households.





DIRECTV offers in excess of 800 entertainment channels of digital
quality video and compact disc quality audio programming and currently transmits
via ten high power satellites. DIRECTV is currently delivering 160 national HDTV
channels with 200 expected in the next year giving DIRECTV the distinct edge in
high definition programming. We believe that DIRECTV’s extensive line up of high
definition programming, international programming, pay per view movies and
events and sports packages, including the exclusive “NFL Sunday Ticket,” have
enabled DIRECTV to capture a majority market share of existing DTH subscribers
and will continue to drive strong subscriber growth for DIRECTV programming in
the future.  Through our strategic relationship with DIRECTV, we expect to
capitalize on the significant name recognition that DIRECTV creates and
maintains as well as their immense advertising budget and advertised programming
specials. Additionally, we benefit from the large-scale national marketing
campaigns that are continuously run by DIRECTV.




MARKET





The
United States MDU market represents a large niche market of potential
telecommunications customers. There are over 26 million MDU television
households out of a total of 100 million U.S. television households.
Historically, the MDU market has been served by local franchised cable
television operators and the relationship between the property owners and
managers that control access to these MDU properties and the cable operator have
been significantly strained over the past 20 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:


4




·
            Advances
      in communication and information technology have created demand for new
      state-of-the-art services such as digital satellite television, high
      definition television, digital video recorders and bundled
      services.





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





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





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




COMPETITION





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





Franchised Cable Systems.   Cable companies currently dominate the market in terms
of subscriber penetration, the number of programming services available,
audience ratings and expenditures on programming. The traditional cable
companies currently serve an estimated 68% of U.S. television households, down
from approximately 72% five years ago. Satellite services are gaining market
share and DTH providers like us have a window of opportunity in which to acquire
and consolidate a significant subscriber base by providing a higher quality
signal over a vast selection of video and audio channels at a comparable or
reduced price to most cable operators’ current service.





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





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




GOVERNMENTAL REGULATION





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




5


On
October 31, 2007, the FCC banned the use of exclusivity clauses by franchised
cable companies for the provision of video services to MDU properties. The FCC
noted that 30% of Americans live in MDU properties and that competition has been
stymied due to these exclusivity clauses. The FCC maintains that prohibiting
exclusivity will increase choice and competition for consumers residing in MDUs.
Currently this Order only applies to cable companies subject to Section 628 of
the Communications Act, which does not include DBS and private cable operators
("PCOs") that do not cross public rights-of-way, such as the Company. Although
exempt from this Order, the FCC did reserve judgment on exclusivity clauses used
by DBS companies and PCOs until further discussion and comment can be taken and
evaluated. The IMCC “Independent Multi-Family Communications Council”, which is
a trade association comprised of DBS, PCOs, MDU owners and the supporting
industry, continued to lobby to keep DBS and PCOs, who do not cross public
rights-of-way, exempt from the Order and in March, 2010 the FCC agreed with the
IMCC and upheld the right of PCOs and DBS providers to maintain exclusivity
clauses and enter into new exclusive contracts with properties.  The
FCC reserved the right to review these matters and address them in the future
due to their complexity.




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




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




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




Preferential
Access Rights.   We generally negotiate exclusive rights
(or exclusive rights to marketing or inside wire) to provide services
singularly, or in competition with competing cable providers, and also negotiate
where possible “rights-of-first-refusal” to match price and terms of third-party
offers to provide other communication services in buildings where we have
negotiated broadcast access rights. We believe that these preferential rights of
entry are generally enforceable under applicable law, however, current trends at
state and federal level suggest that the future enforceability of these
provisions may be uncertain. In addition to the October 2007 order banning
exclusive agreements, the FCC has also issued an order prohibiting
telecommunications service providers from negotiating exclusive contracts with
owners of commercial MDU properties. Although it is open to question whether the
FCC has statutory and constitutional authority to compel mandatory access for
other providers, there can be no assurance that it will not attempt to do so.
There can be no assurance that future state or federal laws or regulations will
not restrict our ability to offer access payments, limit MDU owners’ ability to
receive access payments or prohibit MDU owners from entering into exclusive
agreements, any of which could have a material adverse effect on our
business.





6


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





EMPLOYEES





We had
135 employees, all full-time, as of September 30, 2010. None of our
employees are represented by a labor union. The Company has experienced no work
stoppages and believes that its employee relations are good.





INVESTOR INFORMATION





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




Item
1A. Risk Factors





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




The
business of the Company may be adversely affected by the current economic
recession.




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





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





To date,
the Company has not shown a profit in its operations. As of the Company’s year
end September 30, 2010, it has accumulated losses of $60,951,204. It cannot
assure that it will achieve or attain profitability beyond fiscal 2010. If it
cannot achieve operating profitability, the Company may not be able to meet its
working capital requirements, which could have a material adverse effect on its
business and may impair its ability to continue as a going
concern.  If we are unable to continue as a going concern, our
stockholders could lose their entire investment in the Company.





The Company depends upon its relationship with
DIRECTV.




The
Company has entered into several agreements with DIRECTV since 2000. Under all
of these agreements the Company may not maintain or market DTH services for any
other provider. Consequently, the Company is totally dependent upon DIRECTV for
its set-top DTH programming service. During the year ended September 30, 2010,
revenues from all DIRECTV services were approximately 63% of the Company’s total
revenues. DIRECTV is not required to use the Company on an exclusive basis for
marketing its programming to MDUs. The Company’s Agreement with DIRECTV can be
terminated under various circumstances, including, in particular, an uncured
material breach by the Company of the Agreement. Any such termination may have a
material effect on the Company’s business.




7


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





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




The
Company had a net loss of $8.4 million, an accumulated deficit of $61 million
and a working capital deficit of approximately $2.7 million at and for the year
ended September 30, 2010.  Additionally, the Company is currently
unable to access its Credit Facility above $25 million.  Management
believes, but cannot assure, that the Company has sufficient liquidity to
maintain existing operations of the business and meet its contractual
obligations at least through September 30, 2011. The Company’s current planned
cash requirements for fiscal 2011 are based upon certain assumptions, including
its ability to manage expenses and maintain and grow revenue.  These
assumptions may vary from actual results.




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





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




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




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





The
Company could face increased competition.





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




8


Franchised
cable television operators have a large, established
subscriber base, and many cable operators have significant investments in, and
access to, programming. One of the competitive advantages of DTH providers is
their ability to provide subscribers with more channels and a better quality
digital signal than traditional cable television systems. Many cable television
operators have made significant investments to upgrade their systems,
significantly increasing the number and variety of channels and the quality of
the transmission they can provide to their subscribers. As a result of these
upgrades, cable television operators have become better able to compete with DTH
providers. If competition from cable television operators or traditional phone
companies should increase in the future, the Company could experience a decrease
in its number of subscribers or increased difficulty in obtaining new
subscriptions.





The
Company depends on key personnel to maintain its success.




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





Corporate
governance-related issues.




At
present, the Company’s Chief Executive Officer, Sheldon Nelson, is also acting
as the Company’s Chief Financial Officer. Because both the CEO and CFO positions
are currently held by a single person, outside of the Board of Directors and the
audit committee, no independent oversight of the CEO or the CFO function
currently exist within the Company’s management structure.




System
disruptions could affect the Company.




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




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




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





9


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




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




The Company may issue preferred stock and common stock in the
future.




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




The
Company’s certificate of incorporation authorizes the issuance of 35,000,000
shares of common stock. The future issuance of common stock may result in
dilution in the percentage of the Company’s common stock held by its existing
stockholders. Also, any stock the Company sells in the future may be valued on
an arbitrary basis by it and the issuance of shares of common stock for future
services, acquisitions or other corporate actions may have the effect of
diluting the value of the shares held by existing stockholders.





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




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




Absence
of dividends on common stock.





The
Company has never declared nor paid any dividends on its common stock. The
declaration and payment in the future of any cash or stock dividends on the
common stock will be at the discretion of the Board of Directors of the Company
and will depend upon a variety of factors, including the ability of the Company
to service its outstanding indebtedness, if any, and to pay dividends on
securities ranking senior to the common stock, the Company’s future earnings, if
any, capital requirements, financial condition and such other factors as the
Company’s Board of Directors may consider to be relevant from time to time.
Earnings of the Company, if any, are expected to be retained for use in
expanding the Company’s business. Accordingly, the Company does not expect to
declare or pay any dividends on its common stock in the foreseeable
future.





10


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




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




The Company may default on its revolving line of
credit.





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





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





The
Company’s common stock is a “penny stock” which is subject to Rule 15g-9
under the Securities Exchange Act of 1934. It is considered penny stock because
it is not listed on a national exchange or NASDAQ and its bid price is below
$5.00 per share. As a result, broker-dealers must comply with additional sales
practices requirements. Broker-dealers must determine that the investment is
suitable for the buyer and receive the buyer’s written agreement to the
transaction before they can sell the Company’s common stock to buyers who are
not the broker-dealer’s established customers or institutional accredited
investors. In addition, broker-dealers must deliver to the buyer before the
transaction a disclosure schedule which explains the penny stock market and
its risks, discloses the commissions to be paid to the broker-dealer, discloses
the stock’s bid and offer quotations, and discloses if the broker-dealer is the
sole market maker in the stock. Generally, brokers may be less willing to
execute transactions in securities subject to the "penny stock" rules. This may
make it more difficult for investors to dispose of the Company’s common stock
and may cause a decline in the market value of the common stock.




The
public trading market for the Company’s common stock is limited and may not be
developed or sustained.




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




11


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




Rules
adopted by the Securities and Exchange Commission pursuant to Section 404
of the Sarbanes-Oxley Act of 2002 require the Company to assess its internal
controls over financial reporting annually. The rules governing the standards
that must be met for management to assess its internal controls over financial
reporting are complex. They require significant documentation, testing, and
possible remediation of any significant deficiencies in and/or material
weaknesses of its internal controls in order to meet the detailed standards
under these rules. Although the Company has evaluated its internal controls over
financial reporting as effective as of September 30, 2010, it may encounter
unanticipated delays or problems in assessing its internal controls as effective
or in completing assessments by required dates. In addition, the Company cannot
assure that an audit of its internal controls by its independent registered
public accountants, if and when required by Sarbanes-Oxley, will result in an
unqualified opinion. If the Company cannot assess its internal controls as
effective, investor confidence and share value may be negatively
impacted.





Change
of control may adversely affect certain contractual relationships.





Change in
control of the Company, through ownership, beneficial ownership or majority
representation on the Board of Directors, may have an adverse effect on certain
contractual relationships, including those with our financing partners,
programming partners, property owners and executive management.  For
example, pursuant to the terms and conditions of the Company’s amended financing
agreement with FCC, LLC, d/b/a First Capital, and Full Circle Funding, LP
(“Lenders”), dated June 30, 2008, as set forth in Forms 8-K filed July 3, 2008
and July 11, 2008, a change in control is a condition of
default.  Elements constituting a change of control can include a
majority changeover in the directors comprising the Board or a beneficial
shareholder (or group) acquiring an over 50% voting interest in the shares of
stock of the Company.  Should this occur, the Lenders reserve the
right, among other rights, to provide notice of default and call for immediate
repayment of the borrowings outstanding on the credit
facility.   Should such event occur, the Company may not be able
to make such immediate payment.





Integration
or performance of Company acquisitions, joint ventures or mergers may not be as
expected.




Acquisitions,
mergers and joint ventures entered into by us may have an adverse effect on our
business. We expect to engage in acquisitions, mergers or joint ventures as part
of our long-term business strategy. These transactions involve significant
challenges and risks including that the transaction does not advance our
business strategy, that we don't realize a satisfactory return on our
investment, or that we experience difficulty in the integration of new assets,
employees, business systems, and technology, or diversion of management's
attention from our other businesses. These events could harm our operating
results or financial condition.




Item
      1B.
            Unresolved
      Staff Comments





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





Item
      2.
            Properties




Our
headquarters are outside New York City in Totowa, New Jersey, where we
centralize our corporate administrative functions. The office houses our senior
management, accounting and billing functions, call center, subscription
management system and warehouse. We currently hold a lease in Totowa, New Jersey
of 14,909 square feet at a current monthly cost of $17,394, expiring
June 30, 2012. We believe that this space is adequate to suit our needs for
the foreseeable future and are currently negotiating a renewal of this
lease.





We
currently hold a lease for office and warehouse space in Chicago, Illinois for
approximately 4,100 square feet that runs through November 30, 2013 at a cost of
$4,411 per month. This space is adequate to suit our needs for the foreseeable
future in the Chicago metropolitan area.




We currently hold a lease for office and warehouse space in
Pompano Beach, Florida for approximately 4,088 square feet that runs through
December 31, 2012 at a cost of $2,481 per month. This space is adequate to suit
our needs for the foreseeable future in the South Florida area.





12


We
currently hold a lease for office and warehouse space in Rockville, Maryland for
approximately 2,500 square feet that runs through April 30, 2012 at a cost of
$2,300 per month. This space is adequate to suit our needs for the foreseeable
future in the Mid-Atlantic area.





We
currently hold a lease for office and warehouse space in Amherst, New York for
approximately 1,710 square feet that runs through September 15, 2012 at a cost
of $3,064 per month. This space is adequate to suit our needs for the
foreseeable future.




Item
      3.
            Legal
      Proceedings





From time
to time, the Company may be subject to legal proceedings, which could have a
material adverse effect on its business. As of September 30, 2010 and through
the date of this filing, December 21, 2010, the Company does have litigation in
the normal course of business and it does not expect the outcome to have a
material effect on the Company.





Item 4.
            Reserved.





PART II




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




Market Information




The
Company’s common stock is not traded on a national securities exchange or the
NASDAQ Stock Market. The common stock has been quoted on the OTC Bulletin Board
under the symbol “MDTV” since December 2, 1998. On December 14, 2010, the
Company’s stock began trading on a 1-for-10 reverse-split basis. The range of
high and low bid prices on the OTC Bulletin Board during each fiscal quarter for
the past two years, as reported by Bloomberg L.P., is as follows:





Quarter Ended
                      
                      High
                      
                      
                      LowDecember 31,
      2008
                      
                      $
                      3.70
                      
                      
                      $
                      1.20March 31,
      2009
                      
                      $
                      3.30
                      
                      
                      $
                      1.50June 30,
      2009
                      
                      $
                      5.00
                      
                      
                      $
                      3.10September 30,
      2009
                      
                      $
                      4.70
                      
                      
                      $
                      4.00December 31,
      2009
                      
                      $
                      4.90
                      
                      
                      $
                      2.90March 31,
      2010
                      
                      $
                      4.00
                      
                      
                      $
                      2.60June 30,
      2010
                      
                      $
                      4.10
                      
                      
                      $
                      2.50September 30,
      2010
                      
                      $
                      3.40
                      
                      
                      $
                      2.20




Holders




On
December 20, 2010, the closing price for the Company’s common stock on the OTC
Bulletin Board was $4.05 per share. As of December 20, 2010, the Company
had approximately 140 stockholders of record of its shares of common stock,
with an approximate total of 1,000 shareholders of its common
stock.





Dividends





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




13


Securities
Authorized for Issuance under Equity Compensation Plans




EQUITY
COMPENSATION PLAN INFORMATION


(September 30,
2010)





Number of securities to
                        be issued upon exercise
                        of outstanding options,
                        warrants and rights
                      
                      
                      Weighted-
                        average exercise price
                        of outstanding options,
                        warrants and rights
                      
                      
                      Number of securities
                        remaining available for
                        future issuance under equity
                        compensation plansEquity
      compensation plans approved by security holders (1)
                      
                      
                      227,600
                      (1)
                      
                      $
                      4.00
                      
                      
                      
                      57,630Equity
      compensation plans not approved by security holders
                      
                      
                      0
                      
                      
                      
                      0
                      
                      
                      
                      0






(1)
            The 2001 Stock Option Plan was
      approved by the stockholders on May 10, 2001, see Note 5 to
      Consolidated Financial Statements, contained herein. On August 5, 2004,
      the stockholders approved an increase in the number of shares available
      under the 2001 Stock Option Plan from a total of 4,000,000 to 5,600,000
      shares of common stock, which post-reverse is 560,000 shares of common
      stock. As of September 30, 2010, 274,770 options have been
      exercised.





Purchases
of Equity Securities by the Issuer





On
December 19, 2008, the Company’s Board of Directors authorized the repurchase of
shares of its common stock over a twelve month period in open market
transactions, up to an aggregate value of $1 million.  During the
fiscal year ended September 30, 2009, the Company purchased 17,442 shares of its
common stock at an average price per share of $3.92. During the fiscal year
ended September 30, 2010, there were no purchases of its common
stock.  The repurchase authorization ended on December 18, 2009.




Item
      6.
            Selected
      Financial Data





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




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




The
following discussion of the financial condition and results of operations of the
Company should be read in conjunction with the consolidated financial statements
and related notes, which are included herein. This Report contains
forward-looking statements that involve risks and uncertainties. The Company’s
actual results could differ materially from those indicated in the
forward-looking statements. The discussion below should be read together with
the risks to our business as described in Item 1A - “Risk Factors.”





RECENT
DEVELOPMENTS




For the
fiscal year ended September 30, 2010, the Company realized total revenue of
$25,933,135, a 5% increase over the prior fiscal year’s revenue of $24,753,128.
However, “recurring revenue” for the year ended September 30, 2010 (total
revenue less the one-time HD upgrade subsidy received) increased by 17% over the
recurring revenue from the prior fiscal year.





EBITDA
(as adjusted) for the fiscal year ended September 30, 2010 was $1,795,008, which
included $708,650 in one-time HD upgrade subsidy revenue.  EBITDA (as
adjusted) for the prior fiscal year ended September 30, 2009 was $8,457,062,
which included (i) a $5,038,839 gain resulting from the sale of assets to CSC
Holdings, and (ii) $3,166,990 of one-time HD upgrade subsidy received. Net of
the impact of the asset sale and one-time HD upgrade subsidies (which have no
appreciable associated expense) received during the respective fiscal years, the
Company’s EBITDA (as adjusted) increased more than four-fold during fiscal
2010.





14


The
Company’s average revenue per unit (“ARPU”), net of the one-time HD upgrade
subsidy in each respective year, was $28.13 at September 30, 2010, a slight
increase over $27.56 for the year ended September 30, 2009. Inclusive of the
one-time HD upgrade subsidies, ARPU was $29.82 for the year ended September 30,
2010, as compared to ARPU of $33.08 for the prior fiscal year, with such
decrease due mainly to the $2,458,340 additional one-time HD upgrade subsidy
received in fiscal 2009. ARPU is calculated by dividing average monthly revenues
for the period (total revenues during the period divided by the number of months
in the period) by average subscribers for the period. The average subscribers
for the period is calculated by adding the number of subscribers as of the
beginning of the period and for each quarter end in the current year or period
and dividing by the sum of the number of quarters in the period plus one. The
Company believes that its recurring revenue and ARPU will be positively impacted
by (i) an increasing DIRECTV ARPU (the average revenue generated by a DIRECTV
subscriber was up 4.3% in DIRECTV’s third fiscal quarter to $88.98 (as disclosed
in DIRECTV’s public filings), (ii) an increasing ARPU generated from the sale of
incremental high-speed Internet services to the Company’s subscribers, (iii) a
general increase in recurring revenue realized from the upgrade of properties to
the new DIRECTV HD platform and the associated advanced services, and (iv) an
increase in the total number of DIRECTV Choice and Exclusive subscribers that
produce a higher ARPU relative to certain other types of subscribers. DIRECTV
currently offers over 160 national HD programming channels - the most full-time
HD channels of any provider. The continued launch and advertising campaign for
the new DIRECTV HD programming and associated services will continue to provide
visibility, incremental revenue and improved penetration rates within Company
properties.





