**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 _________________
 
 **FORM
        10-KSB**
 
 x
              **ANNUAL
                  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                  OF 1934****For
                  the fiscal year ended September 30, 2005, or**o
              **TRANSITION
                  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                  OF 1934****For
                  the transition period from _______________****to ___________________******
 
 
 
 **Commission
        File No. 0-26053**
 ____________________
 
 **MDU
        COMMUNICATIONS INTERNATIONAL, INC.**
 (Name
        of
        Small Business Issuer in its charter)
 
 **Delaware**
              
              **84-1342898**(State
                  of Incorporation)
              
              (IRS
                  Employer ID. No.)
 
 **60-D
        Commerce Way, Totowa, New Jersey 07512**
 (Address
        of Principal Executive Offices) (Zip Code)
 
 Issuer's
        telephone number, including area code: **(973) 237-9499**
 
 Securities
        registered under Section 12(b) of the Exchange Act:
 
 none
 
 Securities
        registered under Section 12(g) of the Exchange Act:
 
 **Common
        Stock, par value $0.001 per share**
 
 (Title
        of
        Class)
 
 ____________________
 
 1
 Check
        whether the issuer: (1) filed all reports required to be filed by
        Section 13 or 15(d) of the Exchange Act during the past 12 months
        (or
        for such shorter period that the registrant was required to file such reports),
        and (2) has been subject to such filing requirements for the past
        90 days. Yes x No o
 
 Check
        if
        there is no disclosure of delinquent filers pursuant to Item 405 of
        Regulation S-B contained herein, and no disclosure will be contained,
        to
        the best of registrant's knowledge, in definitive proxy or information
        statements incorporated by reference in Part III of this Form 10-KSB
        or any amendment to this Form 10-KSB. x
  Indicate
        by check mark whether registrant is a shell
        company (as defined in Rule 12b-2 of the Exchange Act). Yes  oNox
 
 The
        issuer's revenues for its most recent fiscal year were $9,142,228.
 
 The
        aggregate market value of the common equity held by non-affiliates, computed
        by
        reference to the price at which the issuer's common stock was sold, based
        on the
        average of bid and asked prices on December 19, 2005, was $76M.
 
 As
        of
        December 19, 2005 there were 50,171,609 shares of common stock outstanding
        and no other outstanding classes of a common equity security.
 
 Transitional
        Small Business Disclosure Format (check one): Yes o No x
 
 
 2
 
 **TABLE
        OF CONTENTS**
 
 **PART
                  I**
              
              **Page**ITEM
                  1.
              Description
                  of Business
              4ITEM
                  2.
              Description
                  of Properties
              13ITEM
                  3.
              Legal
                  Proceedings
              13ITEM
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              14**PART
                  II**ITEM
                  5.
              Market
                  for Common Equity and Related Stockholder Matters
              14ITEM
                  6.
              Management’s
                  Discussion and Analysis or Plan of Operation
              16ITEM
                  7.
              Financial
                  Statements
              27ITEM
                  8.
              Changes
                  In and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              49ITEM
                  8A.
              Controls
                  and Procedures
              49**PART
                  III**ITEM
                  9.
              Directors,
                  Executive Officers, Promoters and Control Persons; Compliance with
                  Section
                  16(a) of the Exchange Act
              50ITEM
                  10.
              Executive
                  Compensation
              53ITEM
                  11.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              56ITEM
                  12.
              Certain
                  Relationships and Related Transactions
              57ITEM
                  13.
              Exhibits
              58ITEM
                  14.
              Principal
                  Accountant Fees and Services
              58
 
 **FORWARD-LOOKING
        STATEMENTS**
 
 This
        Report contains certain forward looking statements (as such term is defined
        in
        the Private Securities Litigation Reform Act of 1995) and information relating
        to MDU Communications International, Inc. that is based on the beliefs of
        our
        management, as well as assumptions made by and information currently available
        to our management. When used in this Report, the words “estimate,” 
“project,”  “believe,”  “anticipate,”  “hope,” 
“intend,”  “expect,” and similar expressions are intended to identify
        forward looking statements, although not all forward looking statements contain
        these identifying words.
 
 Such
        statements reflect our current views with respect to future events and are
        subject to unknown risks, uncertainties, and other factors that may cause
        actual
        results to differ materially from those contemplated in such forward looking
        statements. Such factors include the risks described in Item 1. Description
        of
        Business; Risk Factors and elsewhere in this Report and, among others, the
        following: general economic and business conditions, both nationally,
        internationally, and in the regions in which we operate; catastrophic events,
        including acts of terrorism; relationships with and events affecting third
        parties like DIRECTV; demographic changes; existing government regulations,
        and
        changes in, or the failure to comply with, government regulations; competition;
        the loss of any significant numbers of subscribers or viewers; changes in
        business strategy or development plans; the cost of pursuing new business
        initiatives; technological developments and difficulties; the availability
        and
        terms of capital to fund the potential expansion of our businesses; and other
        factors referenced in this Report. Readers are cautioned not to place undue
        reliance on these forward-looking statements, which speak only as of the
        date
        hereof. We do not undertake any obligation to publicly release any revisions
        to
        these forward-looking statements to reflect events or circumstances after
        the
        date hereof or to reflect the occurrence of unanticipated events.
 
 *The
        words “MDU Communications,”  “the Company,”  “we,”  “our,” and
“us” refer to MDU Communications International, Inc. together with its
        subsidiaries, where appropriate.*
 
 3
 **PART
        I**
 
 **Item
        1.** **** **Description
        of Business**
 
 **BUSINESS
        OF THE COMPANY**
 
 MDU
        Communications International, Inc. concentrates exclusively on installing
        and delivering state-of-the-art digital satellite television and high-speed
        Internet solutions to the United States multi-dwelling unit (“MDU”) residential
        market—estimated to include 26 million residences. MDUs include apartment
        buildings, condominiums, gated communities, universities, nursing homes,
        hospitals, hotels, motels and other properties having multiple units located
        within a defined area. Multi-family properties present unique technological,
        management and marketing challenges, as compared to single-family homes -
        challenges we have a certain experience and expertise in overcoming. We seek
        to
        differentiate ourselves from other multi-family service providers through
        a
        unique strategy of balancing the information and communication needs of today’s
        MDU residents with the technology concerns of property managers and owners
        and
        providing the best overall service to both. To accomplish this objective,
        we
        have partnered with DIRECTV, Inc. and have been working with large
        property
        owners and real estate investment trusts (REITs) such as AvalonBay Communities,
        Trammell Crow Residential, Roseland Property Company, KSI Services, as well
        as
        many others, to understand and meet the technology needs of these groups.
 
 Our
        Canadian operating company, MDU Communications Inc. (“MDU Canada”), was
        incorporated in March 1998. In November 1998, MDU Canada’s
        shareholders sold all of their MDU Canada stock to Alpha Beta
        Holdings, Ltd., an inactive U.S. public reporting company, in exchange
        for
        Alpha Beta stock, and renamed it “MDU Communications International, Inc.”
        Alpha Beta had been incorporated in Colorado in July 1995, but never
        conducted any significant business activities and was essentially inactive
        in
        November 1998. In April 1999, we reincorporated MDU Communications
        International, Inc. in Delaware and MDU Canada became a wholly owned
        subsidiary that at its peak, had over 15,000 subscribers and seven offices
        across Canada. In March 2000, we formed MDU Communications (USA) Inc.,
        a Washington corporation (“MDU USA”), to conduct business in the United States.
         In early 2001, the Company made a fundamental re-assessment of its
        business plan and determined that the most profitable markets lay in densely
        populated areas of the United States. The Company changed its corporate focus
        and business strategy from serving the entire North American MDU market,
        to
        several key U.S. markets, beginning with the Northeast United States. To
        further
        this change, in 2001, we completed an agreement with Star Choice Television
        Network, Inc., for the sale of certain of our Canadian satellite television
        assets. As a result, by May 30, 2001, the Company relocated its operations
        and certain key employees to our New York Metro Area office in Totowa, New
        Jersey. MDU Communications International, Inc. operates essentially as a
        holding
        company with MDU Canada and MDU USA as our wholly owned operating subsidiaries.
 
 The
        Company earns its revenue through the sale of digital satellite television
        programming and high-speed Internet services to owners and residents of MDUs.
        We
        negotiate long-term access agreements with the owners and managers of MDU
        properties allowing us the right to provide digital satellite television
        and
        high-speed Internet services, and potentially other services, to their
        residents.
 
 Our
        common stock trades under the symbol “MDTV” on the OTC Bulletin Board. Our
        principal executive offices are located at 60-D Commerce Way, Totowa, New
        Jersey
        07512 and our telephone number is (973) 237-9499. Our website is located
        at *www.mduc.com.*
 
 **OUR
        STRENGTHS**
 
 In
        addition to the high quality of our digital satellite television systems
        and
        programming, our high-speed (broadband) Internet solution and the wide range
        of
        choices that our products offer to MDU owners and residents, we believe that
        our
        access agreements and our strategic alliances represent significant competitive
        and business strengths.
 
 
 4
 
 
 **Access
        Agreements**
 
 Our
        access agreements with the owners of MDU properties generally grant us exclusive
        rights to provide high-speed Internet, digital satellite television services,
        and in some cases video services altogether, for terms of seven to ten years,
        and in many cases a right of first refusal for other new telecommunications
        services. Most access agreements provide for marketing services by the owner
        or
        manager on our behalf, and in many cases, these marketing arrangements are
        exclusive. These access agreements are in the name of the Company and provide
        us
        with revenue streams either directly from property owners in bulk properties
        or
        from individual subscribers in choice or exclusive properties.
 