The
Company reports 74,712 subscribers at September 30, 2010, compared to 65,262
subscribers at September 30, 2009, an overall 14% increase, but a 22% increase
in higher margin DIRECTV subscribers. As compared to the previous fiscal quarter
ended June 30, 2010, the Company experienced a slight overall subscriber
decrease due to the non-renewal of approximately 1,700 low-revenue and
low-margin bulk private cable (mostly mobile home) subscribers that were not
feasible to convert to DIRECTV or deploy high-speed Internet services, with such
loss being offset by the launch of five new DIRECTV bulk properties during the
quarter ended September 30, 2010 serving over 400 new high-margin DIRECTV
subscribers. Additionally, as of September 30, 2010, the Company had 27
properties and 7,226 units in work-in-process (“WIP”) which will contribute to
organic growth in the upcoming quarters.  The Company’s breakdown of
total subscribers by type and kind as of September 30, 2010 is outlined
below:





Service Type
                  
                  Subscribers
                    as of
                    Sept. 30, 2009
                  
                  
                  Subscribers
                    as of
                    Dec. 31, 2009
                  
                  
                  Subscribers
                    as of
                    Mar. 31, 2010
                  
                  
                  Subscribers
                    as of
                    June 30, 2010
                  
                  
                  Subscribers
                    as of
                    Sept. 30, 2010Bulk
      DTH –DIRECTV
                  
                  
                  13,646
                  
                  
                  
                  15,273
                  
                  
                  
                  15,545
                  
                  
                  
                  15,784
                  
                  
                  
                  16,143Bulk
      BCA -DIRECTV
                  
                  
                  10,255
                  
                  
                  
                  10,128
                  
                  
                  
                  10,289
                  
                  
                  
                  10,319
                  
                  
                  
                  10,339DTH
      -DIRECTV Choice/Exclusive
                  
                  
                  12,259
                  
                  
                  
                  14,086
                  
                  
                  
                  15,601
                  
                  
                  
                  17,032
                  
                  
                  
                  17,477Bulk
      Private Cable
                  
                  
                  14,567
                  
                  
                  
                  15,503
                  
                  
                  
                  17,813
                  
                  
                  
                  17,824
                  
                  
                  
                  16,112Private
      Cable Choice/ Exclusive
                  
                  
                  3,479
                  
                  
                  
                  4,077
                  
                  
                  
                  4,268
                  
                  
                  
                  3,141
                  
                  
                  
                  3,010Bulk
      ISP
                  
                  
                  5,719
                  
                  
                  
                  5,785
                  
                  
                  
                  5,878
                  
                  
                  
                  6,102
                  
                  
                  
                  6,121ISP
      Choice or Exclusive
                  
                  
                  5,275
                  
                  
                  
                  6,047
                  
                  
                  
                  6,142
                  
                  
                  
                  5,689
                  
                  
                  
                  5,484Voice
                  
                  
                  62
                  
                  
                  
                  41
                  
                  
                  
                  27
                  
                  
                  
                  25
                  
                  
                  
                  26Total
      Subscribers
                  
                  
                  65,262
                  
                  
                  
                  70,940
                  
                  
                  
                  75,563
                  
                  
                  
                  75,916
                  
                  
                  
                  74,712





As of
September 30, 2010, 4,863 subscribers in 67 properties with 20,666 wired units
have been transferred to the Company under the December 2, 2009 agreement with
AT&T Video Services, Inc. (“ATTVS”). The ATTVS agreement provides for the
multi-closing transfer to the Company of its mostly DIRECTV multi-family video
subscribers. The transitions have recently accelerated with the Company
transitioning an additional 4,325 subscribers in 59 properties with 16,100 wired
units during the first fiscal quarter ended December 31, 2010.  The
Company anticipates one final closing of properties prior to March 31, 2011. The
Company continues to establish new property relationships, extend the term for
(or enter into new) right-of-entry agreements and evaluate for upgrade the
properties acquired from ATTVS.  The Company has delayed any
significant upgrade program for these acquired properties until transition of
the remaining ATTVS properties could be accelerated and until the Company
reaches an agreement to determine DIRECTV’s capital assistance to upgrade these
transitioned properties to the DIRECTV MFH-2 or MFH-3 HD platform.




15


In the
fourth fiscal quarter, and continuing into the first fiscal quarter of 2011, the
Company implemented a number of initiatives designed to dramatically improve its
EBITDA (as adjusted) and reduce its reliance on debt financing. In particular,
the Company has (i) accelerated the closing and transition of the remaining
ATTVS properties, (ii) signed and launched the DIRECTV CapEx program (described
below), (iii) initiated price increases and introduced new pricing bundles for
video and broadband services across multiple properties, (iv) developed and
launched its new online web portal for subscribers to manage and pay their
accounts online thereby eliminating the costs associated with mailings and
collections, (v) developed and launched robust premium priced broadband services
and tiers to several of its high-speed Internet properties, (vi) negotiated
direct cost reductions for video and broadband services thereby improving gross
margins derived from existing properties and subscribers, (vii) re-packaged its
monthly video subscriber access fee into a “Customer Protection Plan” fee
requiring annual pre-payment or monthly auto-payment (eliminating time and costs
and reducing bad debt exposure), (viii) implemented a $0.99 monthly mailed
statement fee to increase revenues from approximately 35,000 current
subscribers, (ix) developed an independent contractor national rate card for
subcontracted construction and installation services at a significant cost
savings, and (x) instituted cost saving changes (and service level increases) to
its call center structure and technology to provide more efficient and
cost-effective call routing solutions.  The impact of these
initiatives should be seen starting in the Company’s first fiscal quarter
2011.




In
addition to improving financial results, the Company is continuing negotiations
and due diligence with two companies that it deems significant strategic
acquisition/merger prospects. Both companies have a significant presence in the
multi-family space and collectively have in excess of 70,000 subscribers as well
as strong broadband capabilities. To assist with strategic planning and the
potential financing associated with any acquisition or merger, the Company has
retained and sought the advice of New York investment bank Morgan Joseph &
Co. Through the efforts of Morgan Joseph & Co., the Company has executed a
term sheet for a combined debt and equity financing of up to $10.25 million with
the net proceeds to be used for one of the above-mentioned acquisitions should
terms be reached.  Similarly, the Company continues to assess its core
and non-core service areas and has identified certain assets in non-core markets
that may be considered for sale.  To that end, the Company is
preliminarily engaged with several parties regarding interest for the sale of
these assets at prices similar to what the Company has previously received. The
Company makes no representations that these acquisition/merger, financing or
sale negotiations will result in any closed transactions.





To reduce
capital spending, but still concentrate on growth, on November 10, 2010, the
Company executed the DIRECTV CapEx Agreement, which will allow the Company to
leverage its existing infrastructure to provide services to DIRECTV for the
deployment of services to certain multi-family properties identified by the
Company, but where DIRECTV becomes a party to the right of entry
agreement.  Once a property is identified by the Company, is under
contract with DIRECTV and the satellite system constructed and activated, the
Company earns fees from DIRECTV by providing certain services, including (i)
activation fees generated from new subscription sales to residents in the
property, and (ii) an ongoing percentage of the revenue generated by that
subscriber as a management fee. The CapEx Agreement reduces the Company’s
capital costs for certain subscriber growth areas – a pivotal option when
capital, or the cost of capital, is prohibitive. The Company’s current DIRECTV
agreement and the new CapEx Agreement are mutually exclusive of each
other.  Prior to bringing a property to DIRECTV, the Company retains
sole discretion as to whether it decides to build out and maintain ownership of
a property or offer it to DIRECTV and simply provide ongoing management, sales,
service and maintenance for DIRECTV.





At the
Company’s Annual General Meeting of Stockholders in Totowa, New Jersey on June
10, 2010, the stockholders authorized the Board of Directors to effect a reverse
stock split, at a ratio to be determined by the Board of Directors, within a
range from 1-for-5 to 1-for-10, and to reduce the current authorized number of
shares of common stock from 70 million shares to 35 million shares. The Board of
Directors proceeded with this authorization effective December 9, 2010 and filed
an amendment to the Company’s Certificate of Incorporation to be effective on
December 9, 2010.  The Company’s stock began trading on a 1-for-10
consolidated basis on December 14, 2010.





16


Use of Non-GAAP Financial Measures




The
Company uses the common performance gauge of “EBITDA” (as adjusted by the
Company) to evidence earnings exclusive of mainly noncash events, as is common
in the technology, and particularly the cable and telecommunications,
industries. EBITDA (as adjusted) is an important gauge because the Company, as
well as investors who follow this industry, frequently use it as a measure of
financial performance. The most comparable GAAP reference is simply the removal
from net income or loss of - in the Company's case - interest, depreciation,
amortization and noncash charges related to its shares, warrants and stock
options. The Company adjusts EBITDA by then adding back any provision for bad
debts and inventory reserve. EBITDA (as adjusted) is not, and should not be
considered, an alternative to income from operations, net income, net cash
provided by operating activities, or any other measure for determining operating
performance or liquidity, as determined under accounting principles generally
accepted in the Unites States of America. EBITDA (as adjusted) also does not
necessarily indicate whether cash flow will be sufficient to fund working
capital, capital expenditures or to react to changes in the industry or the
economy generally. For the years ended September 30, 2010 and 2009, the Company
reported positive EBITDA (as adjusted) of $1,795,008 and $8,457,062,
respectively. The decreases are primarily the result of the gain on the sale of
subscribers to CSC Holdings in the prior period and a reduction in the subsidy
received from the HD upgrade program. The following table reconciles the
comparative EBITDA (as adjusted) of the Company to its consolidated net loss as
computed under accounting principles generally accepted in the United States of
America:




For the Years Ended September 30,2010
                  
                  
                  2009EBITDA  (as
      adjusted)
                  
                  $
                  1,795,008
                  
                  
                  $
                  8,457,062Interest
      expense
                  
                  
                  (2,188,774
                  )
                  
                  
                  (1,631,923
                  )Deferred
      finance costs and debt discount amortization (interest
      expense)
                  
                  
                  (320,594
                  )
                  
                  
                  (287,261
                  )Provision
      for doubtful accounts
                  
                  
                  (317,569
                  )
                  
                  
                  (210,612
                  )Depreciation
      and amortization
                  
                  
                  (7,227,277
                  )
                  
                  
                  (6,850,478
                  )Share-based
      compensation expense - employees
                  
                  
                  (55,141
                  )
                  
                  
                  (92,901
                  )Compensation
      expense for issuance of common stock through Employee Stock Purchase
      Plan
                  
                  
                  (24,481
                  )
                  
                  
                  (34,075
                  )Compensation
      expense for issuance of common stock for employee bonuses
                  
                  
                  —
                  
                  
                  
                  (28,070
                  )Compensation
      expense for issuance of common stock for employee services
                  
                  
                  —
                  
                  
                  
                  (2,720
                  )Compensation
      expense accrued to be settled through the issuance of common
      stock
                  
                  
                  —
                  
                  
                  
                  (187,473
                  )Compensation
      expense through the issuance of restricted common stock for services
      rendered
                  
                  
                  (28,000
                  )
                  
                  
                  (51,530
                  )Net
      Loss
                  
                  $
                  (8,366,828
                  )
                  
                  $
                  (919,981
                  )





RESULTS
OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2010 AND 2009





For the Year Ended
                        September 30, 2010
                      
                      
                      For the Year Ended
                        September 30, 2009
                      
                      
                      Change
                        ($)
                      
                      
                      Change
                        (%)REVENUE
                      
                      $
                      25,933,135
                      
                      
                      
                      100
                      %
                      
                      $
                      24,753,128
                      
                      
                      
                      100
                      %
                      
                      $
                      1,180,007
                      
                      
                      
                      5
                      %Direct
      costs
                      
                      
                      12,117,211
                      
                      
                      
                      47
                      %
                      
                      
                      10,283,422
                      
                      
                      
                      42
                      %
                      
                      
                      1,833,789
                      
                      
                      
                      18
                      %Sales
      expenses
                      
                      
                      2,082,219
                      
                      
                      
                      8
                      %
                      
                      
                      1,417,443
                      
                      
                      
                      6
                      %
                      
                      
                      664,776
                      
                      
                      
                      47
                      %Customer
      service and operating expenses
                      
                      
                      5,882,934
                      
                      
                      
                      23
                      %
                      
                      
                      5,997,854
                      
                      
                      
                      24
                      %
                      
                      
                      (114,920
                      )
                      
                      
                      -2
                      %General
      and administrative expenses
                      
                      
                      4,481,347
                      
                      
                      
                      17
                      %
                      
                      
                      4,310,859
                      
                      
                      
                      17
                      %
                      
                      
                      170,488
                      
                      
                      
                      4
                      %Depreciation
      and amortization
                      
                      
                      7,227,277
                      
                      
                      
                      28
                      %
                      
                      
                      6,850,478
                      
                      
                      
                      28
                      %
                      
                      
                      376,799
                      
                      
                      
                      6
                      %Gain
      on sale of customers and property and equipment
                      
                      
                      —
                      
                      
                      
                      0
                      %
                      
                      
                      (5,104,673
                      )
                      
                      
                      -21
                      %
                      
                      
                      5,104,673
                      
                      
                      
                      100
                      %OPERATING
      INCOME (LOSS)
                      
                      
                      (5,857,853
                      )
                      
                      
                      -23
                      %
                      
                      
                      997,745
                      
                      
                      
                      4
                      %
                      
                      
                      (6,855,598
                      )
                      
                      
                      (687
                      )%Total
      other expense
                      
                      
                      (2,508,975
                      )
                      
                      
                      -9
                      %
                      
                      
                      (1,917,726
                      )
                      
                      
                      -8
                      %
                      
                      
                      (591,249
                      )
                      
                      
                      31
                      %NET
      LOSS
                      
                      $
                      (8,366,828
                      )
                      
                      
                      -32
                      %
                      
                      $
                      (919,981
                      )
                      
                      
                      -4
                      %
                      
                      $
                      (7,446,847
                      )
                      
                      
                      (809
                      )%





Net Loss.     Primarily as a result of the matters discussed
below, and noncash charges for the years ended September 30, 2010 and 2009 of
$7,973,062 and $7,745,120, respectively, the Company reported a net loss of
$8,366,828 for the year ended September 30, 2010, compared to a net loss of
$919,981 for the year ended September 30, 2009.




17


Revenues.   Revenue for the year ended September 30, 2010 increased
5% to $25,933,135 compared to revenue of $24,753,128 for the year ended
September 30, 2009, however, the fiscal year revenue for September 30, 2009
included $3,166,990 in one-time installation revenue from the HD upgrade subsidy
compared to the one-time installation revenue from the HD upgrade subsidy of
only $708,650 in the fiscal year revenue for September 30, 2010. Adjusted for
the HD upgrade subsidy, the Company actually realized 17% growth in “recurring
revenue” during the periods.  This increase in recurring revenue is mainly
attributable to an increase in billable subscribers and a higher percentage of
customers subscribing to advanced services.  The Company expects total
revenue to increase during fiscal year 2011, without significant capital
expenditure, through the transition of ATTVS subscribers, subscriber additions
from aggressive marketing plans in properties recently upgraded to the new HD
platform, subscribers gained through capital already invested in WIP, price
increases that were implemented shortly after the year ended September 30, 2010,
and a continuation, although to a lesser degree, of the DIRECTV HD upgrade
subsidy. The fiscal year revenue (inclusive of the DIRECTV HD upgrade subsidy)
has been derived from the following sources:





For the Year Ended
                    September 30, 2010
                  
                  
                  For the Year Ended
                    September 30, 2009Private
      cable programming revenue
                  
                  $
                  4,584,648
                  
                  
                  
                  18
                  %
                  
                  $
                  4,003,676
                  
                  
                  
                  16
                  %DTH
      programming revenue and subsidy
                  
                  
                  15,315,692
                  
                  
                  
                  59
                  %
                  
                  
                  13,136,834
                  
                  
                  
                  53
                  %Internet
      access fees
                  
                  
                  3,351,395
                  
                  
                  
                  13
                  %
                  
                  
                  2,806,708
                  
                  
                  
                  12
                  %Installation
      fees, wiring  and other revenue
                  
                  
                  2,681,400
                  
                  
                  
                  10
                  %
                  
                  
                  4,805,910
                  
                  
                  
                  19
                  %Total
      Revenue
                  
                  $
                  25,933,135
                  
                  
                  
                  100
                  %
                  
                  $
                  24,753,128
                  
                  
                  
                  100
                  %





The
increase in private cable programming revenue is due to the acquisition of
certain subscribers with private cable programming services. The Company expects
DTH programming revenue to continue to increase due to a larger subscriber base,
an increase in revenue associated with advanced services, and the conversion of
certain properties from low average revenue private cable to DIRECTV service.
The increase in Internet access fees is a result of subscriber growth and
increases in revenue associated with tiers for the provisioning of faster more
robust Internet offerings. The decrease in installation fees, wiring and other
revenue is due to the significant reduction of the HD upgrade subsidy referenced
above.





As
mentioned above, the year ended September 30, 2009 included $2,458,340 more in
DIRECTV HD upgrade subsidy (with no appreciable associated expense) than the
year ended September 30, 2010.  The inclusion of this upgrade revenue as of
September 30, 2009 essentially understates the percentage of revenue the fiscal
2009 associated direct costs and expenses have to total revenue, which may
inflate the increase in direct costs and expenses as a percent of revenue, from
September 30, 2009 to September 30, 2010.





Direct Costs.   Direct costs are comprised of DIRECTV bulk and Private
Cable programming costs, monthly recurring Internet broadband connections and
costs relating directly to installation services. Direct costs increased to
$12,117,211 as of September 30, 2010, as compared to $10,283,422 as of September
30, 2009, due to the 14% increase in subscribers, the 17% increase in recurring
revenue, and certain one-time transition related costs on acquired properties.
Direct costs generally increase after an acquisition due to higher than normal
programming and broadband costs associated with service contracts on acquired
properties, as well as other transition costs. Additionally, certain direct
programming and broadband circuit overlaps and delayed terminations during a
transition are generally unavoidable. As the Company transitions programming and
broadband costs to its preferred vendors and other one-time acquisition
transition costs are absorbed, these direct costs will normalize. The Company
estimates that such one-time delayed circuit and programming terminations and
overruns included in direct costs for the year ended September 30, 2010 was
approximately $283,000. The Company expects a proportionate increase in direct
costs as subscriber growth continues, however, direct costs are linked to the
type of subscribers the Company add and choice and exclusive DTH DIRECTV
subscribers have no associated programming cost. Direct costs on the current
subscriber base should normalize and decrease as a percent of revenue during
2011.





Sales Expenses. Sales expenses were $2,082,219 and $1,417,443 for the years ended
September 30, 2010 and 2009, respectively, a 2% increase as a percent of
revenue. The increase was due to (i) the transfer of certain employees
previously performing operations functions who are now performing sales
functions, and are accordingly in sales expenses, representing 33% of the
increase, (ii) new sales personnel for the ATTVS properties and in other
regions, representing 46% of the increase, and (iii) a significant increase in
marketing events and materials associated with the transition of previously
disclosed recent acquisitions, representing 15% of the increase. The
increase as a percent of revenue is also partially due to the above-mentioned
affect of the HD upgrade subsidy on the September 30, 2009 revenue, costs and
expenses. During fiscal 2011, the Company expects these expenses to decline as a
percent of revenue.





18


Customer Service
and Operating Expenses.   Customer service and operating
expenses are comprised of expenses related to the Company’s call center,
technical support, project management and general operations. Customer service
and operating expenses were $5,882,934 and $5,997,854 for the years ended
September 30, 2010 and 2009, respectively, decreasing slightly due to the
transfer of certain employees previously performing operations functions who are
now performing sales functions, despite a 14% increase in the number of
subscribers between the periods. These expenses are expected to increase in
dollars in conjunction with an increasing subscriber base, an increase in
customer service quality levels and the continued launch of new DIRECTV HD
services in existing and new properties. The Company anticipates these expenses
to decrease as a percent of revenue during fiscal 2011. A breakdown of customer
service and operating expenses is as follows:





Year Ended
                    September 30, 2010
                  
                  
                  Year Ended
                    September 30, 2009Call
      center expenses
                  
                  $
                  2,049,654
                  
                  
                  
                  35
                  %
                  
                  $
                  1,812,143
                  
                  
                  
                  30
                  %General
      operation expenses
                  
                  
                  1,225,666
                  
                  
                  
                  21
                  %
                  
                  
                  1,754,538
                  
                  
                  
                  29
                  %Property
      system maintenance expenses
                  
                  
                  2,607,614
                  
                  
                  
                  44
                  %
                  
                  
                  2,431,173
                  
                  
                  
                  41
                  %Total
      customer service and operating expense
                  
                  $
                  5,882,934
                  
                  
                  
                  100
                  %
                  
                  $
                  5,997,854
                  
                  
                  
                  100
                  %





Property system maintenance
expenses increased slightly due to the transition of ATTVS
properties.  The decrease in general operations expense was
mainly due the transfer of certain operations personnel into sales and
marketing.




General and
Administrative Expenses.General and administrative expenses were
$4,481,347 and $4,310,859 for the years ended September 30, 2010 and 2009,
respectively, a slight increase.  This is primarily the result of
expenses related to the Company’s new Subscriber Management System and an
increase in wages from the hiring of employees to facilitate the Company’s
acquisition and growth plans. Adjusting for noncash charges, the increase as a
percent of revenue, is also partially due to the aforementioned affect of the
fiscal 2009 HD upgrade subsidy on fiscal 2009 revenue, costs and expenses. Of
the general and administrative expenses for the years ended September 30, 2010
and 2009, the Company had total noncash charges included of $425,191 and
$600,179, respectively. These noncash charges are described below:





Year Ended September 30,2010
                    
                    
                    2009Total
      general and administrative expenses
                    
                    $
                    4,481,347
                    
                    
                    $
                    4,310,859Noncash charges:Share
      based compensation - employees
                    
                    
                    55,141
                    
                    
                    
                    92,901Compensation
      expense through the issuance of restricted common stock for services
      rendered
                    
                    
                    28,000
                    
                    
                    
                    51,530Excess
      discount for the issuance of stock under stock purchase
    plan
                    
                    
                    24,481
                    
                    
                    
                    34,075Issuance
      of common stock for bonuses
                    
                    
                    —
                    
                    
                    
                    23,588Provision
      for compensation expense settled through the issuance of common
      stock
                    
                    
                    —
                    
                    
                    
                    187,473Bad
      debt provision
                    
                    
                    317,569
                    
                    
                    
                    210,612Total
      noncash charges
                    
                    
                    425,191
                    
                    
                    
                    600,179Total
      general and administrative expenses, net of noncash
charges
                    
                    $
                    4,056,156
                    
                    
                    $
                    3,710,680Percent
      of revenue
                    
                    
                    16
                    %
                    
                    
                    15
                    %







(1)
            The
      Company recognized noncash share-based compensation expense for employees
      based upon the fair value at the grant dates for awards to employees for
      the years ended September 30, 2010 and 2009 of $55,141 and $92,901,
      respectively, amortized over the requisite vesting period. The total
      stock-based compensation expense not yet recognized and expected to vest
      over the next seventeen months is approximately
  $74,000.





Excluding
the $425,191 and $600,179 in noncash charges from the years ended September 30,
2010 and 2009, respectively, general and administrative expenses were $4,056,156
(16% of revenue) compared to $3,710,680 (15% of revenue). Although the Company
anticipates general and administrative expenses to increase in dollars, it
expects these expenses to decrease as a percent of revenue in fiscal
2011.





19


Gain on Sale of
Customers and Plant and Equipment.There was no gain on sale of customers
and plant and equipment for the year ended September 30, 2010.





During
the fiscal year ended September 30, 2009, on November 5, 2008 and December 17,
2008, the Company sold subscribers and certain related property and equipment to
CSC Holdings, Inc. for $2,704,500 and $3,061,500, respectively. The total gain
on the sale of customers and the related property and equipment was
$5,038,839.  On April 30, 2009, the Company disposed of assets to a
property at the end of its access agreement for proceeds of $15,000. The total
gain on the disposal was $10,634.  On July 17, 2009, the Company
disposed of assets to a property at the end of its access agreement for proceeds
of $75,000. The total gain on the disposal was $55,200.





Other Noncash
Charges.  Depreciation and amortization expenses increased
from $6,850,478 during the fiscal year ended September 30, 2009 to $7,227,277
during the fiscal year ended September 30, 2010. The dollar increase in
depreciation and amortization is associated with additional equipment deployed,
including HD upgrade equipment and other intangible assets that were acquired
over prior periods. Interest expense during the year ended September 30, 2010
and 2009 included noncash charges of $320,594 and $287,261, respectively, for
the amortization of deferred finance costs and debt discount.




Other Income,
Net.During the year ended September 30, 2010, interest expense increased
to $2,509,368, from interest expense of $1,919,184 for the year ended September
30, 2009, due mainly to increased Credit Facility borrowing. During the year
ended September 30, 2009, interest expense was lower primarily as a result of
the sale of subscribers to CSC Holdings, Inc. and the corresponding receipts of
$5,766,000, which were used to lower the Credit Facility and related interest
expense.





LIQUIDITY AND CAPITAL RESOURCES





During
the years ended September 30, 2010 and 2009, the Company recorded net losses of
$8,366,828 and $919,981, respectively. The Company had positive cash flow from
operating activities of $305,127 and $3,533,641 during the years ended September
30, 2010 and 2009, respectively. However, the cause for higher positive cash
flow from operating activities for the year ended September 30, 2009 was
primarily a result of (i) an additional $2,458,340 in DIRECTV HD upgrade subsidy
(with no appreciable associated expense) than the year ended September 30, 2010,
and (ii) the gain from the sale of subscribers and related property and
equipment to CSC Holdings of $5,038,839. At September 30, 2010, the Company had
an accumulated deficit of $60,951,204.





On
September 11, 2006, the Company entered into a Loan and Security Agreement with
FCC, LLC, d/b/a First Capital, and Full Circle Funding, LP for a senior secured
$20 million non-amortizing revolving five-year credit facility (“Credit
Facility”) to fund the Company's subscriber growth. The Credit Facility was
specifically designed to provide a long-term funding solution to the Company’s
subscriber growth capital requirements. The size of the Credit Facility is
ultimately determined by factors relating to the present value of the Company’s
future revenue as determined by its access agreements. Therefore, as the
Company’s subscriber base increases through the signing of new access agreements
and renewal of existing access agreements, the Company’s borrowing base
potential increases concurrently to certain limits. Given the Company’s focus on
both EBITDA (as adjusted) and subscriber growth, an increasing percentage of
future subscriber acquisition costs should be funded from net operations,
despite the availability of more capital through an increasing borrowing base.
On June 30, 2008, the Company entered into an Amended and Restated Loan and
Security Agreement with the same parties for a $10 million increase to the
Credit Facility and a new five-year term.  The original material terms and
conditions of the Credit Facility, previously negotiated and executed on
September 11, 2006, have not changed.





The
Credit Facility requires interest payable monthly only on the principal
outstanding and is specially tailored to the Company's needs by being divided
into six $5 million increments. The Company is under no obligation to draw an
entire increment at one time. The first $5 million increment carries an interest
rate of prime plus 4.1%, the second $5 million at prime plus 3%, the third $5
million at prime plus 2%, the fourth $5 million at prime plus 1%, and the new
$10 million in additional Credit Facility is also divided into two $5 million
increments with the interest rate on these increments being prime plus 1% to 4%,
depending on the Company's ratio of EBITDA to the total outstanding
loan balance. As defined in the Credit Facility, “prime” shall be a minimum
of 7.75%. As of September 30, 2010, the Company has borrowed a total of
$23,181,825 under the Credit Facility, which is due on June 30,
2013.





20


To access
the Credit Facility above $20 million (which the Company has), the Company must
have (i) positive EBITDA of $1 million, on either the higher of a trailing
twelve (12) month basis or a six (6) month basis times two, and (ii) 60,000
subscribers. To access the Credit Facility above $25 million, the Company must
have (i) positive EBITDA of $3 million on a trailing twelve (12) month
basis, and (ii) 65,000 subscribers.  EBITDA shall mean the Company’s net
income (excluding extraordinary gains and noncash charges as defined in the
Credit Facility) before provisions for interest expense, taxes, depreciation and
amortization.  As of September 30, 2010, $6,818,175 remains available for
borrowing under the Credit Facility, however, the Company currently does not
meet the EBITDA covenant described above to access the Credit Facility above $25
million.





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





·
            incur
      other indebtedness;·
            incur
      other liens;


·
            undergo
      any fundamental changes;·
            engage
      in transactions with affiliates;


·
            issue
      certain equity, grant dividends or repurchase shares;·
            change
      our fiscal periods;


·
            enter
      into mergers or consolidations;·
            sell
      assets; and


·
            prepay
      other debt.




The
Credit Facility also includes certain events of default, including nonpayment of
obligations, bankruptcy, change of control and certain financial covenants.
Borrowings will generally be available subject to a borrowing base and to the
accuracy of all representations and warranties, including the absence of a
material adverse change and the absence of any default or event of
default.





The
Company did not incur or record a provision for income taxes for the years ended
September 30, 2010 and 2009 due to the net loss and the utilization of the
Company’s net operating loss carryforward. This net operating loss carryforward
expires on various dates through 2030; therefore, the Company should not incur
cash needs for income taxes for the foreseeable future.





The
Company believes, but can not assure, that the combination of revenues, expected
revenue increases and the remaining available balance under the Credit Facility
at least up to $25 million will provide it with the needed funds to maintain
operations through September 30, 2011. Should the Company begin to accelerate
subscriber growth, it will have to achieve the EBITDA covenant to access the
remainder of the Credit Facility up to $30 million, rely on the DIRECTV CapEx
Program, sell assets, or find alternative sources of capital
funding.





Cash Position. At September 30, 2010 and 2009, the Company had cash and cash
equivalents of $324,524 and $688,335, respectively. The Company maintains little
cash, as revenues are deposited against the balance of the Credit Facility to
reduce interest cost. During the year ended September 30, 2010, the Company
increased the amount borrowed against the Credit Facility by $7,058,354. As of
September 30, 2010, the Company believes, but cannot assure, that the
combination of cash, revenues, expected revenue growth and the remaining
available balance under the Credit Facility up to at least $25 million will
provide it with the needed funds to maintain operations at least through
September 30, 2011.





Operating
Activities. Company operations provided net cash of $305,127 and
$3,533,641 for the years ended September 30, 2010 and 2009,
respectively.





Net cash
provided by operations for the year ended September 30, 2010 included a decrease
in accounts receivables of $283,361, an increase in prepaid expenses of $26,878,
an increase in accounts payable and accrued liabilities of $650,533 and a
decrease in deferred revenue of $252,712.





Net cash
provided by operations for the year ended September 30, 2009 included a decrease
in accounts and other receivables of $755,881, primarily from the receipt of CSC
Holdings sale proceeds from escrow, an increase in prepaid expenses of $98,772,
an increase in accounts payable and accrued liabilities of $931,782 and an
increase in deferred revenue of $141,829.





21


The
Company’s net losses of $8,366,828 and $919,981 for the years ended September
30, 2010 and 2009, respectively, are inclusive of net noncash charges associated
primarily with depreciation and amortization, stock options and warrants, and
other non-cash charges totaling $7,973,062 and $7,745,120 for the respective
periods.





Investing
Activities.During the year ended September 30, 2010, the Company
purchased $6,687,200 of equipment relating to subscriber additions and HD
upgrades for the fiscal year and to be used for future periods.  During the
year end September 30, 2010, the Company paid $853,667 for the acquisition of
intangible assets and related fees. During the year ended September 30, 2010,
the Company received $5,000 in proceeds on the disposal of
equipment.





During
the year ended September 30, 2009, the Company purchased $6,893,767 of equipment
relating to subscriber additions and HD Platform upgrades for the fiscal year
and to be used for future periods. During the year ended September 30, 2009, the
Company received $5,703,500 in proceeds, net of costs of $62,500, for the sale
of subscribers and related property and equipment to CSC Holdings, and $90,000
in proceeds for the sale of equipment to properties at the end of access
agreements. Additionally, the Company paid $813,953 for the acquisition of
intangible assets and related fees.




Financing
Activities.During the year ended September 30, 2010, the Company
incurred $200,000 in deferred financing costs and increased the amount borrowed
through the Credit Facility by $7,058,354. Equity financing activity provided
$8,575 from 2,719 shares of common stock purchased by employees through the
Employee Stock Purchase Plan.





During
the year ended September 30, 2009, the Company used $62,721 for the repayment of
certain notes payable and capital lease obligations. Equity financing activity
provided $15,599 from 6,333 shares of common stock purchased by employees
through the Employee Stock Purchase Plan. Additionally, during the year ended
September 30, 2009, the Company incurred $150,000 in deferred finance costs and
lowered the amount borrowed through the Credit Facility by $728,496. The Company
also repurchased 17,442 shares of its common stock at an aggregate cost of
$68,324.




Working
Capital. The Company had negative working capital of $2,714,130 and
$1,209,045 as of September 30, 2010 and 2009, respectively. The Credit Facility
provided $7,058,354 in proceeds towards working capital for the year ended
September 30, 2010, and the Company lowered the amount borrowed through the
Credit Facility by $728,496 for the year ended September 30, 2009. To minimize
the draw on the Credit Facility, the Company expects to be at neutral or
slightly negative working capital. The Company believes, but can not assure,
that it will have sufficient funds to meet current operating activity
obligations through current revenue levels, expected revenue growth, cost
cutting, and the funds available through the Credit Facility at least up to $25
million, to maintain operation through September 30, 2011.  Should the
Company accelerate growth, it will have to achieve the EBITDA covenant to access
the remainder of the Credit Facility up to $30 million, rely on the DIRECTV
CapEx Program, sell assets, or find alternative sources of capital
funding.




Capital
Commitments and Contingencies.   The Company has access
agreements with the owners of MDU properties to supply satellite television and
Internet systems and services to the residents of those properties. However, the
Company has no obligation to build out those properties and no penalties will
accrue if it elects not to do so.





Future Capital
Requirements.The Company believes, but can not assure, that
it has sufficient liquidity to fund current levels of operating
expenses.  However, the Company will need additional funds or
financings to sustain an increasing rate of growth.  To fund future
organic growth and acquisitions, the Company has been and will continue to (i)
work to achieve the EBITDA covenant that would allow it access to the Credit
Facility above $25 million, (ii) pursue opportunities to raise additional
financing through private placements of both equity and debt securities, (iii)
accelerate deployments and growth under the DIRECTV CapEx Program which does not
require significant capital, and/or (iv) pursue negotiations with certain
entities for the sale of Company non-core assets.  The Company has
executed a term sheet for a combined debt and equity financing of up to $10.25
million with the net proceeds to be used for a certain acquisition should such
acquisition terms be reached.  There is no assurance that the Company
will be successful in closing this financing or any of the other above
directives.




22


CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL
COMMITTMENTS




As of
September 30, 2010, the resources required for scheduled payment of contractual
obligations were as follows:





Total
                  
                  
                  Due in
                    1 year
                    or less
                  
                  
                  Due after
                    1 year through
                    3 years
                  
                  
                  Due after
                    3 years through
                    5 yearsOperating
      leases
                  
                  $
                  863,355
                  
                  
                  $
                  375,993
                  
                  
                  $
                  487,362
                  
                  
                  $Credit
      line borrowing
                  
                  
                  23,181,825
                  
                  
                  
                  -
                  
                  
                  
                  23,181,825
                  
                  
                  
                  —Total
      contractual obligations
                  
                  $
                  24,045,180
                  
                  
                  $
                  375,993
                  
                  
                  $
                  23,669,187
                  
                  
                  $
                  —





CRITICAL
ACCOUNTING POLICIES AND ESTIMATES





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





Revenue
recognition with respect to initial service or connection:





On June
1, 2007, the Company signed a new System Operator Agreement with DIRECTV (the
“DIRECTV Agreement"), which replaced an agreement dated September 29, 2003.
Under the DIRECTV Agreement the Company receives monthly residual fees from
DIRECTV based upon the programming revenue DIRECTV receives from subscribers
within the Company's multi-dwelling unit properties. The Company also receives
an “Individual Subscriber PPC” (prepaid programming commission, also known as an
“activation fee”) for every new subscriber that activates a DIRECTV
commissionable programming package. The Individual Subscriber PPC is paid on a
gross activation basis in choice and exclusive properties and on a one-time
basis in our bulk properties. The payment of the Individual Subscriber PPC
requires an annual commitment for the individual services and is subject to a
“charge back” if a subscriber disconnects within the annual commitment. The
revenue from the Individual Subscriber PPC is recognized over one year in
conjunction with the annual commitment. The DIRECTV Agreement also provides for
an “Analog Commission” to the Company for the addition of a new Bulk Choice
Advantage (“BCA”) subscriber. The Analog Commission is not subject to an annual
commitment from a subscriber and there is no proportional “charge back” by
DIRECTV if a subscriber disconnects at any time. Due to the fact that no portion
of the Analog Commission is subject to the annual commitment or charge back
provision, the Analog Commission is recognizable immediately upon the approval
and acceptance of the subscriber by DIRECTV.




Over the
past few years, the Company has entered into letter agreements with DIRECTV that
allow the Company, for a specified period of time, to receive an upgrade subsidy
from DIRECTV when it completes a high definition system upgrade (“HD upgrade”)
on certain of the Company’s properties. To receive this subsidy, the Company is
required to submit an invoice to DIRECTV within thirty (30) days after the HD
upgrade of the property and subscribers are complete. This subsidy is treated as
revenue, similar to the “activation fee” referenced above, except that the
entire amount of the subsidy is recognized immediately. However, on certain
occasions, the letter agreement provided for a minimum retention period of three
years and may require a full refund of the subsidy by the Company to DIRECTV for
properties that terminate DIRECTV service before expiration of the three year
period.  On December 16, 2009, the Company entered into one such letter
agreement with DIRECTV to receive an HD upgrade subsidy specifically for
properties that the Company acquires from ATTVS. The letter agreement contains
the three year minimum retention period described above. For those ATTVS
properties acquired by the Company that have access agreements with a remaining
term of shorter than three years, the Company expects to enter into access
agreements or addendums covering the minimum retention period, and if unable to
do so, the Company will defer revenue recognition until the minimum retention
period expires or a new long-term access agreement or addendum is signed. 
Through the year ended September 30, 2010, every property acquired from ATTVS
that the Company has completed the HD upgrade has had a minimum term of three
years.





23


Deferred
revenue:





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




Use
of estimates:





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





Allowance for doubtful accounts:





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





Fair
value of equity instruments (stock-based compensation):





The
Company measures compensation expense based on estimated fair values of all
stock-based awards, including, employee stock options, restricted stock awards
and stock purchase rights. Stock-based compensation is recognized in the
financial statements based on the portion of their grant date fair values
expected to vest over the period during which the employees are required to
provide their services in exchange for the equity instruments.





The
Company uses the Black-Scholes option pricing model to estimate the fair value
of stock-based awards. The Black-Scholes model requires the use of highly
subjective and complex assumptions, including the option’s expected term and the
price volatility of the underlying stock. The expected term of options is based
on observed historical exercise patterns. Expected volatility is based on
historical volatility over the expected life of the options.




All other
issuances of common stock, stock options, warrants or other equity instruments
to employees and non-employees as consideration for goods or services received
were accounted for based on the fair value of the consideration received or the
fair value of the equity instrument, whichever is more readily measurable. Such
fair value is measured at an appropriate date and capitalized or expensed as if
the Company had paid cash for the goods or services.





For
purposes of determining the fair values of options and warrants using the
Black-Scholes option pricing model, the Company used the following assumptions
in the years ended September 30, 2010 and 2009:





2010
                    
                    2009Expected
      volatility
                    37%
                    
                    27%Risk-free
      interest rate
                    2.20%
                    
                    2.80%Expected
      years of option life
                    1
      to 4.1
                    
                    1
      to 4.1Expected
      dividends
                    0%
                    
                    0%





24


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





Valuation
of deferred tax assets:





The
Company regularly evaluates its ability to recover the reported amount of
deferred income tax assets considering several factors, including an estimate of
the likelihood that the Company will generate sufficient taxable income in
future years in which temporary differences reverse and net operating loss carry
forwards may be used. Due to the uncertainties related to, among other things,
the extent and timing of future taxable income, the Company offsets its net
deferred tax assets by an equivalent valuation allowance as of September 30,
2010 and 2009.





Valuation
of long-lived assets:





The
Company assesses the recoverability of long-lived tangible and intangible assets
whenever it determines that events or changes in circumstances indicate that
their carrying amount may not be recoverable. This assessment is primarily based
upon estimate of future cash flows associated with these assets. Accordingly,
the Company has determined that there has not been an impairment of any of
long-lived assets. However, should the Company’s operating results deteriorate,
it may determine that some portions of long-lived tangible or intangible assets
are impaired. Such determination could result in noncash charges to income that
could materially affect the Company’s consolidated financial position or results
of operations for that period.




Reporting segments:





Financial
reporting for segments of a business enterprise establishes standards for the
way that public entities report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements regarding products and
services, geographic areas and major customers. Operating segments are defined
as components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performances.





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




Therefore,
the Company maintains that because its products are evaluated with common
financial information by a common decision maker, all of the Company's
operations are in one primary industry segment.




RECENT
ACCOUNTING PRONOUNCEMENTS





In
October 2009, “Multiple-Deliverable Revenue Arrangements” was issued. This
update provides amendments to the criteria for revenue recognition for
separating consideration in multiple-deliverable arrangements. The amendments to
this update establish a selling price hierarchy for determining the selling
price of a deliverable. Multiple-Deliverable Revenue Arrangements is effective
for financial statements issued for years beginning on or after June 15,
2010. The Company is currently evaluating the effect that the adoption of
Multiple-Deliverable Revenue Arrangements will have on its consolidated results
of operations, financial position and cash flows, but does not expect the
adoption to have a material impact.





25


The FASB,
the EITF and the SEC have issued certain other accounting pronouncements and
regulations as of September 30, 2010 that will become effective in subsequent
periods, however, management of the Company does not believe that any of those
pronouncements would have significantly affected the Company’s financial
accounting measurements or disclosures had they been in effect during 2010 and
2009, and it does not believe that any of those pronouncements will have a
significant impact on the Company’s consolidated financial statements at the
time they become effective.




Off
Balance Sheet Arrangements:





None.




Item 7A. Quantitative and Qualitative Disclosures
about Market Risk





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




26




Item 8.    Financial
Statements and Supplementary Data





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM





Board of
Directors and Stockholders


MDU
Communications International, Inc.





We have
audited the accompanying consolidated balance sheets of MDU Communications
International, Inc. and Subsidiaries as of September 30, 2010 and 2009, and the
related consolidated statements of operations, stockholders’ equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of MDU Communications
International, Inc. and Subsidiaries as of September 30, 2010 and 2009, and
their results of operations and cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.





/s/ J.H.
Cohn LLP


Roseland,
New Jersey


December
21, 2010




27





MDU COMMUNICATIONS INTERNATIONAL,
INC.