 **Strategic
        Alliance With DIRECTV**
 
 In
        May of 2000, we entered into a long-term proprietary System Operator
        Agreement with DIRECTV. Under this agreement we are able to establish and
        maintain MDU distribution systems in non-rural states of the United States
        (as
        identified in the agreement) and act as a commissioned sales agent for the
        marketing of DIRECTV programming to residents of MDU properties. We only
        incur
        costs associated with the implementation of our services and do not pay any
        of
        DIRECTV’s programming or broadcasting costs. On September 29, 2003, the
        Company entered into a new System Operator Agreement with DIRECTV, which
        replaced the System Operator Agreement previously executed by the Company,
        which
        was due to initially expire on May 19, 2005. The Company considers
        the
        following contractual changes as material:
 
 •
              The
                  upfront activation commission (the “commission”) that the Company receives
                  from DIRECTV for each new subscriber will now be paid to the Company
                  on
                  “gross” subscriber additions instead of “net” subscriber additions in a
                  given month and in an accelerated fashion. Commission is being
                  paid on
                  “gross” subscriber additions rather than “net” subscriber additions.
 
 •
              The
                  Company must obtain an annual (twelve month) commitment from a
                  subscriber
                  for DIRECTV programming in order to receive the commission.
 
 •
              The
                  commission can be proportionally “charged back” by DIRECTV only if a
                  subscriber disconnects within the annual commitment period (i.e.,
                  if a
                  subscriber disconnects after six months, the Company forfeits 50%
                  of the
                  commission). After twelve months, no portion of the commission
                  can be
                  “charged back.”
 
 •
              The
                  monthly residual payment paid to the Company by DIRECTV, which
                  is based
                  upon the monthly programming revenue to DIRECTV from a subscriber,
                  has
                  been increased.
 
 •
              The
                  new agreement has an initial term of three years with two, two-year
                  automatic renewal periods upon the Company’s achievement of certain
                  subscriber growth goals, for a total term of seven years.
 
 •
              The
                  agreement has an automatic extension of the entire agreement to
                  coincide
                  with the expiration date of the Company’s latest property access
                  agreement.
 
 In
        late
        December 2004, the Company executed an addendum to the September 29, 2003
        System
        Operator Agreement with DIRECTV, Inc. effective as of November 15, 2004.
        The new
        addendum provides for an “Analog Commission” to the Company for the addition of
        a new Bulk Choice Advantage (“BCA”) subscriber. However, the commission is not
        subject to an annual commitment from a subscriber and there is no proportional
        “charge back” by DIRECTV if a subscriber disconnects at any time. Due to the
        fact that no portion of the BCA “Analog Commission” is subject to the annual
        commitment or “charge back” provision, the “Analog Commission” is recognizable
        immediately upon the approval and acceptance of the subscriber by DIRECTV.
        The
        addendum also offers the “Individual Subscriber PPC” (prepaid programming
        commission). Contrary to the “Analog Commission”, the payment of the “Individual
        Subscriber PPC” by DIRECTV requires an annual commitment of the individual
        services and is subject to a “charge back” if a subscriber disconnects within
        the annual commitment. Accordingly, the revenue from the “Individual Subscriber
        PPC” is recognized over one year.
 
 5
 Under
        the
        DIRECTV agreement, we may not solicit sales or provide equipment for any
        other
        direct-to-home digital satellite television service in the United States.
        Consequently, we are totally dependent on DIRECTV for our digital set-top
        programming in the United States. We are not, however, prohibited from
        contracting with other program providers in connection with our private cable
        services. During the fiscal year ended September 30, 2005, revenues
        from
        DIRECTV direct-to-home (“DTH”) were 25% of our total revenues. DIRECTV is not
        required to use us on an exclusive basis and could either contract with others
        to install distribution systems and market programming in MDUs or undertake
        such
        activities directly through retail stores, as it does for single-family
        television households.
 
 DIRECTV
        offers in excess of 800 entertainment channels of digital quality video and
        compact disc quality audio programming. DIRECTV currently transmits via five
        high power Ku band satellites and has two spare satellites in orbit. We believe
        that DIRECTV’s extensive line up of pay per view movies and events and sports
        packages, including the exclusive “NFL Sunday Ticket,” have enabled DIRECTV to
        capture a majority market share of existing direct broadcast satellite (“DBS”)
        subscribers and will continue to drive strong subscriber growth for DIRECTV
        programming in the future.  Through our strategic relationship with
        DIRECTV, we expect to capitalize on the significant name recognition that
        DIRECTV creates and maintains as well as their immense advertising budget
        and
        advertised programming specials. Additionally, we benefit from the large-scale
        national marketing campaigns that are continuously run by DIRECTV.
 
 **MARKET**
 
 The
        United States MDU market represents a large niche market of potential
        telecommunications customers. There are over 26 million MDU television
        households out of a total of 100 million U.S. television households
        with
        the most densely populated MDU areas in the Northeast. Our short-term goal
        is to
        become a significant provider of bundled MDU products and services to the
        over
        8 million MDUs in the Northeastern United States marketplace. During
        the
        year ended September 30, 2005, we continued our expansion and growth in the
        greater Chicago metropolitan area and the Southeast.
 
 Historically,
        the MDU market has been served by local cable television operators. Generally,
        these providers used analog technology and MDU residents could not access
        digital or competitive services, although many cable companies have now begun
        the process of upgrading to a digital signal. More importantly, the relationship
        between the property owners and managers that control access to these MDU
        properties and the cable operator have been significantly strained over the
        past
        15 years due to the monopolistic sentiment of the cable operator.
 
 We
        believe that today’s MDU market offers us a very good business opportunity
        because:
 
 •
              Advances
                  in communication and information technology have created demand
                  for new
                  state-of-the-art services such as digital satellite television
                  and high
                  definition television (HDTV).
 
 •
              Regulatory
                  changes in the United States authorizing the provision of digital
                  satellite television services and local channels has given television
                  viewers the opportunity to choose the provider of their television
                  programming based on quality of signal, cost and variety of programming.
 
 •
              Our
                  marketing program focuses on the choice and benefits of using satellite
                  television programming over cable programming, including cost savings.
 
 •
              A
                  number of MDUs are underserved by cable television providers or
                  digital
                  satellite television private cable providers. In addition, the
                  market has
                  only been enhanced by the recent pull back by many competitors,
                  leaving
                  the residential MDU community with very little choice among alternative
                  service providers.
 
 •
              To
                  date, DIRECTV and other digital satellite television program providers
                  have focused primarily on the single-family residence market because
                  of
                  the lower cost of deployment and fewer technical difficulties than
                  those
                  incurred in MDU properties and are now gearing to capitalize on
                  the MDU
                  market.
 
 6
 **COMPETITION**
 
 The
        home
        entertainment and video programming industry is competitive, and we expect
        competition to intensify in the future. We face our most significant competition
        from the franchised cable operators. In addition, our competition includes
        other
        satellite providers, wireless cable and off-air broadcasters:
 
 *Hardwired
        Franchised Cable Systems.* Cable
        companies currently dominate the market in terms of subscriber penetration,
        the
        number of programming services available, audience ratings and expenditures
        on
        programming. The traditional cable companies serve an estimated 68% of U.S.
        television households. However, satellite services are gaining market share
        and
        DTH providers like us have a window of opportunity in which to acquire and
        consolidate a significant subscriber base by providing a higher quality signal
        over a vast selection of video and audio channels at a comparable or reduced
        price to most cable operators’ current service.
 
 *Other
        Operators.* Our
        next
        largest competitor is other operators who build and operate communications
        systems such as satellite master antenna television systems, commonly known
        as
        SMATV, or private cable headend systems, which generally serve condominiums,
        apartment and office complexes and residential developments.  We also
        compete with other national DBS operators such as Echostar.
 
 *Off-Air
        Broadcasters.* A
        majority of U.S. households that are not serviced by cable operators are
        serviced only by broadcast networks and local television stations (“off-air
        broadcasters”). Off-air broadcasters send signals through the air, which are
        received by traditional television antennas at the customer’s property. Signals
        are accessible to anyone with an antenna and programming is funded by
        advertisers. Audio and video quality is limited and service can be adversely
        affected by weather or by buildings blocking a signal.
 
 *Wireless
        Cable Systems (Multi-Channel Multi-Point Distribution Services (“MMDS”)).* MMDS
        systems are a hybrid of cable transmission and off-air broadcasting. MMDS
        was
        developed as an alternative where hard-wired cable systems are unavailable
        or
        not possible. MMDS programming is transmitted by local cable operators in
        a
        scrambled form through the air via microwave frequencies to a small microwave
        dish at the subscriber’s property, which converts the signal to a frequency band
        used by standard cable services. However, this system generally requires
        a
        direct “line-of-sight” from the transmission facility to the subscriber’s
        receiving dish, which limits its range and capability of being received.
        There
        are very few MMDS providers operating in the U.S. and they serve regional
        markets only.
 
 **GOVERNMENTAL
        REGULATION**
 
 *Federal
        Regulation.* In
        February 1996, Congress passed the Telecommunications Act, which
        substantially amended the Federal Communications Act of 1934, as amended
        (“Communications Act”). This legislation has altered and will continue to alter
        federal, state, and local laws and regulations affecting the communications
        industry, including certain of the services we provide. On November 29,
        1999, Congress enacted the Satellite Home Viewer Improvement Act of 1999
        (“SHVIA”), which amended the Satellite Home Viewer Act. SHVIA permits DBS
        operators to transmit local television signals into local markets. In other
        important statutory amendments of significance to satellite carriers and
        television broadcasters, the law generally seeks to place satellite operators
        on
        an equal footing with cable television operators in regards to the availability
        of television broadcast programming. SHVIA amends the Copyright Act and the
        Communications Act in order to clarify the terms and conditions under which
        a
        DBS operator may retransmit local and distant broadcast television stations
        to
        subscribers. The law was intended to promote the ability of satellite services
        to compete with cable television systems and to resolve disputes that had
        arisen
        between broadcasters and satellite carriers regarding the delivery of broadcast
        television station programming to satellite service subscribers. As a result
        of
        SHVIA, television stations are generally entitled to seek carriage on any
        DBS
        operator’s system providing local service in their respective markets. SHVIA
        creates a statutory copyright license applicable to the retransmission of
        broadcast television stations to DBS subscribers located in their markets.
        Although there is no royalty payment obligation associated with this license,
        eligibility for the license is conditioned on the satellite carrier’s compliance
        with the applicable Communications Act provisions and FCC rules governing
        the
        retransmission of such “local” broadcast television stations to satellite
        service subscribers. Noncompliance with the Communications Act and/or FCC
        requirements could subject a satellite carrier to liability for copyright
        infringement. We are subject to certain provisions of SHVIA. SHIVIA was
        essentially extended and re-enacted. The new law, the Satellite Home Viewer
        Extension and Reauthorization Act (SHVERA) was signed in December of 2004.
 
 7
 We
        are
        not directly subject to rate regulation or certification requirements by
        the
        Federal Communications Commission (FCC), the Telecommunications Act of 1996
        or
        state public utility commissions because our equipment installation and sales
        agent activities do not constitute the provision of common carrier or cable
        television services. As a resale agent for DIRECTV, we are not subject to
        regulation as a direct broadcast satellite (DBS) provider, but rely upon
        DIRECTV
        to procure all necessary re-transmission consents and other programming rights
        under the Communications Act of 1934 and the Copyright Act. To the extent
        that
        we may also elect to provide our MDU customers with transmission of signals
        not
        currently available via satellite, our offering of these services may be
        subject
        to compulsory copyright filings with the U.S. Copyright Office, although
        we do
        not expect the licensing fees to have a material adverse effect on our business.
        Our systems do not use or traverse public rights-of-way and thus are exempt
        from
        the comprehensive regulation of cable systems under the Communications Act
        of
        1934. Because we are subject to minimal federal regulation, have fewer
        programming restrictions, greater pricing freedom and are not required to
        serve
        any customer whom we do not choose to serve, we have significantly more
        competitive flexibility than do the franchised cable systems. We believe
        that
        these regulatory advantages help to make our satellite television systems
        competitive with larger franchised cable systems.
 
 *State
        and Local Cable System Regulation.* We
        do not anticipate that our deployment of satellite television services will
        be
        subject to state or local franchise laws primarily due to the fact that our
        facilities do not use or traverse public rights-of-way. Although we may be
        required to comply with state and local property tax, environmental laws
        and
        local zoning laws, we do not anticipate that compliance with these laws will
        have any material adverse impact on our business.
 
 *State
        Mandatory Access Laws.* A
        number of states have enacted mandatory access laws that generally require,
        in
        exchange for just compensation, the owners of rental apartments (and, in
        some
        instances, the owners of condominiums) to allow the local franchise cable
        television operator to have access to the property to install its equipment
        and
        provide cable service to residents of the MDU. Such state mandatory access
        laws
        effectively eliminate the ability of the property owner to enter into an
        exclusive right of entry with a provider of cable or other broadcast services.
        In addition, some states have anti-compensation statutes forbidding an owner
        of
        an MDU from accepting compensation from whomever the owner permits to provide
        cable or other broadcast services to the property. These statutes have been
        and
        are being challenged on constitutional grounds in various states. These state
        access laws may provide both benefits and detriments to our business plan
        should
        we expand significantly in any of these states.
 
 *Preferential
        Access Rights.* We
        generally negotiate exclusive rights to provide satellite services singularly,
        or in competition with competing cable providers, and also negotiate where
        possible “rights-of-first-refusal” to match price and terms of third-party
        offers to provide other communication services in buildings where we have
        negotiated broadcast access rights. We believe that these preferential rights
        of
        entry are generally enforceable under applicable law, however, current trends
        at
        state and federal level suggest that the future enforceability of these
        provisions may be uncertain. The FCC has recently issued an order prohibiting
        telecommunications service providers from negotiating exclusive contracts
        with
        owners of commercial MDU properties, though it deferred determination in
        a
        pending rulemaking whether to render existing exclusive access agreements
        unenforceable, or to extend this prohibition to residential MDUs due to an
        inadequate administrative record. Although it is open to question whether
        the
        FCC has statutory and constitutional authority to compel mandatory access,
        there
        can be no assurance that it will not attempt to do so. Any such action may
        undermine the exclusivity provisions of our rights of entry on the one hand,
        but
        would also open up many other properties to which we could provide a competing
        service. There can be no assurance that future state or federal laws or
        regulations will not restrict our ability to offer access payments, limit
        MDU
        owners’ ability to receive access payments or prohibit MDU owners from entering
        into exclusive agreements, any of which could have a material adverse effect
        on
        our business.
 
 8
 *Regulation
        of our High-Speed Internet Business.* Information
        service providers (ISPs), including Internet access providers, are largely
        unregulated by the FCC or state public utility commissions at this time (apart
        from federal, state and local laws and regulations applicable to business
        in
        general). However, there can be no assurance that this business will not
        become
        subject to regulatory restraints. Also, although the FCC has rejected proposals
        to impose additional costs and regulations on ISPs to the extent they use
        local
        exchange telephone network facilities, such change may affect demand for
        Internet related services. No assurance can be given that changes in current
        or
        future regulations adopted by the FCC or state regulators or other legislative
        or judicial initiatives relating to Internet services would not have a material
        adverse effect on our business.
 
 **EMPLOYEES**
 
 The
        Company had 107 employees, all full-time, as of September 30, 2005.
        None of
        the Company’s employees are represented by a labor union. The Company has
        experienced no work stoppages and believes that its employee relations are
        good.
 
 **RISK
        FACTORS**
 
 The
        Company faces a number of risks and uncertainties that could cause actual
        results or events to differ materially from those contained in any
        forward-looking statement. Additional risks and uncertainties not presently
        known to the Company or that are currently deemed to be immaterial may also
        impair the Company’s business operations. Factors that could cause or contribute
        to such differences include, but are not limited to, the following:
 
 ***The
        Company has incurred losses since inception and may incur future losses.***
 
 To
        date,
        the Company has not shown a profit in its operations. As of the Company’s year
        end September 30, 2005, it has accumulated losses of $30,945,299. The Company
        does not expect to have profitable operations for several years, and it cannot
        assure that it will ever achieve or attain profitability. If it cannot achieve
        operating profitability, the Company may not be able to meet its working
        capital
        requirements, which could have a material adverse effect on its business
        and may
        impair its ability to continue as a going concern.
 
 ***The
        Company has a limited operating history.***
 
 The
        Company commenced operations in August 1998 and was not active in the U.S.
        market until May of 2000. Accordingly, it has a limited operating history
        and
        its business strategy may not be successful. The Company’s failure to implement
        its business strategy or an unsuccessful business strategy could materially
        adversely affect its business, financial condition and operating losses.
 
 ***The
        Company depends upon its relationship with DIRECTV.***
 
 On
        September 29, 2003, the Company entered into a new System Operator Agreement
        with DIRECTV to install and maintain distribution systems in MDU properties.
        Under the Company’s agreement with DIRECTV, the Company may not maintain or
        market direct-to-home satellite broadcast services for others. Consequently,
        the
        Company is totally dependent upon DIRECTV for its set-top direct broadcast
        satellite programming. During the year ended September 30, 2005, revenues
        from
        DIRECTV were 25% of the Company’s total revenues. DIRECTV is not required to use
        the Company on an exclusive basis for marketing its programming to MDUs.
        The
        Company’s contract with DIRECTV can be terminated under various circumstances,
        including, in particular, an uncured material breach by the Company of the
        contract. Any such termination may have material affect on the Company’s
        business.
 
 Because
        the Company is an intermediary for DIRECTV, events the Company does not control
        at DIRECTV could adversely affect the Company. One of the most important
        of
        these is DIRECTV’s ability to provide programming that appeals to mass
        audiences. DIRECTV generally does not produce its own programming; it purchases
        programming from third parties. DIRECTV’s success - and accordingly the
        Company’s - depends in large part on DIRECTV’s ability to select popular
        programming sources and acquire access to this programming on favorable terms.
        The Company has no control or influence over this. If DIRECTV is unable to
        retain access to its current programming, the Company cannot be assured that
        DIRECTV would be able to obtain substitute programming, or that such substitute
        programming would be comparable in quality or cost to its existing programming.
        If DIRECTV is unable to continue to provide desirable programming, the Company
        would be placed at a competitive disadvantage and may lose subscribers and
        revenues.
 
 9
 ***The
        Company may be unable to meet its future capital expansion requirements.***
 
 The
        Company may require additional capital to finance expansion or growth at
        levels
        greater than its current business plan. Because of the uncertainties in raising
        additional capital, there can be no assurance that the Company will be able
        to
        obtain the necessary capital to finance its growth initiatives. Insufficient
        capital may require the Company to delay or scale back its proposed development
        activities.
 
 ***The
        Company’s management and operational systems might be inadequate to handle its
        potential growth.***
 
 The
        Company is experiencing rapid growth that could place a significant strain
        upon
        its management and operational systems and resources. Failure to manage the
        Company’s growth effectively could have a material adverse effect upon its
        business, results of operations and financial condition and could force it
        to
        halt its planned continued expansion, causing the Company to lose its
        opportunity to gain significant market share. The Company’s ability to compete
        effectively as a provider of digital satellite television and high-speed
        Internet products and services and to manage future growth will require the
        Company to continue to improve its operational systems, its organization
        and its
        financial and management controls, reporting systems and procedures. The
        Company
        may fail to make these improvements effectively. Additionally, the Company’s
        efforts to make these improvements may divert the focus of its personnel.
 
 The
        Company must integrate its key executives into a cohesive management team
        to
        expand its business. If new hires perform poorly, or if it is unsuccessful
        in
        hiring, training and integrating these new employees, or if it is not successful
        in retaining its existing employees, the Company’s business may be harmed. To
        manage the expected growth of the Company’s operations and personnel, the
        Company will need to increase its operational and financial systems, procedures
        and controls. 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 off-air broadcasters. Also, DIRECTV itself
        could
        corporately focus on MDUs. Other companies with substantially greater assets
        and
        operating histories could enter this market. The Company’s competitors may be
        able to respond more quickly to new or emerging technologies and changes
        in
        customer requirements and devote greater resources to develop, promote and
        sell
        their products or services. In addition, increased competition could result
        in
        reduced subscriber fees, reduced margins and loss of market share, any of
        which
        could harm the Company’s business. ****** The
        Company cannot assure that it can compete successfully against current or
        future
        competitors, many of which have substantially more capital, existing brand
        recognition, resources and access to additional financing. All these competitive
        pressures may result in increased marketing costs, or loss of market share
        or
        otherwise may materially and adversely affect the Company’s business, results of
        operations and financial condition.
 