Consolidated
Balance Sheets


September
30, 2010 and 2009





September 30,
                          2010
                        
                        
                        September 30,
                          2009ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                        
                        $
                        324,524
                        
                        
                        $
                        688,335Accounts
      receivable - trade, net of an allowance of $913,786 and
      $592,275
                        
                        
                        1,470,401
                        
                        
                        
                        2,071,331Prepaid
      expenses and deposits
                        
                        
                        645,719
                        
                        
                        
                        645,802TOTAL
      CURRENT ASSETS
                        
                        
                        2,440,644
                        
                        
                        
                        3,405,468Telecommunications
      equipment inventory
                        
                        
                        843,082
                        
                        
                        
                        781,916Property
      and equipment, net of accumulated depreciation of $28,240,886 and
      $22,071,379
                        
                        
                        22,696,096
                        
                        
                        
                        22,139,769Intangible
      assets, net of accumulated amortization of $7,417,568 and
      $6,445,203
                        
                        
                        2,470,875
                        
                        
                        
                        2,638,683Deposits,
      net of current portion
                        
                        
                        64,450
                        
                        
                        
                        65,489Deferred
      finance costs, net of accumulated amortization of $934,449 and
      $658,146
                        
                        
                        339,000
                        
                        
                        
                        415,303TOTAL
      ASSETS
                        
                        $
                        28,854,147
                        
                        
                        $
                        29,446,628LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIESAccounts
      payable
                        
                        $
                        2,698,920
                        
                        
                        $
                        2,079,925Other
      accrued liabilities
                        
                        
                        1,793,951
                        
                        
                        
                        1,718,170Current
      portion of deferred revenue
                        
                        
                        661,903
                        
                        
                        
                        816,418TOTAL
      CURRENT LIABILITIES
                        
                        
                        5,154,774
                        
                        
                        
                        4,614,513Deferred
      revenue, net of current portion
                        
                        
                        186,021
                        
                        
                        
                        284,218Credit
      line borrowing, net of debt discount
                        
                        
                        23,060,026
                        
                        
                        
                        15,957,381TOTAL
      LIABILITIES
                        
                        
                        28,400,821
                        
                        
                        
                        20,856,112COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS’
      EQUITYPreferred
      stock, par value $0.001; 5,000,000 shares authorized, none
      issued
                        
                        
                        —
                        
                        
                        
                        —Common
      stock, par value $0.001; 70,000,000 shares authorized, 5,395,717 and
      5,349,731 shares issued and 5,378,275 and 5,332,288
      outstanding
                        
                        
                        5,396
                        
                        
                        
                        5,350Additional
      paid-in capital
                        
                        
                        61,467,458
                        
                        
                        
                        61,237,866Accumulated
      deficit
                        
                        
                        (60,951,204
                        )
                        
                        
                        (52,584,376
                        )Less:
      Treasury stock; 17,442 shares
                        
                        
                        (68,324
                        )
                        
                        
                        (68,324
                        )TOTAL
      STOCKHOLDERS’ EQUITY
                        
                        
                        453,326
                        
                        
                        
                        8,590,516TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                        
                        $
                        28,854,147
                        
                        
                        $
                        29,446,628





See
accompanying notes to the consolidated financial statements




28





MDU COMMUNICATIONS INTERNATIONAL,
INC.


Consolidated
Statements of Operations


Years
Ended September 30, 2010 and 2009




Years ended September 30,2010
                    
                    
                    2009REVENUE
                    
                    $
                    25,933,135
                    
                    
                    $
                    24,753,128OPERATING
      EXPENSESDirect
      costs
                    
                    
                    12,117,211
                    
                    
                    
                    10,283,422Sales
      expenses
                    
                    
                    2,082,219
                    
                    
                    
                    1,417,443Customer
      service and operating expenses
                    
                    
                    5,882,934
                    
                    
                    
                    5,997,854General
      and administrative expenses
                    
                    
                    4,481,347
                    
                    
                    
                    4,310,859Depreciation
      and amortization
                    
                    
                    7,227,277
                    
                    
                    
                    6,850,478Gain
      on sale of customers and plant and equipment
                    
                    
                    —
                    
                    
                    
                    (5,104,673
                    )TOTALS
                    
                    
                    31,790,988
                    
                    
                    
                    23,755,383OPERATING
      INCOME (LOSS)
                    
                    
                    (5,857,853
                    )
                    
                    
                    997,745Other
      income (expense)Interest
      income
                    
                    
                    393
                    
                    
                    
                    1,458Interest
      expense
                    
                    
                    (2,509,368
                    )
                    
                    
                    (1,919,184
                    )NET
      LOSS
                    
                    $
                    (8,366,828
                    )
                    
                    $
                    (919,981
                    )BASIC
      AND DILUTED LOSS PER COMMON SHARE
                    
                    $
                    (1.56
                    )
                    
                    $
                    (0.17
                    )WEIGHTED
      AVERAGE COMMON SHARES OUTSTANDING
                    
                    
                    5,365,632
                    
                    
                    
                    5,278,563





See
accompanying notes to the consolidated financial statements




29





MDU COMMUNICATIONS INTERNATIONAL,
INC.


Consolidated
Statements of Stockholders’ Equity


Years
Ended September 30, 2010 and 2009




Common stock
                          
                          
                          Treasury stock
                          
                          
                          Additional
                            paid-in
                          
                          
                          AccumulatedShares
                          
                          
                          Amount
                          
                          
                          Shares
                          
                          
                          Amount
                          
                          
                          capital
                          
                          
                          deficit
                          
                          
                          TotalBalance,
      October 1, 2008
                          
                          
                          5,200,547
                          
                          
                          $
                          5,201
                          
                          
                          
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          60,811,425
                          
                          
                          $
                          (51,664,395
                          )
                          
                          $
                          9,152,231Issuance
      of common stock through Employee Stock Purchase Plan
                          
                          
                          9,133
                          
                          
                          
                          9
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          55,985
                          
                          
                          
                          
                          
                          
                          
                          55,994Issuance
      of common stock for employee bonuses
                          
                          
                          76,271
                          
                          
                          
                          76
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          132,524
                          
                          
                          
                          
                          
                          
                          
                          132,600Issuance
      of restricted common stock for employee bonuses
                          
                          
                          27,207
                          
                          
                          
                          27
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          46,226
                          
                          
                          
                          
                          
                          
                          
                          46,253Issuance
      of common stock for compensation for services rendered
                          
                          
                          13,785
                          
                          
                          
                          14
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          37,206
                          
                          
                          
                          
                          
                          
                          
                          37,220Issuance
      of restricted common stock for compensation for services
      rendered
                          
                          
                          15,000
                          
                          
                          
                          15
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          59,385
                          
                          
                          
                          
                          
                          
                          
                          59,400Exercise
      of warrants (cashless)
                          
                          
                          3,750
                          
                          
                          
                          4
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (4
                          )
                          
                          
                          
                          
                          
                          
                          —Issuance
      of common stock as a result of exercise of options
                          
                          
                          4,038
                          
                          
                          
                          4
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          2,218
                          
                          
                          
                          
                          
                          
                          
                          2,222Share-based
      compensation - employees
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          92,901
                          
                          
                          
                          
                          
                          
                          
                          92,901Treasury
      stock acquired
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (17,442
                          )
                          
                          
                          (68,324
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (68,324
                          )Net
      loss
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (919,981
                          )
                          
                          
                          (919,981
                          )Balance,
      October 1, 2009
                          
                          
                          5,349,731
                          
                          
                          
                          5,350
                          
                          
                          
                          (17,442
                          )
                          
                          
                          (68,324
                          )
                          
                          
                          61,237,866
                          
                          
                          
                          (52,584,376
                          )
                          
                          
                          8,590,516Issuance
      of common stock through Employee Stock Purchase Plan
                          
                          
                          2,719
                          
                          
                          
                          3
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          10,078
                          
                          
                          
                          
                          
                          
                          
                          10,081Issuance
      of common stock for employee bonuses
                          
                          
                          40,291
                          
                          
                          
                          40
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          153,066
                          
                          
                          
                          
                          
                          
                          
                          153,106Issuance
      of restricted common stock for compensation for services
      rendered
                          
                          
                          2,976
                          
                          
                          
                          3
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          11,307
                          
                          
                          
                          
                          
                          
                          
                          11,310Share-based
      compensation - employees
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          55,141
                          
                          
                          
                          
                          
                          
                          
                          55,141Net
      loss
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (8,366,828
                          )
                          
                          
                          (8,366,828
                          )Balance,
      September 30, 2010
                          
                          
                          5,395,717
                          
                          
                          $
                          5,396
                          
                          
                          
                          (17,442
                          )
                          
                          $
                          (68,324
                          )
                          
                          $
                          61,467,458
                          
                          
                          $
                          (60,951,204
                          )
                          
                          $
                          453,326





See
accompanying notes to the consolidated financial statements




30


MDU COMMUNICATIONS INTERNATIONAL,
INC.


Consolidated
Statements of Cash Flows


Years
Ended September 30, 2010 and 2009





.
                      
                      Years ended September 30,2010
                      
                      
                      2009OPERATING
      ACTIVITIESNet
      loss
                      
                      $
                      (8,366,828
                      )
                      
                      $
                      (919,981
                      )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Bad
      debt provision
                      
                      
                      317,569
                      
                      
                      
                      210,612Depreciation
      and amortization
                      
                      
                      7,227,277
                      
                      
                      
                      6,850,478Share-based
      compensation expense - employees
                      
                      
                      55,141
                      
                      
                      
                      92,901Charge
      to interest expense for amortization of deferred finance costs and debt
      discount
                      
                      
                      320,594
                      
                      
                      
                      287,261Compensation
      expense for issuance of common stock through Employee Stock Purchase
      Plan
                      
                      
                      24,481
                      
                      
                      
                      34,075Compensation
      expense for issuance of common stock for employee bonuses
                      
                      
                      —
                      
                      
                      
                      28,070Compensation
      expense for issuance of common stock for employee services
                      
                      
                      —
                      
                      
                      
                      2,720Compensation
      expense for issuance of restricted common stock
                      
                      
                      28,000
                      
                      
                      
                      51,530Compensation
      expense accrued to be settled through the issuance of common
      stock
                      
                      
                      —
                      
                      
                      
                      187,473Gain
      on sale of customers and property and equipment
                      
                      
                      —
                      
                      
                      
                      (5,104,673
                      )Loss
      on write-off of property and equipment
                      
                      
                      44,589
                      
                      
                      
                      82,455Changes
      in operating assets and liabilities:Accounts  receivable
                      
                      
                      283,361
                      
                      
                      
                      755,881Prepaid
      expenses and deposits
                      
                      
                      (26,878
                      )
                      
                      
                      (98,772
                      )Accounts
      payable
                      
                      
                      618,995
                      
                      
                      
                      496,573Other
      accrued liabilities
                      
                      
                      31,538
                      
                      
                      
                      435,209Deferred
      revenue
                      
                      
                      (252,712
                      )
                      
                      
                      141,829Net
      cash provided by operating activities
                      
                      
                      305,127
                      
                      
                      
                      3,533,641INVESTING
      ACTIVITIESPurchase
      of property and equipment
                      
                      
                      (6,687,200
                      )
                      
                      
                      (6,893,767
                      )Proceeds
      from the sale and disposal of customers and property and
      equipment
                      
                      
                      5,000
                      
                      
                      
                      5,793,500Acquisition
      of intangible assets
                      
                      
                      (853,667
                      )
                      
                      
                      (813,953
                      )Net
      cash used in investing activities
                      
                      
                      (7,535,867
                      )
                      
                      
                      (1,914,220
                      )FINANCING
      ACTIVITIESNet
      proceeds from (repayments of) Credit Facility borrowing
                      
                      
                      7,058,354
                      
                      
                      
                      (728,496
                      )Deferred
      financing costs
                      
                      
                      (200,000
                      )
                      
                      
                      (150,000
                      )Purchase
      of treasury stock
                      
                      
                      —
                      
                      
                      
                      (68,324
                      )Payments
      of notes payable
                      
                      
                      —
                      
                      
                      
                      (50,290
                      )Proceeds
      from purchase of common stock through Employee Stock Purchase
      Plan
                      
                      
                      8,575
                      
                      
                      
                      15,599Proceeds
      from options exercised
                      
                      
                      —
                      
                      
                      
                      2,222Payments
      of capital lease obligations
                      
                      
                      —
                      
                      
                      
                      (12,431
                      )Net
      cash provided by (used in) financing activities
                      
                      
                      6,866,929
                      
                      
                      
                      (991,720
                      )NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                      
                      
                      (363,811
                      )
                      
                      
                      627,701CASH
      AND CASH EQUIVALENTS, BEGINNING OF YEAR
                      
                      
                      688,335
                      
                      
                      
                      60,634CASH
      AND CASH EQUIVALENTS, END OF YEAR
                      
                      $
                      324,524
                      
                      
                      $
                      688,335





31




Years ended September 30,2010
                                
                                2009SUPPLEMENTAL
      DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:Issuance
      of 1,200 shares of common stock for accrued compensation
                                
                                $
                                —
                                
                                
                                $
                                3,600Issuance
      of 40,291 and 88,445 shares of common stock for employee
      bonuses
                                
                                $
                                130,121
                                
                                
                                $
                                150,783Issuance
      of 2,976 shares of restricted common stock for services
      rendered
                                
                                $
                                11,310
                                
                                
                                $
                                —Issuance
      of 7,000 shares of restricted common stock for services to be
      rendered
                                
                                $
                                —
                                
                                
                                $
                                28,000Issuance
      of 13,785 shares of common stock for services rendered
                                
                                $
                                —
                                
                                
                                $
                                37,220Accrued
      purchase of equipment not yet paid
                                
                                $
                                185,684
                                
                                
                                $
                                9,525SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONInterest
      paid
                                
                                $
                                2,125,637
                                
                                
                                $
                                1,656,947





See accompanying notes to the
consolidated financial statements




32





MDU COMMUNICATIONS INTERNATIONAL, INC.


Notes to Consolidated Financial
Statements





1.
                 
BUSINESS





MDU
Communications International, Inc. and its subsidiaries (the “Company”) provide
delivery of digital satellite television programming, high-speed (broadband)
Internet and Voice over Internet Protocol (“VoIP”) services to residents of
multi-dwelling unit properties (“MDUs”) such as apartment buildings,
condominiums, gated communities, hotels and universities. Management considers
all of the Company’s operations to be in one industry segment.




The
consolidated 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. As shown in the accompanying
consolidated financial statements, the Company had a net loss of $8.4 million,
an accumulated deficit of $61 million and a working capital deficit of
approximately $2.7 million at and for the year ended September 30,
2010.  Additionally, the Company is currently unable to access its
Credit Facility above $25 million.




The
Company’s cost structure is somewhat variable and provides management some
ability to manage costs as appropriate. Management monitors cash flow and
liquidity requirements. Based upon an analysis of the anticipated working
capital requirements and the Company’s cash and cash equivalents, current
revenue levels, expected revenue growth, cost reductions and remaining funds
available to it under the Credit Facility, management believes, but cannot
assure, that the Company has sufficient liquidity to maintain existing
operations of the business and meet its contractual obligations at least through
September 30, 2011. The Company’s current planned cash requirements for fiscal
2011 are based upon certain assumptions, including its ability to manage
expenses and maintain and grow revenue.




Although
the Company believes that it has sufficient liquidity to maintain existing
operations, the Company may seek to raise additional capital as necessary to
meet certain capital and liquidity requirements in the future through equity or
debt financings and/or the sale of certain assets. If any such activities were
to become necessary, there can be no assurance that the Company would be
successful in completing any of these activities on terms that would be
favorable to the Company, if at all.




Additionally,
the Company's funding of its capital commitments that contemplate growth will be
dependent upon the Company’s ability to (i) achieve the EBITDA covenant to
access the Credit Facility above $25 million, (ii) raise additional funds
through private placements of equity or debt securities, (iii) enter into
material acquisitions that are accretive to EBITDA (as adjusted) utilizing debt
and/or Company equity, (iv) accelerate deployment and growth under the DIRECTV
CapEx Program that significantly decreases the Company’s capital requirements,
and/or (iv) pursue negotiations with certain entities for the sale of Company
non-core assets. The Company has been and will continue to pursue these above
opportunities to fund current and future growth, however, there is no assurance
that the Company will be successful in these directives.




2.
                 
SIGNIFICANT ACCOUNTING POLICIES





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





Use
of Estimates





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





33


Principles
of Consolidation





The
consolidated financial statements include the accounts of MDU Communications
International, Inc. and its wholly-owned subsidiaries, MDU Communications Inc.
and MDU Communications (USA) Inc. All inter-company balances and
transactions are eliminated.




Deferred
Financing Costs and Debt Discount





Costs
related to obtaining loans are presented as deferred finance costs on the
consolidated balance sheets and amortized to interest expense using the
straight-line method over the term of the related obligation. Debt discount is
offset against the principal balance of the related loan and amortized using the
straight-line method over the term of the related loan. As a result of the
Amended and Restated Loan and Security Agreement entered into on June 30, 2008,
the Company incurred additional deferred financing costs that, as well as all
other previously incurred deferred financing costs, will be amortized to
interest expense using the straight-line method over the new term.





Telecommunications
Equipment Inventory and Property and Equipment





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





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




Installed
      telecommunications equipment
            7
      yearsComputer
      equipment
            5
      yearsFurniture
      and fixtures
            5
      years





Intangible
Assets





Intangible
assets consist of acquired property access agreements and subscriber lists and
their costs are being amortized over their estimated useful lives of five years
using the straight-line method.





Long-lived
Assets





The
Company reviews the carrying value of its long-lived assets for impairment
whenever events and circumstances indicate that the carrying value of an asset
may not be recoverable from the estimated future cash flows expected to result
from its use and eventual disposition. In cases where undiscounted expected
future cash flows are less than the carrying value, an impairment loss is
recognized equal to an amount by which the carrying value exceeds the fair value
of the assets. No impairment losses were identified by the Company for the years
ended September 30, 2010 and 2009.





Revenue
Recognition





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





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





34


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





Over the
past few years, the Company has entered into letter agreements with DIRECTV that
allow the Company, for a specified period of time, to receive an upgrade subsidy
from DIRECTV when it completes a high definition system upgrade (“HD upgrade”)
on certain of the Company’s properties. To receive this subsidy, the Company is
required to submit an invoice to DIRECTV within thirty (30) days after the HD
upgrade of the property and subscribers are complete. This subsidy is treated as
revenue; however, on certain occasions, the letter agreement provided for a
minimum retention period of three years and may require a full refund of the
subsidy by the Company to DIRECTV for properties that terminate DIRECTV service
before expiration of the three year period.  On December 16, 2009, the
Company entered into one such letter agreement with DIRECTV to receive an HD
upgrade subsidy specifically for properties that the Company acquires from
AT&T Video Services, Inc. (“ATTVS”). The letter agreement contains the three
year minimum retention period described above. For those ATTVS properties
acquired by the Company that have access agreements with a remaining term of
shorter than three years, the Company expects to enter into access agreements or
addendums covering the minimum retention period, and if unable to do so, the
Company will defer revenue recognition until the minimum retention period
expires or a new long-term access agreement or addendum is signed.  Through
the year ended September 30, 2010, every property acquired from ATTVS that the
Company has completed the HD upgrade has had a minimum term of three
years.





Deferred
Revenue





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




Accounts
Receivable





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





Loss
Per Common Share





The
Company presents “basic” earnings (loss) per common share and, if applicable,
“diluted” earnings per common share. Basic earnings (loss) per common share is
computed by dividing the net income or loss by the weighted average number of
common shares outstanding for the period. The calculation of diluted earnings
(loss) per common share is similar to that of basic earnings per common share,
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if all potentially dilutive
common shares, such as those issueable upon the exercise of stock options and
warrants, were issued during the period and the treasury stock method was
applied.




For the
years ended September 30, 2010 and 2009, basic and diluted loss per common share
are the same as the Company had net losses for these periods and the effect of
the assumed exercise of options and warrants would be anti-dilutive. As of
September 30, 2010 and 2009, the Company had potentially dilutive common shares
attributable to options and warrants that were exercisable (or potentially
exercisable) into shares of common stock as presented in the following
table:


35




For the years ended September 30,2010
                    
                    
                    2009Warrants
                    
                    
                    175,000
                    
                    
                    
                    175,000Options
                    
                    
                    227,600
                    
                    
                    
                    217,750Potentially
      dilutive common shares
                    
                    
                    402,600
                    
                    
                    
                    392,750





Foreign
Exchange





The
Company uses the United States dollar as its functional and reporting currency
since the majority of the Company’s revenues, expenses, assets and liabilities
are in the United States and the focus of the Company’s operations is in that
country. Assets and liabilities in foreign currencies (primarily Canadian
dollars) are translated using the exchange rate at the balance sheet date.
Revenues and expenses are translated at average rates of exchange during the
year. Gains and losses from foreign currency transactions and translation for
the years ended September 30, 2010 and 2009 and cumulative translation
gains and losses as of September 30, 2010 and 2009 were not
material.





Stock-Based
Compensation





The
Company measures compensation expense based on estimated fair values of all
stock-based awards, including employee stock options, restricted stock awards
and stock purchase rights.  Stock-based compensation is recognized in
the financial statements based on the portion of their grant date fair values
expected to vest over the period during which the employees are required to
provide their services in exchange for the equity instruments.





The
Company uses the Black-Scholes option pricing model to estimate the fair value
of stock-based awards. The Black-Scholes model requires the use of highly
subjective and complex assumptions, including the option’s expected term and the
price volatility of the underlying stock. The expected term of options is based
on observed historical exercise patterns. Expected volatility is based on
historical volatility over the expected life of the options.





All other
issuances of common stock, stock options, warrants or other equity instruments
to employees and non-employees as consideration for goods or services received
were accounted for based on the fair value of the consideration received or the
fair value of the equity instrument, whichever is more readily measurable. Such
fair value is measured at an appropriate date and capitalized or expensed as if
the Company had paid cash for the goods or services.





Cash
and Cash Equivalents





Cash and
cash equivalents consist of bank deposits and short-term notes with maturities
at the date of acquisition of ninety days or less. The balances maintained
in bank accounts may, at times, exceed Federally insured limits.  At
September 30, 2010, cash balances in bank accounts that exceeded Federally
insured limits amount to approximately $75,000.




Concentrations





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





Accounts
receivable from DIRECTV (see Note 7) at September 30, 2010 and 2009,
represented 27% and 38%, respectively, of total trade accounts receivable.
Revenues realized directly from DIRECTV represented 25% and 31% of total
revenues in the years ended September 30, 2010 and 2009,
respectively.





Income
Taxes





Deferred
taxes arise due to temporary differences in the bases of assets and liabilities
and from net operating losses and credit carry forwards. In general, deferred
tax assets represent future tax benefits to be received when certain expenses
previously recognized in the Company’s statement of operations become deductible
expenses under applicable income tax laws or loss or credit carry forwards
utilized. Accordingly, realization of deferred tax assets is dependent on future
taxable income against which these deductions, losses and credits can be
utilized. In assessing the realization of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Management considers historical
operating losses, scheduled reversals of deferred tax liabilities, projected
future taxable income and tax planning strategies in making this assessment. The
income tax provision or credit is the tax payable or refundable for the period
plus or minus the change during the period in deferred tax assets and
liabilities.





36


Recently
Adopted Accounting Standards





Business Combinations.The
changes to accounting for business combinations are effective for the annual
period beginning after December 15, 2008 and interim periods within those fiscal
years.This guidance
will be applicable prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008 and will have an impact on
accounting for any business combinations occurring after fiscal year ended
September 30, 2009. The Company will continueto account for all
business combinations using the acquisition method (formerly the purchase
method) and for an acquiring entity to be identified in all business
combinations. However, the new business combination requires the acquiring
entity in a business combination to recognize all (and only) the assets acquired
and liabilities assumed in the transaction; establishes the acquisition-date
fair value as the measurement objective for all assets acquired and liabilities
assumed; and requires the acquirer to disclose to investors and other users all
of the information they need to evaluate and understand the nature and financial
effect of the business combination. The adoption of Business Combinations did
not have a material impact on the Company’s financial statements.




Intangibles – Goodwill and Other.Effective for the annual period beginning after December 15, 2008 and
interim periods within those fiscal years, the Company will be required to
consider renewal or extension assumptions used to determine the useful life of a
recognized intangible asset. The intent will be to improve the consistency
between the useful life of a recognized intangible asset and the period of
expected cash flows used to measure the fair value of the asset under business
combinations. The utilization of these assumptions did not have a material
impact on the Company’s consolidated financial statements.





Codification.The
Financial Accounting Standards Board (“FASB”) established the FASB Accounting
Standards Codification (“Codification”), which officially commenced July 1,
2009, to become the source of authoritative US GAAP recognized by the FASB to be
applied by nongovernmental entities. Rules and interpretive releases of the SEC
under authority of federal securities laws are also sources of authoritative US
GAAP for SEC registrants. Generally, the Codification is not expected to change
US GAAP. All other accounting literature excluded from the Codification will be
considered non-authoritative. The Codification is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. The Company adopted the new guidance for fiscal year 2009. All references
to authoritative accounting literature are now referenced in accordance with the
Codification.





Hierarchy of Generally Accepted
Accounting Principles.Effective November 15, 2008, the
Company adopted The Hierarchy of Generally Accepted Accounting Principles
to improve financial reporting by identifying a consistent framework, or
hierarchy, for selecting accounting principles to be used in preparing financial
statements that are presented in conformity with GAAP for nongovernmental
entities. The adoption of this pronouncement did not have a material impact on
the Company’s consolidated financial statements.





Other
Recently Issued and Not Yet Effective Accounting Standards





In
October 2009, “Multiple-Deliverable Revenue Arrangements” was issued. This
update provides amendments to the criteria for revenue recognition for
separating consideration in multiple-deliverable arrangements. The amendments to
this update establish a selling price hierarchy for determining the selling
price of a deliverable. Multiple-Deliverable Revenue Arrangements is effective
for financial statements issued for years beginning on or after June 15,
2010. The Company is currently evaluating the effect that the adoption of
Multiple-Deliverable Revenue Arrangements will have on its consolidated results
of operations, financial position and cash flows, but does not expect the
adoption to have a material impact.




3.
            ACCOUNTS
      RECEIVABLE





As
of September 30, 2010 and 2009, accounts receivable, trade, net of
allowances were $1,470,401 and $2,071,331, respectively.





37


During
fiscal 2010 and 2009, the allowance for doubtful accounts was based on an
internal analysis of current economic conditions and historical payment
activity.




4.
            DEBT





Credit
Facility





On
September 11, 2006, the Company entered into a Loan and Security Agreement with
FCC, LLC, d/b/a First Capital, and Full Circle Funding, LP for a senior secured
$20 million credit facility (“Credit Facility”) to fund the Company’s subscriber
growth. On June 30, 2008, the Company entered into an Amended and Restated Loan
and Security Agreement with FCC, LLC, d/b/a First Capital, and Full Circle
Funding, LP for a senior secured $10 million increase to its original $20
million Credit Facility. The Credit Facility, of now up to $30 million, has a
new five-year term under which the Company will pay interest on actual principal
drawn during the full term of the agreement. The original terms and conditions
of the Credit Facility, previously negotiated and executed on September 11,
2006, have not otherwise changed.





The
amount that the Company can draw from the Credit Facility is equal to the lesser
of $30 million or the Company's borrowing base which, in large part, is
determined by future revenues and costs accruing from the Company's access
agreements. The borrowing base of the Company was approximately $31 million at
September 30, 2010. The Credit Facility can be prepaid upon thirty days notice
with a penalty of 0% to 2% of the outstanding principal balance depending on the
prepayment timing.





The
Credit Facility was originally divided into four $5 million increments with the
interest rate per increment declining as principal is drawn from each increment.
The first $5 million increment carries an interest rate of prime plus 4.1%, the
second $5 million at prime plus 3%, the third $5 million at prime plus 2%, and
the fourth $5 million at prime plus 1%. The additional $10 million to the Credit
Facility is divided into two $5 million increments with the interest rate on
these increments being equal to prime plus 1% to 4%, depending on the Company's
ratio of EBITDA to the total outstanding loan balance. As defined in the Credit
Facility, ‘prime’ shall be a minimum of 7.75%. The Company is under no
obligation to draw any of the increments.





To access
the Credit Facility above $20 million (which the Company has), the Company must
have (i) positive EBITDA of $1 million, on either the higher of a trailing
twelve (12) month basis or a six (6) month basis times two, and (ii) 60,000
subscribers. To access the Credit Facility above $25 million, the Company must
have (i) positive EBITDA of $3 million on a trailing twelve (12) month
basis, and (ii) 65,000 subscribers.  EBITDA shall mean the Company’s net
income (excluding extraordinary gains and non-cash charges as defined in the
Credit Facility) before provisions for interest expense, taxes, depreciation and
amortization.  As of September 30, 2010, the Company has not met the
required EBITDA to access the Credit Facility above $25 million.





As of
September 30, 2010, the Company has borrowed a total of $23,181,825, which is
reflected in the accompanying consolidated balance sheet, net of debt discount
of $121,799. The outstanding principal is payable on June 30, 2013. As of
September 30, 2010, $6,818,175 remains available for borrowing under the Credit
Facility, subject to covenants described herein.





The
Company is subject to annual costs when it accesses and continues to access a $5
million increment.  In the three months ended December 31, 2009, the
Company incurred an additional annual $50,000 deferred finance cost that is
being amortized to interest expense using the straight-line method over a twelve
month period ending in November 2010.  In the three months ended March
31, 2010, the Company incurred an additional annual $100,000 deferred finance
cost that is being amortized to interest expense using the straight-line method
over a twelve month period with $50,000 each ending in January 2011 and February
2011, respectively. In the three months ended September 30, 2010, the Company
incurred an additional annual $50,000 deferred finance cost that is being
amortized to interest expense using the straight-line method over a twelve month
period ending in June 2011.





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





38




•
            incur
      other indebtedness;•
            incur
      other liens;


•
            undergo
      any fundamental changes;•
            engage
      in transactions with affiliates;


•
            issue
      certain equity, grant dividends or repurchase shares;•
            change
      our fiscal periods;


•
            enter
      into mergers or consolidations;•
            sell
      assets; and


•
            prepay
      other debt.




The
Credit Facility also includes certain events of default, including failure to
make payment, bankruptcy, change of control and certain financial covenants.
Borrowings will generally be available subject to a borrowing base and to the
accuracy of all representations and warranties, including the absence of a
material adverse change and the absence of any default or event of
default.





In
connection with the initial Credit Facility, on October 1, 2006, the Company
issued to FCC, LLC, d/b/a First Capital, a five-year warrant to purchase 47,619
shares of the Company's common stock at an exercise price of $8.20 per share,
issued to Full Circle Funding, LP a five-year warrant to purchase 47,619 shares
of the Company's common stock at an exercise price of $8.20 per share and issued
to Morgan Joseph & Co. Inc., who acted as advisor and placement agent, a
five-year warrant to purchase 4,762 shares of the Company’s common stock at an
exercise price of $8.20 per share. The relative fair value of the warrants of
$290,000, at the time of issuance, which was determined using the Black-Scholes
option pricing model, was recorded as additional paid-in capital and as debt
discount which is a reduction of the carrying value of the Credit Facility
borrowing, and is being amortized using the interest method over the term of the
related loan.





In
connection with the Amended and Restated Loan and Security Agreement executed on
June 30, 2008, the Company issued to FCC, LLC, d/b/a First Capital a five year
warrant to purchase 37,500 shares of the Company's common stock and issued to
Full Circle Funding, LP a five year warrant to purchase 37,500 shares of the
Company's common stock, both at an exercise price of $6.00 per share. The
warrants had a fair value of $45,000, as determined using the Black-Sholes
pricing model, which is being amortized as debt discount over the remaining term
of the Amended and Restated Loan Agreement.





The
warrants discussed above are subject to customary registration rights set forth
in a Registration Rights Agreement that provides for demand registration within
one hundred and thirty five days and (i) a four (4%) percent share penalty if
not effective within that time period, and (ii) a two (2%) percent share penalty
thereafter for each thirty days until effectiveness or one year, whichever is
earlier.   As of September 30, 2010, there has been no “demand” for
registration pursuant to the Registration Rights Agreement.





5.
            STOCKHOLDERS’
      EQUITY





Preferred
Stock





The
Company is authorized to issue up to 5,000,000 shares of preferred stock with a
par value of $.001 per share. The preferred stock may be issued in one or more
series with dividend rates, conversion rights, voting rights and other terms and
preferences to be determined by the Company’s Board of Directors, subject to
certain limitations set forth in the Company’s Certificate of Incorporation.
There were no shares of preferred stock outstanding as of September 30,
2010 or 2009.





Stock-Based
Compensation





The cost
of stock-based payments to employees, including grants of employee stock
options, are recognized in the financial statements based on the portion of
their grant date fair values expected to vest over the period during which the
employees are required to provide services in exchange for the equity
instruments. The Company uses the Black-Scholes method of valuation for
stock-based compensation. During the years ended September 30, 2010 and 2009,
the Company recognized stock-based compensation expense for employees of $55,141
and $92,901, respectively, which was included in general and administrative
expenses.





39


The fair
values of options granted during the years ended September 30, 2010 and 2009
were determined using a Black-Scholes option pricing model based on the
following weighted average assumptions:





2010
              
              2009Expected
      volatility
              37%
              
              27%Risk-free
      interest rate
              2.20%
              
              2.80%Expected
      years of option life
              1
      to 4.1
              
              1
      to 4.1Expected
      dividends
              0%
              
              0%





During
the year ended September 30, 2009, 13,785 shares of common stock were issued as
compensation for services rendered for $37,220.  The entire $37,220
was accrued in the year ended in September 30, 2009, with such shares being
issued during fiscal 2010. No shares of common stock were issued as compensation
for services rendered during fiscal 2010.





Employee
Stock Option Plan





The 2001
Stock Option Plan (“2001 Option Plan”) was approved by the stockholders at the
Annual General Meeting in 2001 with a reservation of 560,000 shares of common
stock, post reverse split. Stock option awards are generally granted with an
exercise price equal to the market price of the Company’s stock on the date of
the grant. The option awards vest quarterly over three years and have a
five-year contractual life. The following table summarizes information about all
of the Company’s stock option activity during the fiscal years ended September
30, 2010 and 2009:





Number of
                                  shares
                                
                                
                                Weighted-average
                                  exercise price ($)Options
      outstanding at October 1, 2008
                                
                                
                                200,444
                                
                                
                                
                                9.40Options
      granted (weighted average fair value of $0.05 per share)
                                
                                
                                82,750
                                
                                
                                
                                2.00Options
      cancelled/expired (1)
                                
                                
                                (61,406
                                )
                                
                                
                                10.10Options
      exercised (2)
                                
                                
                                (4,038
                                )
                                
                                
                                2.90Options outstanding at
      September 30, 2009(6)
                                
                                
                                217,750
                                
                                
                                
                                6.50Options
      granted (3) (weighted average fair value of $0.13 per
    share)
                                
                                
                                62,850
                                
                                
                                
                                4.00Options
      cancelled/expired (4)
                                
                                
                                (53,000
                                )
                                
                                
                                14.50Options
      exercised
                                
                                
                                —
                                
                                
                                
                                —Options outstanding at
      September 30, 2010 (5) (6)
                                
                                
                                227,600
                                
                                
                                
                                4.00Options exercisable at
      September 30, 2010(6)
                                
                                
                                156,539
                                
                                
                                
                                4.50Options
      available for issuance at September 30, 2010
                                
                                
                                576,302







(1)
            During
      the fiscal year ended September 30, 2009, (i) 34,000 options expired in
      the following increments, 10,000 options with an exercise price of $12.80
      per share, 10,000 options with an exercise price of $6.50 per share, 4,000
      options with an exercise price of $20.50 per share, and 10,000 options
      with an exercise price of $22.90 per share, (ii) 15,333 options were
      forfeited as a result of employees leaving the company, 5,667 options with
      an exercise price of $7.50, 5,778 options with an exercise price of $4.50,
      and 3,889 options with an exercise price of $2.00, and (iii) 12,073
      options were surrendered with an exercise price of $3.30 as part of a
      cashless exercise of options. All expired, forfeited and surrendered stock
      options were returned for general use under the 2001 Stock Option
      Plan.





(2)
            During
      fiscal year ended September 30, 2009, 1,111 options were exercised with an
      exercise price of $2.00 with proceeds of $2,222, and 2,927 options were
      exercised with an exercise price of $3.30 as part of a cashless exercise
      of options.





(3)
            On
      December 28, 2009, the Board of Directors granted 62,850 five year options
      to 22 employees and 1 director from the 2001 Stock Option Plan at an
      exercise price of $4.00 per share.




40




(4)
            During
      the fiscal year ended September 30, 2010, (i) certain employees forfeited
      back to the Company, without consideration, 23,000 stock options of which
      12,500 had an exercise price of $13.50 per share and a fair market value
      of $12.50 per share, 2,500 had an exercise price of $7.50 per share and a
      fair market value of $3.80 per share, 1,500 had an exercise price of $4.50
      per share and a fair market value of $1.10 per share, 5,000 had an
      exercise price of $4.00 per share and a fair market value of $1.30, and
      1,500 had an exercise price of $2.00 per share and a fair market value of
      $0.50 per share. Of the 23,000 options, 17,873 options were vested and the
      entire fair market value of $168,629 in noncash expense had already been
      recognized in general and administrative expenses since issuance, (ii) a
      director forfeited back to the Company, without consideration, 10,000
      vested stock options with an exercise price of $12.80 and a fair market
      value of $12.50 per share and the entire fair market value of $125,000 in
      noncash expense had already been recognized in general and administrative
      expenses since issuance, (iii) a prior member of the Board of Directors
      had 10,000 vested stock options expire with an exercise price of $18.30
      per share and a fair market value of $11.80 and the entire fair market
      value of $118,000 in noncash expense had already been recognized in
      general and administrative expenses since issuance, and (iv) consultants
      had 10,000 vested stock options expire of which 7,500 had an exercise
      price of $25.10 per share and a fair market value of $9.30 per share and
      2,500 had an exercise price $20.10 per share and a fair market value of
      $16.70 per share and the entire fair market value of $111,500 in noncash
      expense had already been recognized in general and administrative expense
      since issuance. All stock options were returned for general use under the
      2001 Stock Option Plan.





(5)
            The
      weighted average remaining contractual term of outstanding and exercisable
      options at September 30, 2010 and 2009 was 2.8 and 2.4 years,
      respectively. The aggregate intrinsic value of outstanding and exercisable
      options at September 30, 2010 and 2009 was $113,750 and $58,625,
      respectively. An additional charge of approximately $74,000 is expected to
      vest and be recognized subsequent to September 30, 2010 over a weighted
      average period of 17 months. The charge will be amortized to general and
      administrative expenses as the options vest in subsequent
      periods.





(6)
            Of
      the 227,600 option grants outstanding as of September 30, 2010, 71,061
      options were unvested and are expected to vest. Of the 217,750 option
      grants outstanding as of September 30, 2009, 77,742 options were
      unvested.





Warrants
to Purchase Common Stock





The
following table summarizes all of the Company’s warrant activity during the
years ended September 30, 2010 and 2009:





Number of
                          warrants
                          outstanding
                        
                        
                        Weighted-average
                          exercise price per
                          share ($)Outstanding
      at October 1, 2008
                        
                        
                        190,000
                        
                        
                        
                        6.80Issued
                        
                        
                        —
                        
                        
                        
                        —Cancelled/expired
      (1)
                        
                        
                        (11,250
                        )
                        
                        
                        3.30Exercised
      (2)
                        
                        
                        (3,750
                        )
                        
                        
                        3.30Outstanding
      at September 30, 2009
                        
                        
                        175,000
                        
                        
                        
                        7.10Issued
                        
                        
                        —
                        
                        
                        
                        —Cancelled/expired
                        
                        
                        —
                        
                        
                        
                        —Exercised
                        
                        
                        —
                        
                        
                        
                        —Outstanding
      at September 30, 2010
                        
                        
                        175,000
                        
                        
                        
                        7.10







(1)
            During
      the year ended September 30, 2009, 11,250 warrants to purchase shares of
      common stock were surrendered at an exercise price of $3.30 as part of a
      cashless exercise of warrants.





(2)
            During
      fiscal year ended September 30, 2009, 3,750 warrants were exercised with
      an exercise price of $3.30 as part of a cashless exercise of
      warrants.




41


Employee
Stock Purchase Plan





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





On April
23, 2009, the shareholders approved the 2009 Employee Stock Purchase Plan (“2009
ESPP”) to replace the 2001 ESPP (in all material respects identical to the 2001
ESPP) and reserved 150,000 shares of common stock, post reverse split. The 2009
ESPP shall terminate on April 23, 2016 or (i) upon the maximum number of
shares being issued, or (ii) sooner terminated per the discretion of the
Board of Directors. The purchase price per share under the 2009 ESPP is equal to
85% of the fair market value of a share of Company common stock at the beginning
of the purchase period or on the exercise date (the last day in a purchase
period) whichever is lower.




During
the year ended September 30, 2010, the Company issued to
employees under the 2009 ESPP through payroll deductions, (i) 2,719 shares of
common stock for $55,994 which was paid by the employees through the offset of
the amount they owed for the shares against an equivalent amount the Company
owed them for accrued salaries, and (ii) 40,291 shares of common stock for
$130,131 which was paid by the employees through the offset of the amount they
owed for the shares against an equivalent amount the Company owed them for
accrued employee bonuses, however, the $130,131 bonus amount was accrued in the
year ended in September 30, 2009, but such shares were not issued until fiscal
2010. The Company recognized expense for the full discount for the 2,719 shares
and the 40,291 shares of $1,506 and $22,975, respectively, for the year ended
September 30, 2010.





During
the year ended September 30, 2009, the Company issued to
employees under the 2001 ESPP and 2009 ESPP through payroll deductions, (i)
9,133 shares for $55,994 which was paid by the employees through the offset of
the amount they owed for the shares against an equivalent amount the Company
owed them for accrued salaries, and (ii) 76,271 shares for $132,600 which was
paid by the employees through the offset of the amount they owed for the shares
against an equivalent amount the Company owed them for accrued employee bonuses.
Of the 76,271 shares issued for bonuses, 61,238 shares for $104,531 had been
accrued in the year ended in September 30, 2008, but were not issued until
fiscal 2009.





Restricted
Stock





During
the year ended September 30, 2010, the Company issued 2,976 shares of restricted
common stock to an executive for services rendered in fiscal 2009 with a value
of $11,310 based on the quoted market price at the grant date. The entire
$11,310 amount was accrued in the year ended in September 30, 2009, but the
shares were not issued until fiscal 2010.