 Cable
        television operators have a large, established subscriber base, and many
        cable
        operators have significant investments in, and access to, programming. One
        of
        the competitive advantages of DBS providers is their ability to provide
        subscribers with more channels and a better quality digital signal than
        traditional analog cable television systems. Many cable television operators
        have made significant investments to upgrade their systems from analog to
        digital, significantly increasing the number and variety of channels and
        the
        quality of the transmission they can provide to their subscribers. As a result
        of these upgrades, cable television operators have become better able to
        compete
        with DBS providers. If competition from cable television operators should
        increase in the future, the Company could experience a decrease in its number
        of
        subscribers or increased difficulty in obtaining new subscriptions.
 
 10
 ***The
        Company depends on key personnel to maintain its success.***
 
 The
        Company’s success depends substantially on the continued services of its
        executive officers and key employees, in particular Sheldon Nelson and certain
        other executive officers. The loss of the services of any of the Company’s key
        executive officers or key employees could harm its business. None of the
        Company’s key executive officers or key employees currently has a contract that
        guarantees their continued employment with the Company. There can be no
        assurance that any of these persons will remain employed by the Company or
        that
        these persons will not participate in businesses that compete with it in
        the
        future.
 
 ***Corporate
        governance-related issues.***
 
 At
        present, the Company’s Chief Executive Officer, Sheldon Nelson, is also acting
        as the Company’s Chief Financial Officer. Because both the CEO and CFO positions
        are currently held by a single person, outside of the Board of Directors
        and the
        audit committee, no independent oversight of the CEO or the CFO function
        currently exist within the Company’s management structure. The Company intends
        to be Sarbanes-Oxley compliant for its internal controls and procedures by
        the
        end of fiscal 2006.
 
 ***System
        disruptions could affect the Company.***
 
 The
        Company’s ability to attract and retain subscribers depends on the performance,
        reliability and availability of its services and infrastructure. The Company
        may
        experience periodic service interruptions caused by temporary problems in
        its
        own systems or in the systems of third parties upon whom it relies to provide
        service or support. Fire, floods, hurricanes, earthquakes, power loss,
        telecommunications failures, break-ins and similar events could damage these
        systems and interrupt the Company’s services. Service disruptions could
        adversely affect the Company’s revenue and, if they were prolonged, would
        seriously harm its business and reputation. The Company does not carry business
        interruption insurance to compensate for losses that may occur as a result
        of
        these interruptions. Any of these problems could adversely affect its business.
        If any of the DIRECTV satellites are damaged or stop working partially or
        completely, although DIRECTV has a contingency satellite plan, DIRECTV may
        not
        be able to continue to provide its subscribers with programming services.
        The
        Company would in turn likely lose subscribers, which could materially and
        adversely affect its operations and financial performance. DBS technology
        is
        highly complex and is still evolving. As with any high technology product
        or
        system, it may not function as expected.
 
 ***The
        market for the Company’s products and service are subject to technological
        change.***
 
 The
        market for digital satellite television and high-speed Internet products
        and
        services is characterized by rapid change, evolving industry standards and
        frequent introductions of new technological developments. These new standards
        and developments could make the Company’s existing or future products or
        services obsolete. Keeping pace with the introduction of new standards and
        technological developments could result in additional costs or prove difficult
        or impossible. The failure to keep pace with these changes and to continue
        to
        enhance and improve the responsiveness, functionality and features of the
        Company’s services could harm its ability to attract and retain users.
 
 ***The
        Company may be affected if the United States participates in wars or military
        or
        other action; the Company may be affected by international terrorism.***
 
 Involvement
        in a war or other military action or acts of terrorism may cause significant
        disruption to commerce throughout the world. To the extent that such disruptions
        result in (i) delays or cancellations of customer orders, (ii) a general
        decrease in consumer spending on video broadcast and information technology,
        (iii) the Company’s inability to effectively market and distribute its products
        or (iv) its inability to access capital markets, the Company’s business and
        results of operations could be materially and adversely affected. The Company
        is
        unable to predict whether the involvement in a war or other military action
        will
        result in any long-term commercial disruptions or if such involvement or
        responses will have any long-term material adverse effect on its business,
        results of operations, or financial condition.
 
 11
 ***The
        Company may issue preferred stock and Common Stock in the future.***
 
 The
        Company’s Board of Directors has the authority to issue up to 5,000,000 shares
        of preferred stock and to determine the price, rights, preferences, privileges
        and restrictions, including voting rights, of those shares without any vote
        or
        action by the Company’s common stockholders. The rights of the holders of the
        Common Stock will be subject to, and could be materially adversely affected
        by,
        the rights of the holders of any preferred stock that may be issued in the
        future. The issuance of preferred stock, while providing flexibility in
        connection with corporate purposes, could have the effect of delaying, deferring
        or preventing a change in control, discouraging tender offers for the Common
        Stock, and materially adversely affecting the voting rights and market price
        of
        the Common Stock.
 
 The
        Company’s certificate of incorporation authorizes the issuance of 70,000,000
        shares of Common Stock. The future issuance of Common Stock may result in
        dilution in the percentage of the Company’s Common Stock held by its existing
        stockholders. Also, any stock the Company sells in the future may be valued
        on
        an arbitrary basis by it and the issuance of shares of Common Stock for future
        services, acquisitions or other corporate actions may have the effect of
        diluting the value of the shares held by existing stockholders.
 
 ***Provisions
        in the Company’s charter documents and Delaware law could prevent or delay a
        change in control, which could reduce the market price of the Company’s Common
        Stock.***
 
 Provisions
        in the Company’s certificate of incorporation and bylaws may have the effect of
        delaying or preventing a change of control or changes in the Company’s
        management. Pursuant to the Company’s certificate of incorporation the Company
        has a staggered Board of Directors whereby the directors are elected to serve
        three-year terms, are separated into three classes and each class is elected
        in
        a different year. The staggered Board of Directors may prevent or frustrate
        stockholder attempts to replace or remove current Board members as they will
        have to wait until each class of directors is up for election before the
        directors can be voted out of office. The Company’s certificate of incorporation
        authorizes the issuance of up to 5,000,000 shares of preferred stock with
        such
        rights and preferences as may be determined from time to time by the Board
        of
        Directors. The Board of Directors may, without shareholder approval, issue
        preferred stock with dividends, liquidation, conversion, voting or other
        rights
        that could adversely affect the voting power or other rights of the holders
        of
        the Company’s Common Stock. The ability of the Board to issue preferred stock
        may prevent or frustrate shareholder attempts to replace or remove current
        management. In addition, certain provisions of Delaware law may discourage,
        delay or prevent someone from acquiring or merging with the Company. These
        provisions could limit the price that investors might be willing to pay in
        the
        future for shares of the Company’s Common Stock.
 
 ***Absence
        of dividends on Common Stock.***
 
 The
        Company has never declared or paid any dividends on its Common Stock. The
        declaration and payment in the future of any cash or stock dividends on the
        Common Stock will be at the discretion of the Board of Directors of the Company
        and will depend upon a variety of factors, including the ability of the Company
        to service its outstanding indebtedness, if any, and to pay dividends on
        securities ranking senior to the Common Stock, the Company’s future earnings, if
        any, capital requirements, financial condition and such other factors as
        the
        Company’s Board of Directors may consider to be relevant from time to time.
        Earnings of the Company, if any, are expected to be retained for use in
        expanding the Company’s business. Accordingly, the Company does not expect to
        declare or pay any dividends on its Common Stock in the foreseeable future.
 
 12
 ***The
        price of the Company’s securities may be volatile and subject to wide
        fluctuations.***
 
 The
        market price of the Company’s securities may be volatile and subject to wide
        fluctuations. If the Company’s revenues do not grow or grow more slowly than it
        anticipates, or, if operating or capital expenditures exceed its expectations
        and cannot be adjusted accordingly, or if some other event adversely affects
        the
        Company, the market price of the Company’s securities could decline. If
        securities analysts alter their financial estimates of the Company’s financial
        condition it could effect the price of the Company’s securities. Some other
        factors that could affect the market price of the Company’s securities include
        announcements of new product or service offerings, technological innovations
        and
        competitive developments. In addition, if the market for stocks in the Company’s
        industry or the stock market in general experiences a loss in investor
        confidence or otherwise fails, the market price of the Company’s securities
        could fall for reasons unrelated to its business, results of operations and
        financial condition. The market price of the Company’s stock also might decline
        in reaction to conditions, trends or events that affect other companies in
        the
        market for digital satellite television and high-speed Internet products
        and
        services even if these conditions, trends or events do not directly affect
        the
        Company. In the past, companies that have experienced volatility in the market
        price of their stock have been the subject of securities class action
        litigation. If the Company were to become the subject of securities class
        action
        litigation, it could result in substantial costs and a diversion of management’s
        attention and resources.
 
 ***The
        public trading market for the Company’s Common Stock is limited and may not be
        developed or sustained.***
 
 There
        is
        a limited trading market for the Company’s Common Stock. The Common Stock has
        been traded under the symbol “MDTV” on the Over-The Counter Bulletin Board, a
        NASDAQ-sponsored and operated inter-dealer automated quotation system for
        equity
        securities. There can be no assurance that an active and liquid trading market
        will develop or, if developed that it will be sustained.
 
 **Item
        2.** **** **Description
        of Properties**
 
 Our
        headquarters are outside New York City in Totowa, New Jersey, where we
        centralize our corporate administrative functions. The office houses our
        senior
        management, accounting and billing functions, call center and subscription
        management system. We currently hold a lease in Totowa, New Jersey of 14,909
        square feet at a current monthly cost of $16,073, expiring July 31,
        2009.
        We believe that this space is adequate to suit our needs for the foreseeable
        future.
 
 The
        Company recently entered into a lease agreement for its office and warehouse
        location in Chicago for approximately 4,100 square feet that runs through
        September 30, 2008 at a monthly cost of $3,587 per month. This space is adequate
        to suit our needs for the foreseeable future in the Chicago metropolitan
        area.
 