Members
of the Board of Directors were previously granted shares of restricted common
stock as part of their approved compensation for Board service for fiscal 2009
and into fiscal 2010. As a result, 12,000 shares of restricted stock were issued
during the quarter ended June 30, 2009 with a fair value of $48,000 based on
the quoted market price at the grant date to be recognized during the
next twelve months, and as a result of the issuance, the Company recognized pro
rata compensation expense of $28,000 for the year ended September 30, 2010 and
$20,000 for the year ended September 30, 2009.





During
the year ended September 30, 2009, the Company issued 3,000 shares of restricted
common stock to an executive. As a result, the Company recognized $11,400 as
compensation expense based on the quoted market price at the grant
date.





During
the year ended September 30, 2009, the Company issued 27,207 shares of
restricted common stock to employees for $46,253 which was paid by the employees
through the offset of the amount they owed for the shares against an equivalent
amount the Company owed them for accrued employee bonuses.  As a
result, the Company recognized $46,253 as compensation expense based on
the quoted market price at the grant date.  The entire 27,207
shares of restricted common stock for $46,253 had been accrued in the year ended
in September 30, 2008, but were not issued until fiscal 2009.





42


Members
of the Board of Directors were previously granted shares of restricted common
stock as part of their approved compensation for Board service for fiscal 2008
and into fiscal 2009. As a result, 9,834 shares of restricted stock were issued
during the year ended September 30, 2008 with a fair value of $38,734 based on
the quoted market price at the grant date to be recognized during the
next twelve months and, as a result of the issuance, the Company recognized
compensation expense of $20,130 for the year ended September 30,
2009.





Treasury
Stock





On
December 19, 2008, the Board of Directors approved a common stock repurchase
plan authorizing the Company to repurchase shares of its common stock, from
time-to-time over a twelve month period (subject to securities laws and other
legal requirements), in open market transactions, up to an aggregate value of
$1,000,000. There were no repurchases during the year ended September 30, 2010
and during the year ended September 30, 2009, the Company repurchased 17,442
shares of common stock at an aggregate cost of $68,324.





6.
            COMMITMENTS
      AND CONTINGENCIES





Litigation





From time
to time, the Company may be subject to legal proceedings, which could have a
material adverse effect on its business. As of September 30, 2010 and through
December 21, 2010, the date of this filing, the Company does have litigation in
the normal course of business and it does not expect the outcome to have a
material effect on the Company.





Contracts





The
Company had previously entered into an open ended management agreement with a
senior executive that provides for annual compensation, excluding bonuses, of
$275,000. The Company can terminate this agreement at any time upon reasonable
notice and the payment of an amount equal to 24 months of salary. In the event
of a change in control of the Company, either party may, during a period of 12
months from the date of the change of control, terminate the agreement upon
reasonable notice and the payment by the Company of an amount equal to 36 months
of salary.





Operating
Leases





The
Company is obligated under non-cancelable operating leases for its various
facilities that expire through the year ending September 30, 2013 to make future
minimum rental payments in each of the years subsequent to September 30, 2010 as
summarized in the following table:





Year ending September 30,
                          
                          Minimal Rental
                            Payments2011
                          
                          $
                          375,9932012
                          
                          
                          323,3692013
                          
                          
                          163,993Total
      minimum payments
                          
                          $
                          863,355





Rent
expense under all operating leases amounted to $442,041 and $439,842,
respectively, for the years ended September 30, 2010 and 2009.




43




7.
            STRATEGIC
      ALLIANCE WITH DIRECTV





On June
1, 2007, the Company signed a new System Operator Agreement with DIRECTV (the
“DIRECTV Agreement"), which replaced an agreement dated September 29, 2003. The
DIRECTV Agreement has an initial term of three years with two, two-year
automatic renewal periods upon our achievement of certain subscriber growth
goals, with an automatic extension of the entire DIRECTV Agreement to coincide
with the expiration date of the Company’s latest property access agreement.
Under the DIRECTV Agreement the Company receives monthly residual fees from
DIRECTV based upon the programming revenue DIRECTV receives from subscribers
within the Company's multi-dwelling unit properties. The Company also receives
an “Individual Subscriber PPC” (prepaid programming commission, also known as an
“activation fee”) for every new subscriber that activates a DIRECTV
commissionable programming package. The Individual Subscriber PPC is paid on a
gross activation basis in choice and exclusive properties and on a one-time
basis in our bulk properties. The payment of the Individual Subscriber PPC
requires an annual commitment for the individual services and is subject to a
“charge back” if a subscriber disconnects within the annual commitment. The
revenue from the Individual Subscriber PPC is recognized over one year
in conjunction with the annual commitment. The DIRECTV Agreement also
provides for an “Analog Commission” to the Company for the addition of a new
Bulk Choice Advantage (“BCA”) subscriber. The Analog Commission is not subject
to an annual commitment from a subscriber and there is no proportional “charge
back” by DIRECTV if a subscriber disconnects at any time. Due to the fact that
no portion of the Analog Commission is subject to the annual commitment or
charge back provision, the Analog Commission is recognizable immediately upon
the approval and acceptance of the subscriber by DIRECTV. Additionally, the
Company and DIRECTV have agreed to terms allowing DIRECTV a "first option" to
bid on subscribers at fair market value that the Company may wish to
sell.





Over the
past few years, the Company has entered into letter agreements with DIRECTV that
allow the Company, for a specified period of time, to receive an upgrade subsidy
from DIRECTV when it completes an HD upgrade on certain of the Company’s
properties. To receive this subsidy, the Company is required to submit an
invoice to DIRECTV within thirty (30) days after the HD upgrade of the property
and subscribers are complete. This subsidy is treated as revenue, however, on
certain occasions, the letter agreement provided for a minimum retention period
of three years and may require a full refund of the subsidy by the Company to
DIRECTV for properties that terminate DIRECTV service before expiration of the
three year period.  On December 16, 2009, the Company entered into one such
letter agreement with DIRECTV to receive an HD upgrade subsidy specifically for
properties that the Company acquires from ATTVS. The letter agreement contains
the three year minimum retention period described above. For those ATTVS
properties acquired by the Company that have access agreements with a remaining
term of shorter than three years, the Company expects to enter into access
agreements or addendums covering the minimum retention period, and if unable to
do so, the Company will defer revenue recognition until the minimum retention
period expires or a new long-term access agreement or addendum is signed. 
Through the year ended September 30, 2010, every property acquired from ATTVS
that the Company has completed the HD upgrade has had a minimum term of three
years.





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





There was
no gain on sale of customers and plant and equipment for the year ended
September 30, 2010.





On July
17, 2009, the Company disposed of assets to a property at the end of its access
agreement for proceeds of $75,000. The total gain on the disposal was
$55,200.





On April
30, 2009, the Company disposed of assets to a property at the end of its access
agreement for proceeds of $15,000. The total gain on the disposal was
$10,634.





On
December 17, 2008, the Company sold subscribers and certain related property and
equipment to CSC Holdings, Inc. for $3,061,500. The total gain on the sale was
$2,656,337.





On
November 5, 2008, the Company sold subscribers and certain related property and
equipment to CSC Holdings, Inc. for $2,704,500. The total gain on the sale was
$2,382,502.





9.
            ACQUISITIONS
      OF SUBSCRIBERS AND EQUIPMENT





During
the year ended September 30, 2010, the Company acquired assets in multiple
properties containing 24,462 units for the amount of $1,322,360 and related fees
of $10,750, representing fixed assets and intangible assets, inclusive of access
agreements. During the year ended September 30, 2009, the Company acquired
assets in multiple properties containing 10,705 units in the amount of
$1,296,479, representing inventory, fixed assets and intangible assets,
inclusive of access agreements.





44


The
acquisition costs of all acquired access agreements and equipment for the years
ended September 30, 2010 and 2009 were allocated to the fair value of the assets
acquired, as set forth below:





September 30,2010
                  
                  
                  2009Property
      and equipment
                  
                  $
                  479,443
                  
                  
                  $
                  438,791Inventory
                  
                  
                  —
                  
                  
                  
                  43,735Amortizable
      intangible assets
                  
                  
                  853,667
                  
                  
                  
                  813,953Total
      acquisition cost of all acquired access agreements and
      equipment
                  
                  $
                  1,333,110
                  
                  
                  $
                  1,296,479





10.
            PROPERTY
      AND EQUIPMENT





The
components of property and equipment are set forth below:





September 30,2010
                  
                  
                  2009Telecommunications
      equipment, installed
                  
                  $
                  49,058,316
                  
                  
                  $
                  42,443,115Computer
      equipment
                  
                  
                  1,345,325
                  
                  
                  
                  1,264,386Furniture
      and fixtures
                  
                  
                  264,212
                  
                  
                  
                  257,548Leasehold
      improvements
                  
                  
                  193,480
                  
                  
                  
                  178,169Other
                  
                  
                  75,649
                  
                  
                  
                  67,93050,936,982
                  
                  
                  
                  44,211,148Less:
      Accumulated depreciation
                  
                  
                  (28,240,886
                  )
                  
                  
                  (22,071,379
                  )Totals
                  
                  $
                  22,696,096
                  
                  
                  $
                  22,139,769




Depreciation
expense amounted to $6,221,850 and $5,690,670 for the years ended
September 30, 2010 and 2009, respectively.





11.
            INTANGIBLE
      ASSETS





The
components of intangible assets are set forth below:


September 30,2010
                    
                    
                    2009Property
      access agreements, including subscriber lists
                    
                    $
                    9,888,443
                    
                    
                    $
                    9,083,886Less:
      Accumulated amortization
                    
                    
                    (7,417,568
                    )
                    
                    
                    (6,445,203
                    )Totals
                    
                    $
                    2,470,875
                    
                    
                    $
                    2,638,683





Amortization
expense amounted to $1,005,427 and $1,159,808 for the years ended
September 30, 2010 and 2009, respectively. Amortization of intangibles in
the years subsequent to September 30, 2010 is as follows:





Year
                  
                  Amortization
      Amount2011
                  
                  $
                  982,6882012
                  
                  
                  767,9912013
                  
                  
                  366,7882014
                  
                  
                  305,4692015
                  
                  
                  47,939Total
                  
                  $
                  2,470,875




45





12.
            OTHER
      ACCRUED LIABILITIES




Other
accrued liabilities consist of the following:





September 30,2010
                        
                        
                        2009Accrued
      costs and expenses:Equipment
      purchases
                        
                        $
                        185,684
                        
                        
                        $
                        9,525Employee
      stock purchases and employee compensation payable incommon
      stock
                        
                        
                        50,887
                        
                        
                        
                        188,148Subcontractors
      maintenance and installation
                        
                        
                        480,789
                        
                        
                        
                        31,403Programming
      cost
                        
                        
                        74,017
                        
                        
                        
                        3,558Professional
      fees
                        
                        
                        224,083
                        
                        
                        
                        240,702Wages
                        
                        
                        146,849
                        
                        
                        
                        592,928Acquisition
      balance due
                        
                        
                        373,582
                        
                        
                        
                        531,257Sales,
      use and franchise tax
                        
                        
                        187,319
                        
                        
                        
                        39,685Other
                        
                        
                        70,741
                        
                        
                        
                        80,964Totals
                        
                        $
                        1,793,951
                        
                        
                        $
                        1,718,170





13.
            INCOME
      TAXES





The
Company had pre-tax losses but did not record any benefits for Federal or other
income taxes for the years ended September 30, 2010 and 2009. The Company
did not record Federal income tax benefits at the statutory rate of 34% and
state income tax benefits because (i) it has incurred losses in each period
since its inception, and (ii) although such losses, among other things,
have generated future potential income tax benefits, there is significant
uncertainty as to whether the Company will be able to generate income in the
future to enable it to realize any of those benefits and, accordingly, it has
had to take valuation reserves against those potential benefits as shown
below.





As of September 30, 2010
and 2009, the Company had net deferred tax assets, which generate potential
future income tax benefits that consisted of the effects of temporary
differences attributable to the following:





September 30,2010
                            
                            
                            2009Deferred
      tax assets:Benefits
      from net operating loss carryforwards:United
      States
                            
                            $
                            20,644,000
                            
                            
                            $
                            17,363,000Canada
                            
                            
                            214,000
                            
                            
                            
                            279,000Tax
      benefit for nonqualified stock options
                            
                            
                            —
                            
                            
                            
                            11,000Other
                            
                            
                            370,000
                            
                            
                            
                            252,000Totals
                            
                            
                            21,228,000
                            
                            
                            
                            17,905,000Deferred
      tax liabilities—depreciation and amortization of property and equipment
      and intangible assets
                            
                            
                            (2,807,000
                            )
                            
                            
                            (2,841,000
                            )Net
      deferred tax assets
                            
                            
                            18,421,000
                            
                            
                            
                            15,064,000Less
      valuation allowance
                            
                            
                            (18,421,000
                            )
                            
                            
                            (15,064,000
                            )Totals
                            
                            $
                            -
                            
                            
                            $
                            -





At
September 30, 2010 and 2009, the Company had net operating loss
carryforwards of approximately $51,613,000 and $43,408,000, respectively,
available to reduce future Federal and state taxable income and net operating
loss carryforwards of approximately $471,000 and $612,000, respectively,
available to reduce future Canadian taxable income. As of September 30,
2010, the Federal tax loss carryforwards will expire from 2011 through 2030 and
the Canadian tax loss carry forwards will expire from 2011 through 2016.
However, the Company terminated substantially all of its Canadian operations in
the year ended September 30, 2002.





46


Income Taxes –
Uncertainty.  Effective October 1, 2007, the Company adopted
the requirements in Accounting for Uncertainty in Income Taxes recognized in an
enterprise’s financial statements which prescribe a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. The Company
maintains a two-step approach to recognizing and measuring uncertain tax
positions. The first step is to evaluate the tax position for recognition by
determining if the weight of available evidence indicates that it is more likely
than not that the position will be sustained on audit, including resolution of
related appeals or litigation processes, if any. The second step is to measure
the tax benefits as the largest amount that has a greater than 50% likelihood of
being realized upon effective settlement. The standards also provide guidance on
de-recognition, classification, interest and penalties, and other matters.
Interest and penalties, if any, would be included in the income tax provision.
The adoption did not have a material effect on the financial
statements.  The tax years 2007 through 2009 remain open to
examination by the major taxing jurisdictions to which the Company is
subject.





14.
            FAIR
      VALUE OF FINANCIAL INSTRUMENTS





The fair
value of the Company’s cash and cash equivalents, accounts receivable, accounts
payable and other accrued liabilities for the year ended September 30, 2010
are estimated to approximate their carrying values due to the relative liquidity
of these instruments. The Credit Facility carrying value for the year ended
September 30, 2010 approximates fair value based on other rates and terms
available for comparable companies in the marketplace for similar debt and
risk.





15.
            RELATED
      PARTY TRANSACTIONS





On
October 15, 2006, the Company entered into a consulting agreement with Howard
Interests for business advisory services, the principal of which is the spouse
of Board member Carolyn Howard. The consulting agreement is a month to month
agreement with a monthly payment required initially of $5,000, which increased
to $7,500 as of April 2008, and then decreased to $3,500 per month as of July
2009.  During the year ended September 30, 2010, the Company paid
Howard Interests $42,000.





16.
            SUBSEQUENT
      EVENTS





On
October 13, 2010, the Company issued 1,865 shares of common stock to employees
from the 2009 Employee Stock Purchase Plan for $4,475, which was the offset of
the amount they owed for the shares against an equivalent amount the Company
owed them for accrued salaries through September 30, 2010.





On
November 10, 2010, the Company executed the DIRECTV CapEx Agreement, which
allows the Company to leverage its existing infrastructure to provide services
to DIRECTV for deployments to certain multi-family properties identified by the
Company, but where DIRECTV funds a majority of the capital costs and becomes a
party to the right of entry agreement.





On
November 15, 2010, the Company closed, pursuant to the ATTVS December 2, 2009
Purchase Agreement, an additional 4,325 subscribers in 59 properties with 16,100
wired units. These subscribers were transitioned to Company services on December
16, 2010.









On
December 9, 2010, the Board of Directors of the Company effected a 1-for-10
reverse stock split and a reduction in the number of authorized shares of common
stock from 70 million to 35 million shares. The filing of an amendment to the
Company’s Certificate of Incorporation gave effect to these corporate actions on
December 9, 2010. This change in capital structure occurred after the fiscal
year ended September 30, 2010, but prior to the release of the financial
statements. Consequently, the Company has given retroactive effect to the change
in capital structure in the consolidated financial statements and notes thereto
by adjusting all common stock share references to reflect the 1-for-10 reverse
split. Trading of the Company’s common stock on the Over-the-Counter Bulletin
Board on a reverse split basis commenced on December 14, 2010.


47





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





None.





Item 9A.
            Controls
      and Procedures




Evaluation
of disclosure controls and procedures





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





As of
September 30, 2010 (the end of the period covered by this Report), we carried
out an evaluation, under the supervision and with the participation of our Chief
Executive Officer, who is also our Chief Financial Officer, and our Vice
President of Finance and Administration of the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rule
13a-15(e). Based on this evaluation, our Chief Executive Officer and our Vice
President of Finance and Administration concluded that our disclosure controls
and procedures were effective in ensuring that information required to be
disclosed by us in our periodic reports is recorded, processed, summarized and
reported, within the time periods specified for each report and that such
information is accumulated and communicated to our management, including our
principal executive and principal financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.





Management’s
Annual Report on internal controls over financial reporting





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





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





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


•
            provide reasonable assurance that
      transactions are recorded as necessary to permit preparation of financial
      statements in accordance with GAAP, and that receipts and expenditures are
      being made only in accordance with authorizations of our management and
      directors; and


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





Management
has conducted, with the participation of our Chief Executive Officer, who is
also our Chief Financial Officer, and our Vice President of Finance and
Administration, an assessment, including testing of the effectiveness of our
internal controls over financial reporting as of September 30, 2010.
Management’s assessment of internal controls over financial reporting was based
on the framework in Internal
Control over Financial Reporting – Guidance for Smaller Public Companiesissued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation, management concluded that our system of
internal controls over financial reporting was effective as of September 30,
2010.





48


This
annual report does not include an attestation report of our registered
independent public accounting firm regarding internal controls over financial
reporting. Management’s report was not subject to attestation by the Company’s
independent registered public accounting firm pursuant to the rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this Annual Report on Form 10-K.





Changes
in internal controls over financial reporting





There
were no changes in our internal controls over financial reporting during the
period ended September 30, 2010 that has materially affected, or is reasonably
likely to materially affect, our internal controls over financial
reporting.





Item 9B.
            Other
      Information





None.





PART
III




Item
      10.
            Directors,
      Executive Officers and Corporate
Governance





The
following table and the narrative below sets forth the information concerning
the Company’s directors and officers for the fiscal year ended September 30,
2010:





Directors
      and Executive Officers
            
            Age
            
            Position(s)Sheldon
      Nelson
            
            49
            
            President,
      CEO, CFO, DirectorJ.E.
      “Ted”  Boyle
            
            63
            
            Director,
      Chairman of the BoardCarolyn
      Howard
            
            47
            
            DirectorRichard
      Newman
            
            58
            
            DirectorPatrick
      Cunningham
            
            42
            
            Vice
      President, Sales and MarketingBrad
      Holmstrom
            
            45
            
            General
      Counsel and Corporate SecretaryCarmen
      Ragusa, Jr.
            
            62
            
            Vice
      President, Finance and
Administration





Sheldon B. Nelson, 49, has
served as President and Chief Executive Officer of the Company and a member of
the Board of Directors, including a term as Chairman, since November 1998.
From 1983 to 1998 he was President of 4-12 Electronics Corporation, a provider
of products and services to the Canadian satellite, cable, broadcasting and
SMATV industries. In addition to his day-to-day responsibilities during his
tenure at 4-12 Electronics, Mr. Nelson developed that company into one of
Canada’s largest private cable system operators. Mr. Nelson is a 1983
graduate of Gonzaga University in Spokane, Washington where he graduated from
the School of Business Administration, Magna cum Laude, and was the recipient of
the School of Business Administrations’ Award of Excellence. Mr. Nelson also
sits on the board of Diamcor Mining, Inc. Mr. Nelson is not involved in any
material legal proceedings.





John Edward "Ted" Boyle, 63,
joined the Board of Directors in May of 2000. He is currently the President of
G2W Solutions Inc. (GWIR:OTCBB), a satellite network service provider to the
horse race and gaming industry. In 2006 and 2007, Mr. Boyle oversaw the launch
of cable VoIP telephony at Cable Bahamas in Nassau. From 2002 until 2006 he
worked for 180 Connect Inc., North America's largest cable and satellite
installation and service contractor, and was the president of their $50M per
annum cable division.  From 1998 to 2001 he was the President and CEO
of Multivision (Pvt.) Ltd., the MMDS wireless cable television provider for Sri
Lanka. From 1996 -1997 Mr. Boyle was the President and CEO of PowerTel TV,
a Toronto based digital wireless cable company. As founding President and CEO of
ExpressVu Inc. (1994 -1996), Mr. Boyle was responsible for taking Canada's first
Direct-to-Home satellite service from inception to launch. Prior to 1994, Mr.
Boyle held executive positions with Tee-Comm Electronics, Regional Cablesystems
and Canadian Satellite Communications (Cancom). As the founding officer of
Regional Cablesystems at Cancom, and later as Vice-President of Market
Development at Regional, he led the licensing and construction, or acquisition,
of over 1000 Canadian and American cable systems. Mr. Boyle was a member of the
boards of Rystar Inc. from March 1998 to January 2000, of Urban Networks, Inc.
from November 2008 to April 2009, and of Impulse Media Inc. from September 2001
to May 2002. In addition to MDU Communications, he currently sits on the Board
of Asian Television Network (SAT-TSX-V). Mr. Boyle is not involved in any
material legal proceedings.