 The
        Company recently entered into a lease agreement for its office and warehouse
        location in South Florida for approximately 2,000 square feet that runs through
        January 14, 2008 at a monthly cost of $2,394 per month. This space is adequate
        to suit our needs for the foreseeable future in the South Florida metropolitan
        area.
 
 In
        addition, we carry short term office/warehouse lease space in Connecticut,
        Florida, Massachusetts and Maryland.
 
 **Item
        3.** **** **Legal
        Proceedings**
 
 From
        time
        to time, the Company may be subject to legal proceedings, which could have
        a
        material adverse effect on its business. At September 30, 2005 and through
        the
        date of this filing, the Company was a party to one litigation matter.
 
 On
        or
        about March 11, 2005, the Company brought suit against Star Choice
        Communications Inc. for (i) a dispute over the amount of goods and services
        tax
        (GST) that was owed to MDU Communications Inc. (the Canadian subsidiary)
        on
        associated programming commissions from 2000 and 2001, and (ii) non-payment
        of
        programming commissions on a specific property site for 2004 and 2005. The
        case
        was verbally settled in September with the Company to receive $73,500 (CDN)
        and
        the parties are in the process of drafting settlement and dismissal documents.
 
 13
 **Item
        4.** **** **Submission
        of Matters to a Vote of Security Holders**
 
 There
        was
        no Annual General Meeting of Stockholders during fiscal 2005.
 
 **PART
        II**
 
 **Item
        5.**  **Market for Common Equity and Related Stockholder Matters**
 
 **A.** **** **Market
        for Common Stock**
 
 The
        Company’s common stock is not traded on a national securities exchange or the
        NASDAQ Stock Market. The common stock has been quoted on the OTC Bulletin
        Board
        under the symbol “MDTV” since December 2, 1998. The range of high and low
        bid prices on the OTC Bulletin Board during each fiscal quarter for the past
        two
        years, as reported by Bloomberg L.P., is as follows:
 
 **Quarter
                  Ended**
              
              
              **High**
              
              
              **Low**December 31,
                  2003
              
              $
              2.01
              
              $
              0.71March 31,
                  2004
              
              $
              3.05
              
              $
              1.75June 30,
                  2004
              
              $
              3.01
              
              $
              1.98September 30,
                  2004
              
              $
              2.60
              
              $
              2.15December 31,
                  2004
              
              $
              3.50
              
              $
              2.46March 31,
                  2005
              
              $
              3.48
              
              $
              2.43June 30,
                  2005
              
              $
              2.72
              
              $
              1.95September 30,
                  2005
              
              $
              2.23
              
              $
              1.35
 
 These
        quotations reflect inter-dealer prices, without retail mark-up, mark-down
        or
        commission, and may not represent actual transactions.
 
 **“Penny
        Stock” Rules**
 
 The
        Company’s common stock is a “penny stock” which is subject to Rule 15g-9
        under the Securities Exchange Act of 1934. It is considered penny stock because
        it is not listed on a national exchange or NASDAQ, its bid price is below
        $5.00
        per share, has net tangible assets of less than $5,000,000, and average annual
        revenue has not exceeded $6,000,000 in the past three years.  As
        a
        result, broker-dealers must comply with additional sales practices requirements.
        Broker-dealers must determine that the investment is suitable for the buyer
        and
        receive the buyer’s written agreement to the transaction before they can sell
        the Company’s common stock to buyers who are not the broker-dealer’s established
        customers or institutional accredited investors. In addition, broker-dealers
        must deliver to the buyer before the transaction a disclosure
        schedule which explains the penny stock market and its risks, discloses
        the
        commissions to be paid to the broker-dealer, discloses the stock’s bid and offer
        quotations, and discloses if the broker-dealer is the sole market maker in
        the
        stock.
 
 **B.** **** **Holders
        of Record**
 
 As
        of
        December 19, 2005, the Company had 114 holders of record of its shares
        of
        common stock, excluding shares held by broker-dealers, with an approximate
        total
        of 2,000 shareholders.
 
 14
 **C.** **** **Dividends**
 
 The
        Company has not paid any cash dividends and does not anticipate that it will
        pay
        cash dividends on our common stock in the foreseeable future.  Payment
        of
        cash dividends is within the discretion of our Board of Directors and will
        depend, among other factors, upon our earnings, financial condition and capital
        requirements.  There are no restrictions on the payment of dividends.
 
 **D.** **** **Securities
        Authorized for Issuance under Equity Compensation Plans**
 
 
 **EQUITY
        COMPENSATION PLAN INFORMATION**
 **(September 30,
        2005)**
 
 **Plan
                  category**
              
              **Number
                  of securities to be**
                **issued
                  upon exercise of**
                **outstanding
                  options,**
                **warrants
                  and rights**
              
              **Weighted-average
                  exercise**
                **price
                  of outstanding options,**
                **warrants
                  and rights**
              
              **Number
                  of securities**
                **remaining
                  available for**
                **future
                  issuance under equity**
                **compensation
                  plans**Equity
                  compensation plans approved by security holders
              
              3,300,342
                  shares
              **(1)**
              $
              1.79
              
              43,860Equity
                  compensation plans not approved by security holders
              0
              **(2)**
              $
              
              
              0
 ____________
 
 (1)  2001
        Stock Option Plan, approved by the shareholders on May 10, 2001, see
        Note
        4(a), contained herein. On August 5, 2004, the stockholders approved an increase
        in the number of shares available under the 2001 Stock Option Plan from a
        total
        of 4,000,000 to 5,600,000 common shares.
 
 (2)  Supplier
        Stock Option Plan, see Note 4(a), contained herein. As of September 30, 2005,
        all 250,000 options granted under the Supplier Stock Option Plan have been
        exercised.
 
 **E.** **** **Recent
        Sales of Unregistered Securities Sales**
 
 **Preferred
        Stock**
 
 There
        were no sales or issuances of these securities during the fiscal year ended
        September 30, 2005.
 
 **Common
        Stock**
 
 On
        October 12, 2004, the Company issued 3,500 unregistered shares of common
        stock
        to a new employee.
 
 On
        November 18, 2004, the Company and PDI Communications, Inc. (“PDI”) executed an
        agreement for the termination of the Memorandum of Understanding for a Strategic
        Partnership (the “PDI Agreement”) executed on February 12, 2004 (see Note 4 in
        the Audited Financial Statements). As final compensation, PDI (i) returned
        to
        the Company for cancellation the original stock certificate representing
        250,000
        shares of common stock, (ii) returned to the Company for cancellation the
        original warrant agreement for the purchase of 250,000 shares of common stock
        exercisable at $1.84 per share, and (iii) executed a standard release for
        any
        and all causes of action under the PDI Agreement. In return, the Company
        (i)
        re-issued to PDI a stock certificate for 50,000 registered shares of common
        stock, and (ii) agreed that PDI shall remain the Company’s preferred equipment
        provider for a period of one year. The Company had initially recorded the
        fair
        value of the 250,000 shares and the warrants to purchase 250,000 shares of
        $1,100,000 as unearned compensation of which $219,791 was amortized to expense
        during the period from February 12, 2004 to September 30, 2004. The 50,000
        shares issued in connection with the termination of the PDI Agreement had
        a fair
        value of $152,500. Accordingly, the Company recorded a net credit to expense
        of
        $67,291 during the three months ended December 31, 2004 thereby reducing
        the
        total compensation charged to expense over the period from February 12, 2004
        to
        November 18, 2004 to $152,500. The Company also reversed the remaining $835,209
        of unearned compensation.
 
 15
 On
        November 24, 2004, the Company issued 6,063,440 shares of unregistered common
        stock in connection with the closing of a private equity placement. In addition,
        warrants to purchase 2,122,204
        shares of unregistered common stock were also issued. The warrants have an
        exercise price of 3.40 per share and carry a three-year term. The Company
        closed
        on all 6,063,440 units at a per unit price of $2.68, for $16,250,000 in gross
        proceeds. After payment of fees and expenses, the Company received net proceeds
        of just over $15,000,000. CRT Capital Group LLC acted as placement agent
        for the
        financing.  The
        securities were offered and sold to accredited investors only pursuant to
        Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated
        thereunder. The net proceeds will be used for the development of the Company’s
        services and for general corporate purposes. The Registration Statement for
        these securities most recently became effective June 14, 2005.
 
 On
        May
        19, 2005, the Company and B.A.A.M. LLC (“BAAM”) executed an agreement for the
        termination of the Memorandum of Understanding for a Strategic Partnership
        (the
“BAAM Agreement”) executed on February 12, 2004 (see Note 4 in the Audited
        Financial Statements). The termination resulted in the return to the Company
        for
        cancellation of the original stock certificate representing 250,000 shares
        of
        common stock and executed a standard release for any and all causes of action
        under the BAAM Agreement. In return, the Company re-issued to BAAM a stock
        certificate for 55,000 registered shares of common stock.  The
        Company had initially recorded the fair value of the 250,000 shares of $550,000
        as unearned compensation of which $206,250 was amortized to expense during
        the
        period from February 12, 2004 to March 31, 2005. The 55,000 shares issued
        in
        connection with the termination of the BAAM agreement had a fair value of
        $117,700. Accordingly, the Company recorded a net credit to expense of $88,550
        during the three months ended June 30, 2005 thereby reducing the total
        compensation charged to expense over the period from February 12, 2004 to
        May
        19, 2005 to $117,700. The Company also reversed the remaining $343,750 of
        unearned compensation.
 
 **Warrants**
 
 In
        connection with the November 24, 2004 private placement described above,
        the
        Company issued warrants to purchase 2,122,204 shares of unregistered common
        stock at an exercise price of $3.40 per share that expire on November 24,
        2007.
        These shares underlying the warrants were subsequently registered.
 
 During
        the twelve months ended September 30, 2005, previously unregistered warrants
        to
        purchase 250,000 shares of common stock at an exercise price of $1.84 were
        cancelled as per the termination agreement with PDI.
 
 **Options**
 
 There
        were no issuances of options to purchase unregistered common stock during
        the
        fiscal year ended September 30, 2005.
 
 **F.  
        Purchases of Equity Securities**
 
 None
 
 **Item
        6.  Management’s Discussion and Analysis or Plan 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.
 
 16
 **OVERVIEW**
 
 *In
        this discussion, the words “MDU Communications,”  “the Company,” 
“we,”  “our,” and “us” refer to MDU Communications International, Inc.
        together with its subsidiaries, where appropriate.*
 
 MDU
        Communications International, Inc. concentrates exclusively on delivering
        state-of-the-art digital satellite television and high-speed Internet solutions
        to the United States multi-dwelling unit (“MDU”) residential market, estimated
        to include 26 million residences. MDUs include apartment buildings,
        condominiums, gated communities, universities, nursing homes, hospitals and
        other properties having multiple units located within a defined area. We
        seek to
        differentiate ourselves from other service providers through a unique strategy
        of balancing the information and communication needs of today’s MDU residents
        with the technology concerns of property managers and owners and providing
        the
        best overall service to both. To accomplish this objective, we have partnered
        with DIRECTV and have been working with large U.S. property owners and real
        estate investment trusts (“REITs”) such as AvalonBay Communities, Trammell Crow
        Residential, Roseland Property Company, KSI Services, The Related Companies,
        as
        well as many others, to understand and meet the technology needs of these
        groups.
 
 The
        Company earns its revenue through the sale of digital satellite television
        programming and high-speed Internet services to owners and residents of MDUs.
        We
        negotiate long-term access agreements with the owners and managers of MDU
        properties allowing us the right to provide digital satellite television
        and
        high-speed Internet services, and potentially other services, to their
        residents, resulting in monthly annuity-like revenue streams. We offer two
        types
        of satellite television service - DBS and Private Cable. First, we offer
        Direct
        Broadcast Satellite (“DBS”), which uses a set-top digital receiver for residents
        to receive state-of-the-art digital satellite and local channel programming.
        For
        DBS, we exclusively offer DIRECTV Ò programming
        packages.  From our DBS offerings we receive the following revenue;
        (i) a
        substantial upfront subscriber commission from DIRECTV for each new subscriber,
        (ii) a percentage of the fees charged by DIRECTV to the subscriber each month
        for programming, (iii) a per subscriber monthly digital access fee we bill
        subscribers for rental of the set-top box and connection to the property
        satellite network system, and (iv) occasional other marketing incentives
        from
        DIRECTV. Second, we offer a Private Cable video service, where analog or
        digital
        satellite television programming can be tailored to the needs of an individual
        property and received through normal cable-ready televisions. Our net revenues
        from Private Cable result from the difference between the wholesale prices
        charged to us by programming providers and the price we charge subscribers
        for
        the private cable programming package. We provide the DBS and Private Cable
        services on an individual subscriber basis, but in many properties we provide
        these services in bulk, directly to the property owner, resulting in one
        invoice
        and thus minimizing churn, collection and bad debt exposure. From subscribers
        to
        our Internet service, we earn a monthly Internet access service fee. 
        Again, in many properties, we provide this service in bulk.
 
 Fiscal
        2005 was marked by significant positive change, accomplishment and growth
        for
        the Company. First, the Company attracted several new executives and directors
        who have brought a positive change in culture to the Company, a culture that
        can
        take the Company to its next level of growth and success. In May of this
        year,
        Tom Tracey joined the Company as its new President and Chief Operating Officer. Mr.
        Tracey has fifteen years experience in the high-growth subscriber based video
        and Internet service industry, most recently serving as Vice President of
        Broadband Services at national Internet service provider EarthLink. In this
        capacity he was responsible for a base of over one million subscribers to
        cable
        modem, DSL and satellite services with monthly growth rates in excess of
        25,000
        subscribers. Prior to joining EarthLink, Mr. Tracey was a Director at Directv,
        Inc. responsible for the launch, implementation and business development
        of
        DIRECTV Ò services
        in South America, which achieved growth of over one million subscribers.
        In
        June, Joe Nassau joined the Company as Vice President of Subscriber Operations,
        which includes the Company’s call center, subscriber lifecycle process,
        subscriber operations and support systems, dispatch and training. 
        Mr.
        Nassau brings over twenty years of subscriber based experience in pay television
        and broadband in a number of functional and operational management roles,
        including the launch and management of Home Box Office’s (HBO) call center, the
        launch of Galaxy Latin America (DIRECTV in South America) and the launch
        of
        EarthLink’s high-speed Internet service over Time Warner Cable’s network.
 
 17
 In
        addition to Mr. Tracey and Mr. Nassau, the Company announced in July 2005
        that
        Steve Cox and Carolyn Howard accepted appointments to its Board of Directors.
        Mr. Cox was most recently executive vice president of Sales, Distribution
        and
        Business Development for DIRECTV, Inc. In this position he was responsible
        for
        overseeing all elements of DIRECTV’s sales and distribution strategy, including
        management of national and regional consumer electronics retailers, telephony
        partners, independent accounts and internal sales; execution of new sales
        programs; management of commercial and multi-dwelling unit (MDU) sales programs;
        and sales operations and support. Prior to overseeing the Sales and Distribution
        Division, Mr. Cox served as executive vice president of DIRECTV Global Digital
        Media and as senior vice president of New Ventures, where he was responsible
        for
        structuring and negotiating DIRECTV’s strategic partnerships, acquisitions and
        investments, as well as developing new business opportunities. Ms. Howard
        has
        been employed by Howard Interests since 1987, a venture capital firm, of
        which
        she is a co-founder and manager. Prior to that, Ms. Howard owned and managed
        a
        personnel and staffing firm and held a position in banking with a focus on
        Fannie Mae/Freddie Mac lending. Additionally, she has held positions with
        securities firms trading and covering institutional accounts. In 1992 through
        1997, she was CEO and COO of one of New Hampshire’s largest food service and
        bottled water companies, which she sold in 1997 to Vermont Pure Springs,
        Inc., a
        publicly traded company.
 
 During
        the year the Company also reassessed its organizational structure and shifted
        from a centralized to decentralized management of its operating regions,
        with
        each region now being lead by an experienced general manager. The Company
        now
        operates as three distinct regions, Northeast, Southeast and Midwest, with
        the
        corporate headquarters housed in the Northeast region. This is positively
        impacting the Company’s growth and customer service levels and provides a more
        scalable corporate structure. The Company signed leases to double its square
        footage in New Jersey, and signed new leases for office space in South
        Florida, Chicago and the metro Washington, DC area. The Company had 107 full
        time employees as of September 30, 2005.
 
 Secondly,
        the Company experienced great accomplishment during fiscal year 2005 in the
        areas of finance, technology and strategic partnerships. In November of 2004,
        the Company completed a $16.25 million private placement. Sold to accredited
        investors only, the Company offered up to 6,063,440 units, consisting of
        one
        share of common stock and three-tenths of one three-year warrant to purchase
        one
        share of common stock at an exercise price of $3.40. The Company closed on
        all
        6,063,440 units at a per unit price of $2.68, for $16,250,000 in gross proceeds.
        After the payment of fees and expenses, the Company received net proceeds
        of
        just over $15.0 million. CRT Capital Group LLC acted as placement agent for
        the
        financing.
 
 During
        the fiscal year the Company participated in a beta test of new technology
        that
        allows condominium owners and apartment renters to have unlimited access
        to the
        full DIRECTV Ò television experience due to a dramatically simplified process of delivering
        programming and services to customers living in multi-family housing. A new
        advanced multi-satellite distribution system was developed by DIRECTV and
        first
        installed by the Company in a new luxury apartment complex in New York City,
        which is capable of receiving and distributing programming - more than 225
        channels of sports, news and family entertainment - from each of DIRECTV’s
        existing satellites via a single wire to the MDU customer’s home, whereas
        multiple wires, which in many cases did not exist in most properties, were
        previously required. This new solution more efficiently supports the use
        of
        multiple receivers, has the ability to deliver other national, local and
        high-definition programming services and provides for a more efficient
        installation and maintenance of satellite distribution equipment. This will
        allow the Company to realize greater efficiencies in deployment, an overall
        decrease in installation costs, increased property penetration rates with
        the
        advent of additional DIRECTV services and a more consistent approach to
        marketing.
 
 The
        Company also entered into an agreement with DIRECTV that commenced in December
        to deploy a new satellite video program developed specifically for the
        multi-dwelling unit market -- the Bulk/Choice Advantage. The
        BCA
        program bundles approximately 70 high quality DIRECTV individual programming
        channels (including local channels) into a DIRECTV approved private cable
        service package sold by the Company on a “bulk” basis to property owners for all
        residential units to access. For a nominal monthly fee, each individual resident
        can “upgrade” to the DIRECTV Total Choice Ò programming package which offers more than 60 additional digital programming
        channels, as well as giving residents the ability to access all DIRECTV services
        including premium movie services, High Definition Television (HDTV),
        Pay-Per-View movies and events, NFL SUNDAY TICKETTM, foreign language
        programming, and more. During the first ten months of this program, the Company
        added 2,941 subscribers to this offering.
 
 18
 Of
        the
        accomplishments this fiscal year, the negotiation of a three-year Sales Teaming
        Agreement between the Company and BellSouth Corporation, a Fortune 100 Company,
        which was signed in early November, to jointly market and deploy services
        to the
        residential MDU market in the BellSouth territory, was the most important.
        Under
        this agreement, BellSouth and the Company will offer innovative bundles of
        voice, data and DIRECTV Ò programming packages specifically designed for the MDU market. Joint proposals
        and coordinated deployment of services will provide multi-family property
        owners
        and condominium boards with a full menu of premium residential technology
        services that will result in time and cost savings to residents. BellSouth’s
        comprehensive portfolio of voice and data products, coupled with MDU
        Communications’ ability to deliver leading edge, innovative entertainment will
        provide the multi-family market with one dependable source for the services
        that
        meet their needs. BellSouth and the Company will be training and leveraging
        each
        other’s sales force for the cross-selling of products and qualifying prospective
        property leads for both types of services, which should accelerate the
        negotiation and deployment process. The Company believes that teaming with
        BellSouth, and mutually leveraging assets, in these southeastern states will
        be
        a catalyst to greatly accelerate the Company’s deployment of its video services
        and connect the Company’s footprint all along the eastern seaboard.
 