49


Carolyn C. Howard,47, was elected to
the Board of Directors in July 2005 and is serving on the Company’s Audit
Committee as the independent financial expert .  Ms. Howard has been
employed by Howard Interests since 1987, a venture capital firm, of which she is
a co-founder and manager.  She has held positions in banking with a
focus on Fannie Mae/Freddie Mac lending.  She has managed positions
with securities firms trading and covering institutional accounts.  In
1992 through 1997, she acted as CEO and COO of one of New Hampshire’s largest
food service and bottled water companies.  In 1997, she facilitated
the sale of that company to Vermont Pure Springs, Inc., a publicly traded
company.  Ms. Howard also sits on the board and chairs the audit
committee of Video Display Corporation (VIDE), a publicly traded
company.  Ms. Howard studied accounting and finance at both New
Hampshire College and Franklin Pierce University.  Presently she
serves as President to the Jaffrey Gilmore Foundation and Board Chair to the
Sharon Arts Center, both non-profit educational and art organizations in New
Hampshire. Ms. Howard is not involved in any material legal
proceedings.





Richard Newman,59, joined the
Board of Directors in December 2007 and resides in New York City.  He
is currently a Managing Partner of Atlantis Associates, a private equity firm he
founded, that is mainly focused on business services, manufacturing, education
and media investment opportunities.  Previously, he was Managing
Director at Andlinger & Co., a private equity firm with investments in
media, business services, and manufacturing.  Prior to joining
Andlinger, Mr. Newman was a Managing Director at East Wind Advisors, a boutique
investment banking firm and a partner at Hart Capital, a private equity
firm.  In addition to the experience noted above, Mr. Newman has 20
years of experience in financial advisory and operating roles for both
profitable and financially-challenged corporations.  He holds an MBA
from the Stanford University Graduate School of Business, an MA from the
Stanford University School of Education and a BA from Brown University. Mr.
Newman is not involved in any material legal proceedings.




Patrick Cunningham, Vice President of
Sales and Marketing, 42, has been a Vice President with the Company since
2000.  He has over fifteen years of management experience focused on the
telecommunications industry. Mr. Cunningham was formerly the Vice President of
Distribution and Sales for SkyView World Media. At SkyView, he was responsible
for the distribution, sales, marketing and technical service of the SkyView
products. SkyView was one of the leading private providers of television
services to the MDU and ethnic communities with over 100,000 subscribers
nationwide. SkyView was the largest Master Systems Operator for DIRECTV and a
leading producer and distributor of foreign language television programming.
Prior to SkyView, and after some time as a maintenance manager with Schnieder
National, Inc., Mr. Cunningham was an Officer in the U.S. Army where he served
as a Battalion Communications Officer and an M1A1 Tank Platoon Leader. Mr.
Cunningham has a Bachelor of Science from Union College in Schenectady, NY where
he majored in Industrial Economics.




Brad Holmstrom,
General Counsel and Corporate Secretary, 45, has been with the Company
since 2000. Prior to joining the Company, Mr. Holmstrom was partner in the
Kansas City, Missouri office of the law firm Shughart Thomson & Kilroy,
PC.





Carmen Ragusa, Jr., Vice President of
Finance and Administration, 62, has been with the Company since 2004. He
is a CPA, holds an MBA and brought to the Company over twenty-five years of
experience in both the public and private sectors of the manufacturing and
construction industry, with the last ten years in a senior financial capacities
of Vice President of Finance and Chief Financial Officer in privately held
corporations with $40 to $50 million in recurring annual revenue. Mr. Ragusa has
experience not only in the management of all aspects of accounting and finance
departments, but has made significant contributions in the areas of business
development, financial stability and has assisted in the implementation of
operational strategies that support business development and financial
objectives.





Code of Ethics.The Company
has adopted a Code of Ethics that applies to all upper management, officers and
directors of the Company. A copy of the Company’s Code of Ethics is posted on
the Company’s website.





Board of Directors Meeting and
Committees. All Board members are expected to attend the Company’s Annual
Meeting of Stockholders and to attend 75% of all regular Board and committee
meetings. All of the then-current Board members attended the 2010 Annual Meeting
of Stockholders. During the fiscal year ended September 30, 2010, there
were four regularly scheduled meetings and four additional conference calls of
the Board of Directors. Each director attended at least 75% of the total number
of meetings of the Board of Directors and committees on which the director
served. The Board of Directors has three standing committees; the Audit
Committee, the Compensation Committee, and the Corporate Governance and
Nominating Committee.




50


Audit
Committee.   The Board of Directors has adopted a charter governing
the duties and responsibilities of the Audit Committee. The principal functions
of the Audit Committee include:





•
            overseeing the integrity of the
      Company’s financial statements and compliance with related legal and
      regulatory requirements;





•
            monitoring the adequacy of the
      Company’s accounting and financial reporting, and its internal controls,
      procedures and processes for financial reporting;
    and





•
            overseeing the Company’s
      relationship with its independent auditors, including appointing,
      evaluating, and reviewing the compensation of the independent
      auditors.





Current
members of the Audit Committee include Mr. Newman (Chair) and Ms. Howard.
Ms. Howard qualifies as an "audit committee financial expert" as defined by the
Securities and Exchange Commission (“SEC”). All members of the Audit Committee
are “independent” as defined by Rule 4200 of the National Association of
Securities Dealers (“NASD”). Each member is an “outside director” as defined in
Section 162(m) of the Internal Revenue Code and a “non-employee director”
as defined in Rule 16b-3 under the Securities Exchange Act of 1934. The Audit
Committee met four times during the fiscal year ended September 30, 2010
for approval and filing of the Company's reports and other matters.





Compensation
Committee.  The Board of Directors has adopted a charter governing
the duties and responsibilities of the Compensation Committee. The principal
functions of the Compensation Committee include:




•
            reviewing and making
      recommendations to the Board of Directors regarding all forms of salary,
      bonus and stock compensation provided to executive
      officers;





•
            the long-term strategy for
      employee compensation, including the types of stock and other compensation
      plans to be used by the Company;
and





•
            overseeing the overall
      administration of the Company’s equity-based compensation
      plans.





Current
members of the Compensation Committee include Mr. Boyle (Chair) and Mr. Newman.
All members of the Compensation Committee are "independent” as defined by
Rule 4200 of the NASD. Each member is an “outside director” as defined in
Section 162(m) of the Internal Revenue Code and a “non-employee director”
as defined in Rule 16b-3 under the Securities Exchange Act of 1934. In addition,
there are no Compensation Committee interlocks between the Company and other
entities involving the Company's executive officers and directors who serve as
executive officers of such entities. None of the Company’s executive officers
have served as members of a compensation committee or as a director of any other
entity that has an executive officer serving on the Compensation Committee of
our Board of Directors or as a member of our Board of Directors. The
Compensation Committee met once during fiscal 2010.




Corporate
Governance and Nominating Committee.The
Board of Directors has adopted a charter governing the duties and
responsibilities of the Corporate Governance and Nominating Committee. The
Corporate Governance and Nominating Committee insures that the Company has the
best management processes in place to run the Company legally, ethically and
successfully in order to increase stockholder value. The principal functions of
the Corporate Governance and Nominating Committee are:




•
            assisting the Board of Directors
      in identifying, evaluating, and nominating candidates to serve as members
      of the Board of Directors and as a qualified Audit Committee financial
      expert;





•
            recommending to the Board of
      Directors any director nominees for the next annual meeting of
      stockholders;





•
            reviewing and making
      recommendations to the Board of Directors regarding the composition of the
      Board, the operations of the Board, and the continuing qualifications of
      incumbent directors, including any changes to a director's primary
      activity;





•
            reviewing annually and making
      recommendations to the Board as to whether each non-management director is
      independent and otherwise qualified in accordance with applicable law or
      regulation; and




51




•
            reviewing and making
      recommendations to the Board of Directors regarding corporate governance
      policies and ethical
conduct.





The
Corporate Governance and Nominating Committee identifies potential director
nominees based upon recommendations by directors, management, or stockholders,
and then evaluates the candidates based upon various factors, including, but not
limited to:




•
            a reputation for honesty and
      integrity and a willingness and ability to spend the necessary time to
      function effectively as a
director;





•
            an understanding of business and
      financial affairs and the complexities of business
      organizations;





•
            a general understanding of the
      Company’s specific business and
industry;





•
            strategic thinking and
      willingness to share ideas, network of contacts, and diversity of
      experience; and





•
            a proven record of competence and
      accomplishments through leadership in industry, education, the professions
      or government.





The
Corporate Governance and Nominating Committee considers these and other criteria
to evaluate potential nominees and does not evaluate proposed nominees
differently depending upon who has made the proposal. The Company does not
currently evaluate a potential nominee on the basis of diversity. To date, the
Company has not paid any third-party fees to assist in this
process.




The
Corporate Governance and Nominating Committee will consider and make
recommendations to the Board of Directors regarding any stockholder
recommendations for candidates to serve on the Board of Directors. However, it
has not adopted a formal process for that consideration because it believes that
the informal consideration process has been adequate given the historical
absence of those proposals. If a stockholder wishes to suggest a candidate
for director consideration, the stockholder should send the name of the
recommended candidate, together with pertinent biographical information, a
document indicating the candidate’s willingness to serve if elected, and
evidence of the nominating stockholder’s ownership of Company stock, to the
attention of the Corporate Secretary, 60-D Commerce Way, Totowa, NJ 07512 at
least five months prior to the 2011 Annual Meeting of Stockholders to ensure
time for meaningful consideration.




Current
members of the Corporate Governance and Nominating Committee are Ms. Howard
(Chair), Mr. Boyle and Mr. Nelson. All members of the Corporate
Governance and Nominating Committee, except Mr. Nelson, are "independent” as
defined by Rule 4200 of the NASD. Additionally, each member is an “outside
director” as defined in Section 162(m) of the Internal Revenue Code and a
“non-employee director” as defined in Rule 16b-3 under the Securities Exchange
Act of 1934, both with the exception of Mr. Nelson. The Corporate Governance and
Nominating Committee met once during fiscal 2010.




Compensation of
Directors. Each director who is not an employee or full time
consultant of the Company receives compensation of $1,500 per month and an
attendance fee of $2,000 per in-person meeting, plus out-of-pocket expenses for
each Board or committee meeting attended. The Chairman of the Board and the
financial expert on the Company’s Audit Committee each receive an additional
$5,000 per year. The Chairperson of the Audit Committee receives an additional
$4,000 per year and the Chairpersons of the Compensation and Corporate
Governance and Nominating Committees each receive an additional $2,000 per year
in compensation.





Directors
may also receive grants of restricted stock as additional compensation. Mr. Boyle was granted
4,000 shares of restricted common stock for his service from May 2005 through
May 2007. Mr. Boyle and Ms. Howard were each granted 2,000 shares of restricted
common stock for their service from May 2007 through May 2008. Mr. Newman was
granted 2,000 shares of restricted common stock for his service from December
2007 through December 2008. Mr. Boyle and Ms. Howard were granted 3,000 shares
of restricted common stock for their service from May 2008 through May 2009 and
Mr. Newman was granted 1,834 shares of restricted common stock for his service
from December 2008 through May 2009. In June of 2009, Mr. Boyle, Ms. Howard, Mr.
Newman and Mr. Wiberg were each granted 3,000 shares of restricted common stock
for their service from May 2009 through May 2010. As of September 30, 2010, no
grants of restricted common stock for the service period June 2010 through June
2011 have yet been issued.





52


The table
below sets forth, for each non-employee director, the amount of cash
compensation paid and the number of stock options or shares of common stock
received for his or her service during fiscal 2010:





Non-Employee Director
                              
                              Fiscal
                                Year
                              
                              Fees
                                Earned
                                or Paid
                                in Cash
                                ($) (2)
                              
                              
                              Stock
                                Awards
                                ($) (2)
                              
                              
                              Option
                                Awards
                                ($) (1)
                              
                              
                              Non-
                                Equity
                                Incentive
                                Plan
                                Comp. ($)
                              
                              
                              Non-
                                Qualified
                                Deferred
                                Earnings
                              
                              
                              All Other
                                Comp.
                                ($)
                              
                              
                              Total
                                ($)J.E.
      “Ted” Boyle
                              
                              2010
                              
                              
                              22,000
                              
                              
                              
                              -
                              
                              
                              
                              6,500
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              28,5002009
                              
                              
                              29,000
                              
                              
                              
                              18,075
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              
                              
                              
                              
                              47,075Carolyn
      Howard
                              
                              2010
                              
                              
                              22,000
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              22,0002009
                              
                              
                              26,000
                              
                              
                              
                              18,075
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              
                              
                              
                              
                              44,075Richard
      Newman
                              
                              2010
                              
                              
                              22,000
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              22,0002009
                              
                              
                              28,000
                              
                              
                              
                              18,075
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              
                              
                              
                              
                              46,075James
      Wiberg(3)
                              
                              2010
                              
                              
                              19,000
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              19,0002009
                              
                              
                              8,000
                              
                              
                              
                              12,000
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              20,000


_____________________





(1)
            Represents the dollar amount
      recognized for financial statement reporting purposes, in accordance with
      share based compensation. Assumptions used in the calculation of this
      amount are included in Note 5 to our audited financial statements included
      in our Annual Report on Form 10-K for the year ended September 30, 2010.
      The Board will not realize the value of these awards in cash unless and
      until these awards vest, are exercised and the underlying shares
      subsequently sold.


(2)
            No
      grants of restricted common stock or chairperson fees have yet been issued
      for Board service for fiscal 2010 through fiscal 2011. Grants of
      restricted common stock for fiscal 2009 included a one-time bonus for the
      2008 completed sale of subscribers to CSC Holdings in the amount of $6,075
      each to Ms. Howard and Messers. Boyle and
  Neuman.


(3)
            Mr. Wiberg was not re-elected to
      the Board as of June 10,
2010.




Item 11.
            Executive
      Compensation




Overview.The
Compensation Committee has responsibility for establishing, monitoring and
implementing the Company’s compensation program. The Compensation Committee
designs its policies to attract, retain and motivate highly qualified
executives. It compensates executive officers (Mr. Sheldon Nelson, Mr. Patrick
Cunningham, Mr. Brad Holmstrom and Mr. Carmen Ragusa, Jr. (collectively,
“Executives”)) through a combination of base salary, incentive bonus payments
and stock options and grants, designed to be competitive with comparable
employers and to align each Executive’s compensation with the long-term
interests of our stockholders.





What the
Compensation Program is Designed to Reward.The Compensation
Committee focuses on the long-term goals of the Company and designs reward
programs that recognize business achievements it believes are likely to promote
sustainable growth. The Compensation Committee believes compensation programs
should reward Executives who take actions that are best for the long-term
performance of the Company while delivering positive annual operating results.
Compensation decisions take into account performance by both the Company and the
Executive. To supplement its decision making, the Compensation Committee has the
authority to retain an independent compensation consultant to provide data,
analysis and counsel as necessary.





53


Role of the
President / Chief Executive Officer in Compensation
Decisions.The President/CEO is required to provide to the
Compensation Committee annual reviews of the performance of each Executive,
other than himself. The Committee considers these evaluations and the
recommendations of the President/CEO in determining adjustments to base
salaries, bonus and equity incentive awards for the Executives. The Compensation
Committee considers the President/CEO’s recommendations regarding the
compensation of Executives and a number of qualitative and quantitative factors,
including the Company’s performance during the fiscal year and rates of
compensation for similar public and private companies. The Compensation
Committee itself reviews the performance of the President/CEO.




Elements of the
Executive Compensation Plan and How it Relates to Company
Objectives.The Compensation Committee believes that
compensation paid to Executives should be closely aligned with the performance
of the Company on both a short-term and long-term basis and that such
compensation should assist the Company in attracting and retaining key
executives critical to long-term success. Currently, the Compensation Committee
uses short-term compensation (base salary and incentive bonuses) and long-term
equity compensation (stock options and/or stock grant incentive awards) to
achieve its goal of driving sustainable growth. Specifically, the Compensation
Committee considers: (i) overall financial, strategic and operational
Company performance; (ii) individual performance; (iii) market data;
and (iv) certain additional factors within the Committee’s discretion. The
Compensation Committee may exercise its discretion in modifying any recommended
adjustments or awards to Executives or determining the mix of
compensation.





Employment
Agreements. The Company has previously entered into Management
Employment Agreements with each of the Executives described below:





Sheldon Nelson.The Company
has a Management Employment Agreement with its President/Chief Executive Officer
Sheldon Nelson, with a current annual salary of $275,000 terminable by the
Company upon four (4) weeks notice and a termination payment equal to twenty
four (24) months salary. Upon a change in control, either party may terminate
the Agreement with the Company paying a termination payment equal to thirty-six
(36) months salary.





Patrick Cunningham.The
Company has a Management Employment Agreement with its Vice President of Sales
and Business Development, Patrick Cunningham, with a current annual salary of
$189,000 terminable by the Company upon four (4) weeks notice and a termination
payment equal to twelve (12) months salary. Upon a change in control, either
party may terminate the Agreement with the Company paying a termination payment
equal to twenty four (24) months salary.





Brad Holmstrom.The Company
has a Management Employment Agreement with its General Counsel, Brad Holmstrom,
with a current annual salary of $175,000 terminable by the Company upon four (4)
weeks notice and a termination payment equal to four (4) months salary. Upon a
change in control, either party may terminate the Agreement with the Company
paying a termination payment equal to twelve (12) months salary.





Carmen Ragusa, Jr.The
Company has a Management Employment Agreement with its Vice President of Finance
and Administration, Carmen Ragusa, Jr., with a current annual salary of $176,000
terminable by the Company upon four (4) weeks notice and a termination payment
equal to four (4) months salary. Upon a change in control, either party may
terminate the Agreement with the Company paying a termination payment equal to
twelve (12) months salary.





Short-Term
Compensation.




Base
Salary. Base salary is negotiated into each Executive’s Management
Employment Agreement. Increases are not preset and take into account the
individual’s performance, responsibilities of the position, experience and the
methods used to achieve results, as well as external market practices. At the
end of the year, the President/CEO evaluates the Executive’s performance in
light of Company objectives. Base salary compensates each Executive for the
primary responsibilities of his position and level of experience and is set at
levels that the Company believes enables it to attract and retain
talent.





Management
Incentive Bonus Plan.The Company utilizes
quarterly and annual bonuses as an incentive to promote achievement of
individual and Company performance goals. Bonus awards are determined and based
primarily on Company performance and secondarily on individual performance.
Company performance is determined at the end of the year (or quarter) based on
actual business results compared to preset business objectives, annual financial
performance goals and strategic performance initiatives.  The
Compensation Committee may also take into account additional considerations that
it deems fundamental.





54


Under the
2010 Management Incentive Bonus Plan, Executives could earn an equivalent amount
of up to 35% of their annual salary (100% for the President/CEO) payable in
Company common stock. The Compensation Committee reserves the right to award
additional bonuses for extraordinary events related to performance during the
year. The Bonus Plan is based and paid in accordance with the achievement of the
business and operating goals of the Company, both quantitative and qualitative,
as determined by the Compensation Committee. Quantitative goals are based on
criteria such as subscriber growth, revenue growth, EBITDA growth, acquisition
cost containment, upgrade completion and borrowing base capacity. This portion
of the bonus is paid quarterly and based on a percentage of salary, 3% percent
for each fiscal quarter for a total maximum quantitative bonus of 12% of salary.
The qualitative bonus is worth up to 23% of the Executive’s base salary and is
awarded at the year end. Current year qualitative performance criteria include
HDTV property upgrade fulfillment, penetration rate increases, current property
renewal success, accretive asset acquisitions, and other metrics such as
strategic partner initiatives.  With respect to the President/CEO,
similar quantitative and qualitative criteria apply with a 50% allocation for
quantitative results and 50% for qualitative performance.





For
fiscal 2010, the Compensation Committee met in December and reviewed Executive
performance against performance goals using the fiscal 2010 actual results and
the criteria set forth above. The Compensation Committee also took into
consideration the President/CEO’s statement that he would decline up to 75% of
any granted bonus for fiscal 2010. The Compensation Committee relied to a large
extent on the President/CEO’s evaluations of each Executive’s performance. The
Compensation Committee itself reviewed the performance of the President/CEO. The
Compensation Committee did not award Executives the full annual incentive bonus,
since only certain of the pre-established targets were met. The 2010 Management
Incentive Bonus Plan payouts and the percentage of target opportunity for the
President/CEO and top three highly compensated Executives earned for fiscal 2009
are set forth below:




·
            Mr. Nelson received a bonus of
      $23,718 (net of bonus forfeiture of $71,156), which represented 34.5% of
      the 100% target potential opportunity less a 75% forfeiture, paid in
      shares of Company common
stock.