 Third
        and
        finally, growth was an important factor in the success of fiscal 2005. Financially,
        the Company has been growing at a strong and steady pace. The Company increased
        revenues by 104% over fiscal year 2004 and increased the average revenue
        per
        user/subscriber (“ARPU”) by 26% from $21.80 to $27.42. The Company has also been
        more cognizant to attract and obtain the “right” subscriber and to convert low
        average revenue private cable subscribers, having an ARPU of $16.77, to bulk
        DIRECTV service subscribers, having an ARPU of $33.75. During the year, the
        Company converted 876 of its existing private cable subscribers to DIRECTV
        offerings. DIRECTV has been providing equipment and marketing assistance
        to the
        Company’s effort of converting properties from traditional private cable to
        DIRECTV programming. In addition, high margin subscribers to the Company’s
        high-speed Internet service increased 93% during fiscal year 2005. The Company
        has a strong balance sheet as of September 30, 2005 with $9,358,021 in cash
        and
        cash equivalents and total assets valued at $29,260,416.
 
 Regarding
        subscriber growth, the Company experienced a 50% increase in its subscriber
        base
        during fiscal 2005, from 24,738 total subscribers as of September 30, 2004
        to
        37,124 total subscribers as of September 30, 2005. A
        quarterly breakdown of our subscribers during the fiscal year is as
        follows:
 
 **Service
                  Type**
              **Subscribers**
                **as
                  of**
                **Sept.
                  30, 2004**
              **Subscribers**
                **as
                  of**
                **Dec.
                  31, 2004**
              **Subscribers**
                **as
                  of**
                **March
                  31, 2005**
              **Subscribers**
                **as
                  of**
                **June
                  30, 2005**
              **Subscribers**
                **as
                  of**
                **Sept.
                  30, 2005****Bulk
                  DTH**
              2,563
              3,229
              3,418
              3,963
              5,470**DTH
                  Choice / Exclusive**
              4,895
              5,001
              5,576
              5,833
              6,860**Bulk
                  PC**
              13,705
              13,802
              15,589
              16,869
              16,587**PC
                  Choice / Exclusive**
              1,576
              1,583
              1,688
              1,370
              1,399**DTH
                  “BCA” Program**
              -
              351
              984
              2,175
              2,941**Bulk
                  ISP**
              1,415
              1,489
              1,511
              1,771
              1,823**ISP
                  Choice / Exclusive**
              584
              642
              1,386
              1,525
              2,044**Total
                  Subscribers**
              24,738
              26,097
              30,152
              33,506
              37,124
 
 As
        of
        September 30, 2005, t he
        Company had 70 properties and 33,029 units in work-in-progress
        (“WIP”), a 62% increase from September 30, 2004 when the Company had only 20,330
        units in WIP. Of the current WIP, 18,125 are in new construction properties
        and
        14,904 are in existing conversion properties. The Company’s breakdown of WIP
        units by type of service in the new construction area are as follows: (i)
        DIRECTV (bulk) 588; (ii) DIRECTV (choice/exclusive) 7,870; (iii) DIRECTV
        BCA
        Program (bulk/choice) 2,367; (iv) Private Cable (bulk) 1,146; (v) Private
        Cable
        (choice/exclusive) 725; (vi) Internet (bulk) 1,181; and, (vii) Internet
        (choice/exclusive) 4,248. The Company’s breakdown of WIP units by type of
        service in the existing conversion properties are as follows: (i) DIRECTV
        (bulk)
        782; (ii) DIRECTV (choice/exclusive) 5,770; (iii) DIRECTV BCA Program
        (bulk/choice) 2,700; (iv) Private Cable (bulk) 0; (v) Private Cable
        (choice/exclusive) 0; (vi) Internet (bulk) 0; and, (vii) Internet
        (choice/exclusive) 5,652. The Company defines its WIP as the number of units
        in
        properties where construction has begun on a signed access agreement property
        through the conclusion of a phase in schedule or a marketing campaign, at
        which
        time the property exists WIP. WIP is not reduced by the number of units turned
        billable during any given quarter.
 
 19
 As
        of
        September 30, 2005, the Company had 9,815 “under contract” subscribers in WIP
        that the Company expects will become “billable” subscribers in the next few
        quarters. Under contract is defined in actual potential subscribers, not
        as
        units. The under contract subscribers are an important component of the
        Company’s subscriber base evaluation in that they represent the number of
        remaining "billable" subscribers the Company expects to realize from WIP.
        The
        Company breaks down and reports its under contract subscribers into new
        construction and existing conversion properties, due to the time differential
        that new construction properties remain in under contract. A breakdown of
        these
“under contract” subscribers for new construction and existing conversion
        properties (already reduced to reflect appropriate property type and penetration
        rate) shows the following:
 
 **Bulk**
                **Subscribers**
              
              **Exclusive**
                **Subscribers**
              
              **Competitive**
                **Subscribers**
              
              **Total**
                **Subscribers**New
                  Construction Under Contract Subscribers
                as
                  of Sept. 30, 2005:
              
              
              3,033
              
              
              481
              
              
              2,749
              
              
              6,263Existing
                  ConversionUnder
                  Contract Subscribers as of Sept. 30, 2005:
              
              
              988
              
              
              1,346
              
              
              1,218
              
              
              3,552Total:
              
              
              4,021
              
              
              1,827
              
              
              3,967
              
              
              9,815
 
 The
        Company’s backlog increased 21% from last year to 142,095
        units.  The
        Company’s approximate breakdown of backlog units by type of service is as
        follows: (i) “BCA” DIRECTV (bulk) 17%; (ii) DIRECTV or Private Cable (bulk) 23%;
        (iii) Broadband (bulk) 3%; (iv) DIRECTV or Private Cable (exclusive) 2%;
        (v)
        Broadband (exclusive) 1%; (vi) DIRECTV or Private Cable (choice) 39%; and
        (vii)
        Broadband (choice) 15%.
 
 For
        the
        year ended September 30, 2005, the Company reports negative earnings before
        interest, taxes, depreciation, amortization and noncash stock option charges
        (“EBITDA”) of $767,947. The Company uses the common performance gauge of EBITDA
        to evidence earnings exclusive of mainly noncash events, as is common in
        the
        technology, and particularly the cable and telecommunications, industries.
        EBITDA is an important gauge because investors who follow this industry
        frequently use it as a measure of financial performance.  The most
        comparable GAAP reference is simply the removal from net loss of -
        in the
        Company’s case - interest, depreciation, amortization and non cash charges
        related to its warrants and stock options. EBITDA is not, and should not
        be
        considered, an alternative to income from operations, net income, net cash
        provided by operating activities, or any other measure for determining our
        operating performance or liquidity, as determined under accounting principles
        generally accepted in the Unites States of America. EBITDA also does not
        necessarily indicate whether our cash flow will be sufficient to fund working
        capital, capital expenditures or to react to changes in our industry or the
        economy generally. The following table reconciles the comparative EBITDA
        of the
        Company to our consolidated net income (loss) as computed under accounting
        principles generally accepted in the United States of America:
 
 20
 **Years
                  Ended September 30,****2005**
              
              **2004**EBITDA
              
              $
              (767,947)
              
              $
              (561,580)Interest
                  expense
              
              
              (7,771)
              
              
              (2,755,115)Provision
                  for doubtful accounts
              
              
              (63,658)
              
              
              (131,739)Provision
                  for inventory obsolescence
              
              
              (69,821)
              
              
              --Depreciation
                  and amortization
              
              
              (3,055,287)
              
              
              (1,620,164)Effect
                of shares,
                options and warrants issued for services
              
              
              --
              
              
              (313,040)Effects
                  of shares and warrants issued for termination of professional services
                  agreement
              
              
              (270,200)
              
              
              --Effect
                  of cancellation of shares and warrants issued for termination of
                  professional services agreement
              
              
              426,041
              
              
              --Effect
                  of variable accounting for option plans
              
              
              (271,885)
              
              
              (2,801,682)Amortization
                  of unearned compensation
              
              
              (599,910)
              
              
              (757,815)Net
                  Income (Loss )
              
              $
              (4,680,438)
              
              $
              (8,941,135)
 
 Regarding
        upcoming initiatives, the Company expects to launch a Voice over Internet
        Protocol (VoIP) beta trial during the second fiscal quarter of 2006, with
        the
        goal of beginning to bundle this service with the Company’s DIRECTV and
        broadband services in select markets in fiscal 2006 for a true “triple play.”
        The Company is also developing new strategic relationships designed to
        significantly enhance the Company’s rate of subscriber growth in certain
        markets. Additionally, the Company is exploring a number of acquisition
        opportunities that fit within its expansion plans for fiscal 2006.
 
 Our
        common stock trades under the symbol “MDTV” on the OTC Bulletin Board. Our
        principal executive offices are located at 60-D Commerce Way, Totowa, New
        Jersey
        07512 and our telephone number is (973) 237-9499. Our website is located
        at *www.mduc.com.*
 
 **Critical
        Accounting Policies and Estimates**
 
 Our
        consolidated financial statements have been prepared in accordance with
        accounting principles generally accepted in the United States of America.
        The
        preparation of these consolidated financial statements requires us to make
        estimates and judgments that affect the reported amounts of assets, liabilities,
        revenues and expenses, and related disclosure of contingent assets and
        liabilities. On an on-going basis, we evaluate our estimates. We base our
        estimates on historical experience and on other assumptions that are believed
        to
        be reasonable under the circumstances. Accordingly, actual results could
        differ
        from these estimates under different assumptions or conditions. This section
        summarizes the critical accounting policies and the related judgments involved
        in their application.
 
 *(a)* ** *Revenue
        recognition with respect to initial service or connection:*
 
 On
        September 29, 2003, the Company entered into a new System Operator Agreement
        with DIRECTV, Inc. for the delivery of DIRECTV digital satellite programming.
        Under the new agreement, the upfront activation commission that the Company
        receives from DIRECTV for each new subscriber is paid to the Company based
        on
“gross” subscriber additions in a given month. However, the Company must obtain
        an annual commitment from a subscriber for DIRECTV programming in order to
        receive the commission. The commission can be proportionally “charged back” by
        DIRECTV only if a subscriber disconnects within the annual commitment period.
        Because after twelve months no portion of the commission can be “charged
        back,” the Company recognizes this revenue over one year.
 