·
            Mr. Cunningham received a bonus
      of $17,010, which represented 9% of the 35% target bonus opportunity of
      salary, paid in shares of Company common
  stock.





·
            Mr. Ragusa received a bonus of
      $15,840, which represented 9% of the 35% target bonus opportunity of
      salary, paid in shares of Company common
  stock.





·
            Mr. Holmstrom received a bonus of
      $15,750, which represented 9% of the 35% target bonus opportunity of
      salary, paid in shares of Company common
  stock.





Long-Term
Compensation.





Long-term
performance-based compensation for the Executives takes the form of stock option
awards from the 2001 Stock Option Plan and occasional stock awards from the 2009
Employee Stock Purchase Plan or of restricted shares of common stock. The
Compensation Committee continues to believe in the importance of equity
ownership for all Executives and certain management for purposes of incentive,
retention and alignment with stockholders. The long-term incentive compensation
is intended to motivate Executives to make stronger business decisions, improve
financial performance, focus on both short-term and long-term objectives and
encourage behavior that protects and enhances the long-term interests of
stockholders.





Pursuant
to the Management Employment Agreements mentioned above, Executives are entitled
to receive stock options at an exercise price equal to the fair market value of
the Company’s common stock on the date of grant. Stock options vest based on an
Executive’s continued employment with the Company over a period of three years.
In fiscal 2009, the Company granted 38,500 stock options to Executives at an
exercise price of $2.00 per share. In fiscal 2010, the Company granted 27,000
stock options to Executives at an exercise price of $4.00 per share (see
Outstanding Cumulative Equity Awards Table).





The
Company also provides retirement benefits to all employees, including
limited matching contributions, under the terms of its tax-qualified 401(k)
defined contribution plan. The Executives participate in the 401(k) plan on the
same terms as other participating employees.





Severance
Benefits.




The
Company provides severance in certain cases as a means to attract
individuals with superior ability and managerial talent and to protect our
competitive position.





55


The
Management Employment Agreements, described above, may require the Company to
make certain payments to certain Executives in the event of a termination of
employment or a change of control. The following table summarizes the potential
payments to each Executive assuming that one of the events listed in the tables
below occurs.





Named Executive Officer
                  
                  Payments upon a
                    termination by the
                    Company without cause(1)
                  
                  
                  Payments upon a termination
                    by the Executive or Company without
                    cause during a change in control(1)Sheldon
      Nelson
                  
                  $
                  550,000
                  
                  
                  $
                  825,000Patrick
      Cunningham
                  
                  $
                  189,000
                  
                  
                  $
                  378,000Bradley
      Holmstrom
                  
                  $
                  58,333
                  
                  
                  $
                  175,000Carmen
      Ragusa, Jr.
                  
                  $
                  58,666
                  
                  
                  $
                  176,000






(1)
            Does
      not assume any pro-rata portion of target bonus for a fiscal
      year.




SUMMARY
COMPENSATION TABLE FOR FISCAL YEAR ENDED SEPTEMBER 30, 2010




The
following summary compensation table sets forth certain information concerning
compensation for services rendered in all capacities awarded to, earned by or
paid to our Chief Executive Officer and our three other most highly
compensated Executives, who were serving as executive officers at the end of our
fiscal year ended September 30, 2010:





Name and Principal Position
                            
                            Fiscal
                              Year(1)
                            
                            Salary
                            
                            
                            Bonus
                              (3)
                            
                            
                            Stock
                              Awards
                            
                            
                            Option
                              Awards(2)
                            
                            
                            Non-
                              equity
                              Incentive
                              Plan
                              Comp.
                            
                            
                            Non-
                              qualified
                              Deferred
                              Comp.
                            
                            
                            All Other
                              Comp.
                            
                            
                            TotalSheldon
      Nelson,
                            
                            2010
                            
                            $
                            275,000
                            
                            
                            $
                            23,715
                            
                            
                            $
                            11,310
                            
                            
                            $
                            13,000
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            $
                            323,025President/CEO
                            
                            2009
                            
                            $
                            275,000
                            
                            
                            $
                            165,310
                            
                            
                            $
                            20,885
                            
                            
                            $
                            5,000
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            $
                            466,195
                            (4)Patrick
      Cunningham,
                            
                            2010
                            
                            $
                            189,000
                            
                            
                            $
                            17,010
                            
                            
                            
                            -
                            
                            
                            $
                            7,800
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            $
                            213,810Vice
      President, Sales & Mktg.
                            
                            2009
                            
                            $
                            189,000
                            
                            
                            $
                            140,130
                            
                            
                            
                            -
                            
                            
                            $
                            4,500
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            $
                            333,630Brad
      Holmstrom,
                            
                            2010
                            
                            $
                            175,000
                            
                            
                            $
                            15,540
                            
                            
                            
                            -
                            
                            
                            $
                            7,800
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            $
                            198,340General
      Counsel & Corp. Sec.
                            
                            2009
                            
                            $
                            175,000
                            
                            
                            $
                            89,580
                            
                            
                            
                            -
                            
                            
                            $
                            4,500
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            $
                            269,080Carmen
      Ragusa,
                            
                            2010
                            
                            $
                            176,000
                            
                            
                            $
                            15,750
                            
                            
                            
                            -
                            
                            
                            $
                            6,500
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            $
                            198,250Vice
      President, Fin. & Admin.
                            
                            2009
                            
                            $
                            176,000
                            
                            
                            $
                            62,520
                            
                            
                            
                            -
                            
                            
                            $
                            5,250
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            $
                            243,320


________________





(1)
            The
      information is provided for each fiscal year referenced beginning October
      1 and ending September 30 for compensation earned during or for each
      fiscal year.(2)
            Granted
      in the fiscal year. Represents the dollar amount recognized for financial
      statement reporting purposes, in accordance with share based compensation.
      Assumptions used in the calculation of this amount are included in Note 5
      to our audited financial statements. Our named executive officers will not
      realize the value of these awards in cash unless and until these awards
      vest, are exercised and the underlying shares subsequently
      sold.





(3)
            Fiscal
      year end 2010 bonus, per the 2010 Management Incentive Bonus Plan, paid
      100% in common stock. Fiscal year end 2009 bonus, per the 2009 Management
      Incentive Bonus Plan, paid 50% in cash and 50% in common stock. Also
      included in the 2009 bonus is a one-time bonus for the 2008 completed sale
      of subscribers to CSC Holdings paid 50% in cash and 50% in common stock
      paid in January 2009.(4)
            The
      qualitative component to Mr. Nelson’s 2009 fiscal year end bonus was
      deferred pending the outcome of certain acquisitions and will be
      re-discussed by the Board in fiscal
2011.




56


OUTSTANDING
CUMULATIVE EQUITY AWARDS AT SEPTEMBER 30, 2010





The
following table provides a summary of equity awards outstanding at September 30,
2010 for our CEO and top three highly compensated named Executives:





Option
                                              Expiration
                                              Date
                                            
                                            Option
                                              Exercise
                                              Price ($)
                                            
                                            
                                            Number of Securities
                                              Underlying Options
                                              (#) Exercisable
                                            
                                            
                                            Number of Securities
                                              Underlying Options
                                              (#) UnexercisableSheldon
      Nelson,
                                            
                                            10/20/2011
                                            
                                            
                                            7.50
                                            
                                            
                                            
                                            5,000
                                            
                                            
                                            
                                            —Chief
      Executive Officer
                                            
                                            12/19/2013
                                            
                                            
                                            2.00
                                            
                                            
                                            
                                            5,833
                                            
                                            
                                            
                                            4,16712/29/2014
                                            
                                            
                                            4.00
                                            
                                            
                                            
                                            2,500
                                            
                                            
                                            
                                            7,500Patrick
      Cunningham,
                                            
                                            10/20/2011
                                            
                                            
                                            7.50
                                            
                                            
                                            
                                            2,500
                                            
                                            
                                            
                                            —VP
      of Sales and Marketing
                                            
                                            11/30/2012
                                            
                                            
                                            4.50
                                            
                                            
                                            
                                            8,500
                                            
                                            
                                            
                                            50012/19/2013
                                            
                                            
                                            2.00
                                            
                                            
                                            
                                            5,250
                                            
                                            
                                            
                                            3,75012/29/2014
                                            
                                            
                                            4.00
                                            
                                            
                                            
                                            1,500
                                            
                                            
                                            
                                            4,500Bradley
      Holmstrom,
                                            
                                            10/20/2011
                                            
                                            
                                            7.50
                                            
                                            
                                            
                                            2,500
                                            
                                            
                                            
                                            —General
      Counsel
                                            
                                            11/30/2012
                                            
                                            
                                            4.50
                                            
                                            
                                            
                                            12,278
                                            
                                            
                                            
                                            72212/19/2013
                                            
                                            
                                            2.00
                                            
                                            
                                            
                                            5,250
                                            
                                            
                                            
                                            3,75012/29/2014
                                            
                                            
                                            4.00
                                            
                                            
                                            
                                            1,500
                                            
                                            
                                            
                                            4,500Carmen
      Ragusa, Jr.,
                                            
                                            10/20/2011
                                            
                                            
                                            7.50
                                            
                                            
                                            
                                            8,500
                                            
                                            
                                            
                                            —VP
      of Finance and Admin.
                                            
                                            11/30/2012
                                            
                                            
                                            4.50
                                            
                                            
                                            
                                            8,500
                                            
                                            
                                            
                                            50012/19/2013
                                            
                                            
                                            2.00
                                            
                                            
                                            
                                            2,625
                                            
                                            
                                            
                                            7,87512/29/2014
                                            
                                            
                                            4.00
                                            
                                            
                                            
                                            1,250
                                            
                                            
                                            
                                            3,750




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





The
following table sets forth information (to the best of our knowledge) with
respect to beneficial ownership of MDU Communications International, Inc.
outstanding common stock as of September 30, 2010 by each person or group known
to the Company to be the beneficial owner of more than 5% of the Company’s
common stock based upon Schedules 13G and 13D (and amendments) filed with the
Securities and Exchange Commission:





Name and Address of Beneficial Owner of Common Stock
                                    
                                    Shares
                                    
                                    
                                    Percent of ClassJonathan
      R. Ordway245
      Mountain View St., Decatur, GA  30030
                                    
                                    
                                    1,086,450
                                    
                                    
                                    
                                    20.1
                                    %DED
      Enterprises, Inc.; Carpathian Holding Company, Ltd;
                                      Carpathian
      Resources Ltd.210
      Crystal Grove Blvd.,Lutz,
      FL  33548 (1)
                                    
                                    
                                    509,733
                                    (1)
                                    
                                    
                                    9.5
                                    %(2)SC
      Fundamental, et al.747
      Third Ave., New York, NY 10017
                                    
                                    
                                    284,200
                                    
                                    
                                    
                                    5.3
                                    %







(1)
            In
      a Schedule 13D filed with the SEC on March 19, 2009, DED et al. acquired
      (i) an option to purchase 10,000,000 shares of Company common stock from
      Ron Ordway, and (ii) an irrevocable proxy to vote any and all shares held
      by Ron Ordway (13,192,857 shares) expiring on March 18, 2010. In a
      Schedule 13D/A filed with the SEC on September 28, 2009, DED et al.
      declined to exercise the option on the 10,000,000 shares after Ron Ordway
      gave notice of his intention to sell.  In a Schedule 13D filed
      with the SEC on October 19, 2009, Jonathan Ordway acquired 10,000,000
      shares of Company common stock.  In a Schedule 13G/A filed with
      the SEC on October 26, 2009, Ron Ordway sold 10,000,000 shares of Company
      common stock. Although DED et al. last reported with the SEC a beneficial
      ownership position in 15,097,333 shares of Company common stock,
      10,000,000 of these shares are also reported with the SEC as owned by
      record stockholder Jonathan Ordway. DED et al. has not filed an amended
      Schedule 13D. These SEC reported share amounts are on a pre-reverse split
      basis.




57




(2)
            On
      April 20, 2009, DED et al. entered into a one year Limited Irrevocable
      Proxy with The Alan W. Steinberg Limited Partnership covering certain
      voting rights to 1,494,933 shares of Company common stock. Pursuant to the
      Limited Irrevocable Proxy, it expired on April 20, 2010. On April 20,
      2009, DED et al. entered into a one year Limited Irrevocable Proxy with
      The Riviera Enid Limited Partnership covering certain voting rights to
      570,000 shares of Company common stock. Pursuant to the Limited
      Irrevocable Proxy, it expired on April 20, 2010.  Without these
      two Limited Irrevocable Proxies, the DED et al. percent of class would
      fall to 5.6%.  However, DED et al. has not amended its ownership
      position with the SEC. These SEC reported share amounts are on a
      pre-reverse split basis.




The following table sets forth information with
respect to beneficial ownership of our outstanding common stock (only
outstanding voting security) as of September 30, 2010, including; (i) each
executive officer named in the Summary Compensation Table; (ii) each of the
Company’s directors, and; (iii) all of the Company’s executive officers and
directors as a group:





Name and of Beneficial Owner of Common Stock
                  
                  Amount and
                    Nature ofBeneficial
                    Ownership (Shares)
                  
                  Percent of
                    ClassSheldon
      Nelson 1
                  
                  
                  200,321
                  
                  3.7Patrick
      Cunningham 2
                  
                  
                  91,365
                  
                  1.7Brad
      Holmstrom 3
                  
                  
                  69,292
                  
                  1.3Carmen
      Ragusa, Jr. 4
                  
                  
                  42,895
                  
                  0.8J.E.
      (Ted) Boyle 5
                  
                  
                  19,250
                  
                  *Richard
      Newman 6
                  
                  
                  26,320
                  
                  *Carolyn
      Howard 7
                  
                  
                  42,810
                  
                  0.8All
      executive officers and directors as group (10 persons)
                  
                  
                  492,253
                  
                  9.08






(1)
            Includes
      97,292 shares held of record by 567780 BC Ltd., a British Columbia
      Canada corporation wholly owned by the Sheldon Nelson Family Trust whose
      trustees are Sheldon Nelson and his sister, Nicole Nelson, 89,696 shares
      held personally and 13,333 exercisable options, within the next sixty
      days, to purchase shares of common
stock.


(2)
            Includes
      73,615 shares of common stock and 17,750 exercisable options, within the
      next sixty days, to purchase shares of common
  stock.


(3)
            Includes
      47,764 shares of common stock and 21,528 exercisable options, within the
      next sixty days, to purchase shares of common
  stock.


(4)
            Includes
      22,020 shares of common stock and 20,875 exercisable options, within the
      next sixty days, to purchase shares of common
  stock.


(5)
            Includes
      19,250 shares of common stock only


(6)
            Includes
      23,270 shares of common stock owned directly, 2,050 beneficially owned
      through family members or trusts, and 1,000 beneficially owned through a
      wholly owned company.


(7)
            Includes
      35,310 shares of common stock and 7,500 exercisable options, within the
      next sixty days, to purchase shares of common
  stock.


(8)
            Based
      on 5,451,761 shares, which includes 5,378,275 outstanding shares on
      September 30, 2010, and the above mentioned 73,486
  options.


*
            Less
      than 0.5%





SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE




Under the
securities laws of the United States, the Company’s directors and officers, and
any persons who own more than 10% of the Company’s common stock, are required
under Section 16(a) of the Securities Exchange Act of 1934 to file initial
reports of ownership and reports of changes in ownership with the SEC. Specific
due dates have been established by the SEC, and the Company is required to
disclose any failure to file by those dates. The Company files
Section 16(a) reports on behalf of its directors and executive officers to
report their initial and subsequent changes in beneficial ownership of common
stock. Based solely upon its review of the copies of such reports for fiscal
year 2010 as furnished to MDU Communications and representations from its
directors and officers, the Company believes that all directors, officers, and
greater-than-10% beneficial owners have made all required Section 16(a)
filings on a timely basis for such fiscal year.





58





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




The Audit
Committee of the Board of Directors is responsible for the review, approval, or
ratification of “related-person transactions” between the Company or its
subsidiaries and related persons. Under SEC rules, a related person is a
director, officer, nominee for director, or 5% stockholder of the Company since
the beginning of the last fiscal year, and the immediate family members of these
persons. The Audit Committee determines whether any such transaction constitutes
a “related-person transaction” and may approve, ratify, rescind, or take other
action with respect to the transaction in its discretion. On October 15, 2006,
the Company entered into a Consulting Agreement with Howard Interests for
business advisory services, the principal of which is the spouse of Board member
Carolyn Howard. The Consulting Agreement is a month to month agreement with a
monthly payment required initially of $5,000 that increased to a monthly payment
of $7,500 in April of 2008 and then decreased to $3,500 per month in July of
2009 and decreased to $2,000 per month in November 2010.




Item 14.
            Principal
      Accounting Fees and Services




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





Fiscal year ended
                    September 30 ,2010
                  
                  
                  Fiscal year ended
                    September 30 ,2009Audit
      Fees
                  
                  $
                  156,550
                  
                  
                  $
                  188,902Audit
      Related Fess
                  
                  $
                  —
                  
                  
                  $
                  —Tax
      Fees
                  
                  $
                  16,995
                  
                  
                  $
                  23,836All
      Other Fees
                  
                  $
                  —
                  
                  
                  $
                  —




Audit
Committee Pre-Approval Policy




All audit
and non-audit services to be performed for the Company by its independent
auditor must be pre-approved by the Audit Committee, or a designated member of
the Audit Committee, to assure that the provision of such services do not impair
the auditor’s independence. The Audit Committee has delegated interim
pre-approval authority to the Chairman of the Audit Committee. Any interim
pre-approval of service is required to be reported to the Audit Committee at the
next scheduled Audit Committee meeting. The Audit Committee does not delegate
its responsibility to pre-approve services performed by the independent auditor
to management.




The
engagement terms and fees for annual audit services are subject to the
pre-approval of the Audit Committee. The Audit Committee will approve, if
necessary, any changes in terms, conditions, and fees resulting from changes in
audit scope or other matters. All other audit services not otherwise included in
the annual audit services engagement must be pre-approved by the Audit
Committee.




Audit-related
services are services that are reasonably related to the performance of the
audit or review of the Company’s financial statements or traditionally performed
by the independent auditor. Examples of audit-related services include employee
benefit and compensation plan audits, due diligence related to mergers and
acquisitions, attestations by the auditor that are not required by statute or
regulation, and consulting on financial accounting/reporting standards. All
audit-related services must be specifically pre-approved by the Audit
Committee.





The Audit
Committee may grant pre-approval of other services that are permissible under
applicable laws and regulations and that would not impair the independence of
the auditor. All of such permissible services must be specifically pre-approved
by the Audit Committee.




59


PART IV




Item 15.
            Exhibits,
      Financial Statement Schedules




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




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




INDEX
TO EXHIBITS




Exhibits2.1
                
                Acquisition
      Agreement dated November 2, 1998 between Alpha Beta Holdings, Ltd. and MDU
      Communications Inc. (1)3.1
                
                Certificate
      of Incorporation (1)3.2
                
                Amendment
      to Certification of Incorporation (3)3.2
                
                Amendment
      to Certification of Incorporation (4)3.3
                
                Bylaws
      (1)3.4
                
                Amendment
      to Bylaws (2)10.1
                
                Loan
      and Security Agreement for September 11, 2006 $20M credit facility
      (6)21.1
                
                Subsidiaries
      of the Company (5)23.1
                
                Consent
      of J.H. Cohn LLP, Independent Registered Public Accounting Firm
      (7)31.1
                
                Certification
      by CEO pursuant to Sections 302 of the Sarbanes-Oxley Act of 2002
      (7)31.2
                
                Certification
      by Vice President of Finance pursuant to Sections 302 of the
      Sarbanes-Oxley Act of 2002 (7)32.1
                
                Certification
      of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
      (7)32.2
                
                Certification
      Vice President of Finance pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002 (7)_____________(1)
                Incorporated
      by reference from Form 10-SB filed on May 12, 1999(2)
                Incorporated
      by reference from Form 10-SB/A, Amendment No. 3 filed on April 14,
      2000(3)
                Incorporated
      by reference from Report on Form 8-K, filed November 17,
    2004(4)
                Incorporated
      by reference from Report on Form 8-K, filed December 9,
    2010(5)
                Incorporated
      by reference from Report on Form 10-KSB, filed December 29,
      2004(6)
                Incorporated
      by reference from Report on Form 8-K, filed September 15,
    2006(7)
                Filed
      herewith






60


SIGNATURES





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




MDU
      COMMUNICATIONS INTERNATIONAL, INC.By:
                /s/  SHELDON
      NELSONSheldon
      NelsonChief
      Financial OfficerDecember
      21, 2010




MDU
      COMMUNICATIONS INTERNATIONAL, INC.By:
                /s/  CARMEN
      RAGUSA, JR.Carmen
      Ragusa, Jr.Vice
      President of FinanceDecember
      21, 2010




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, 2010/s/  JOHN
      EDWARD BOYLEJohn
      Edward Boyle
                            
                            Director
                            
                            December
      21, 2010/s/  CAROLYN
      C. HOWARDCarolyn
      C. Howard
                            
                            Director
                            
                            December
      21, 2010/s/
      RICHARD NEWMANRichard
      Newman
                            
                            Director
                            
                            December
      21,
2010




61