 21
 In
        December 2004, the Company executed an addendum to the September 29, 2003
        System
        Operator Agreement with DIRECTV, Inc. effective as of November 15, 2004.
        The new
        addendum provides for an “Analog Commission” to the Company for the addition of
        a new Bulk Choice Advantage (“BCA”) subscriber. However, the commission is not
        subject to an annual commitment from a subscriber and there is no proportional
        “charge back” by DIRECTV if a subscriber disconnects at any time. Due to the
        fact that no portion of the BCA “Analog Commission” is subject to the annual
        commitment or “charge back” provision, the “Analog Commission” is recognizable
        immediately upon the approval and acceptance of the subscriber by DIRECTV.
        The
        addendum also offers the “Individual Subscriber PPC” (prepaid programming
        commission). Contrary to the “Analog Commission”, the payment of the “Individual
        Subscriber PPC” by DIRECTV requires an annual commitment of the individual
        services and is subject to a “charge back” if a subscriber disconnects within
        the annual commitment. Accordingly, the revenue from the “Individual Subscriber
        PPC” is recognized over one year.
 
 *(b)* ** *Allowance
        for doubtful accounts:*
 
 We
        provide an allowance for doubtful accounts equal to the estimated collection
        losses based on our historical experience coupled with a review of the current
        status of existing receivables. Any significant variations in our historical
        experience or status of our existing accounts receivable could have a material
        impact on our statement of operations.
 
 *(c)*  *Fair
        value of equity instruments:*
 
 We
        account for stock options issued to employees using the intrinsic value method
        in accordance with Accounting Principles Board Opinion 25, “Accounting for Stock
        Options issued to Employees.” We estimate the fair value of options issued to
        employees for pro-forma disclosure purposes using an option-pricing model
        (generally, the Black-Scholes model) that meets the criteria set forth in
        Statement of Financial Accounting Standards No. 123, “Accounting for
        Stock-Based Compensation” (“SFAS 123”) and common stock using the market
        value of our stock. In accordance with SFAS 123, all other issuances
        of
        common stock, stock options, warrants or other equity instruments to employees
        and non-employees as consideration for goods or services received by us are
        accounted for based on the fair value of the consideration received or the
        fair
        value of the equity instrument, whichever is more readily measurable. Such
        fair
        value is measured at an appropriate date pursuant to the guidance in the
        consensus reached for EITF Issue No. 96-18 (generally, the earlier
        of the
        date the other party becomes committed to provide goods or services or the
        date
        the performance by the other party is complete) and capitalized or expensed
        as
        if we had paid cash for the goods or services. For purposes of determining
        the
        fair value of options and warrants using the Black-Scholes option pricing
        model,
        we have used the following assumptions in the years ended September 30,
        2005 and 2004:
 
 **2005**
              ****
              **2004**Expected
                  volatility
              76%
              
              68%Risk-free
                  interest rate
              4.00%
              
              4.00%Expected
                  years of option life
              1
                  to 5
              
              1
                  to 5Expected
                  dividends
              0%
              
              0%
 
 Given
        an
        active trading market for our common stock, we estimate the volatility of
        our
        stock based on week ending closing prices over a historical period of not
        less
        than one year. As a result, depending on how the market perceives any news
        regarding us or our earnings, as well as market conditions in general, it
        could
        have a material impact on the volatility we use in computing the value we
        place
        on these equity instruments.
 
 22
 *(d)*  *Valuation
        of deferred tax assets:*
 
 We
        regularly evaluate our ability to recover the reported amount of our deferred
        income tax assets considering several factors, including our estimate of
        the
        likelihood that we will generate sufficient taxable income in future years
        in
        which temporary differences reverse. Due to the uncertainties related to,
        among
        other things, the extent and timing of future taxable income, we offset our
        net
        deferred tax assets by an equivalent valuation allowance as of
        September 30, 2005.
 
 *(e)*  *Valuation
        of long-lived assets:*
 
 We
        assess
        the recoverability of long-lived tangible and intangible assets whenever
        we
        determine that events or changes in circumstances indicate that their carrying
        amount may not be recoverable. Our assessment is primarily based upon our
        estimate of future cash flows associated with these assets. Although there
        has
        been a sustained weakness in our operating results through September 30,
        2005, we continue to project income in the future. Accordingly, we have
        determined that there has not been an impairment of any of our long-lived
        assets. However, should our operating results deteriorate, we may determine
        that
        some portions of our long-lived tangible or intangible assets are impaired.
        Such
        determination could result in non-cash charges to income that could materially
        affect our consolidated financial position or results of operations for that
        period.
 
 **RESULTS
        OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2005 AND 2004**
 
 ***Net
        Loss.***  Primarily
        as a result of the discussion below, we reported a net loss of $4,680,438
        for
        the year ended September 30, 2005, compared to a net loss of $8,941,135 for
        the
        year ended September 30, 2004.
 
 ***Revenues.*** Revenue
        for the year ended September 30, 2005 of $9,142,228 increased 104%
        from
        September 30, 2004 revenue of $4,490,235. Revenue for the years ended
        September 30, 2004 and 2003 was comprised of:
 
 **2005**
              ****
              **2004**Private
                  Cable Programming Revenue
              41%
              
              37%DTH
                  Programming Revenue and Subsidy
              47%
              
              51%Internet
                  Access Fees
              8%
              
              8%Installation
                  Fees, Wiring and other Sales
              4%
              
              4%
 
 The
        revenue increase is attributable to the increase in number of subscribers
        over
        the prior year due to organic growth in subscribers as well as a substantial
        increase in the average revenue per subscriber and integrating the 2004
        acquisitions. We expect an increase in revenues as our subscriber growth
        continues.
 
 ***Direct
        Costs.*** Direct
        costs are primarily comprised of private cable programming, monthly recurring
        Internet T-1 line connections and costs relating to installation services
        and
        are 39% of revenue for the year ended September 30, 2005 compared
        to 31%
        for the same period in the prior year. Direct costs increased to $3,582,407
        as
        of September 30, 2005 from $1,391,464 in the year ended September 30,
        2004. This increase was primarily due to the carrying for a full year of
        private
        cable subscribers acquired from Direct Satellite Inc. and PCM Acquisitions
        Corp.
        late in fiscal 2004. While
        we
        expect an increase in direct costs as our subscriber growth continues, direct
        costs are linked to the type of subscribers we add. However, we expect to
        continue the trend from the end of fiscal 2005 into fiscal 2006 of increasing
        the number of DIRECTV and broadband subscribers and converting certain private
        cable subscribers to DIRECTV services, thus, our direct costs as a percentage
        of
        revenue should decline during fiscal 2006.
 
 ***Sales
        Expenses.*** Sales
        expenses consist mainly of salaries, commissions, marketing materials, trade
        shows, advertising and promotion. Sales expenses increased to $1,963,127
        as of
        September 30, 2005 from $884,523 in the year ended September 30,
        2004. The
        increase in sales expenses primarily results from new marketing initiatives
        to
        increase our subscriber base, including expansion into the Midwest, Southeast
        and Mid-Atlantic regions. We expect this trend to continue as our subscriber
        growth and expansion continues. However, with the increase in revenue and
        certain expenses being fixed, we anticipate a decline in sales expense as
        a
        percent of revenue into 2006.
 
 23
 ***Customer
        Service Expenses.*** Customer
        service expenses consist mainly of call center and customer technical services.
        Customer service expenses were $2,858,881 for the year ended September 30,
        2005 compared to $1,268,694 for the year ended September 30, 2004.
        This
        increase is primarily the result of a 50% increase in our subscriber base
        over
        last year as well as providing better service and positioning the Company
        to
        continue to expand its services to a larger subscriber base in the future.
        We
        expect an increase in customer service expenses with achieved subscriber
        growth
        during 2006. As with the sales expense, certain expenses are fixed and as
        a
        result, the customer service expense as a percent of revenue, as revenue
        increases, is expected to decline over time. ****
 
 ***General
        and Administrative Expenses.*** General
        and administrative expenses decreased to $3,318,866 in 2005 from $5,561,102
        in
        the year ended September 30, 2004. The decrease is primarily the result
        of
        noncash charges of $4,004,276 in 2004 decreasing to $849,433 in 2005. The
        noncash charges for fiscal 2005 are attributable to $271,885 for the effects
        of
        variable accounting for stock options, $599,910 for the amortization of unearned
        compensation related to the fair value of options and warrants issued for
        services, $270,200 for the issuance of options and warrants in exchange for
        services and a provision for doubtful accounts and slow moving inventory
        in the
        amounts of $63,658 and $69,821, respectively. These
        charges were offset by a noncash credit of $206,250 due to the cancellation
        of
        stock issued to BAAM in exchange for services and a credit of $219,791 due
        to
        the cancellation of the stock and warrants issued to PDI in exchange for
        services. Excluding
        these noncash charges, general and administrative expenses were $2,469,433,
        an
        increase of 59% from September 30, 2004. This
        was
        primarily the result of (i) the expenses associated with opening the Chicago,
        South Florida and Washington, DC offices, (ii) increased professional fees
        relating to regulatory filings (iii) increased professional fees relating
        to
        preliminary planning for Sarbanes-Oxley compliance, and (iv) increased staff.
        Although we anticipate general and administrative expense to increase, general
        and administrative expense should decrease as a percent of revenue in fiscal
        2006.
 
 ***Other
        Non-Cash Charges.***  Depreciation
        and amortization expenses increased from $1,620,164 during the fiscal year
        ended
        September 30, 2004 to $3,055,287 during the fiscal year ended September 30,
        2005.  The increase in depreciation and amortization is associated
        with
        additional equipment being deployed and other intangible assets being acquired
        over the prior period.  There was no noncash interest expense for
        the year
        ended September 30, 2005, as compared to $2,735,796 associated with the
        amortization of deferred finance costs and debt discount from warrants issued
        and charges to interest expense from the cashless exercise of warrants by
        investors for the year ended September 30, 2004.
 
 ***Other
        Income.*** On
        May
        31, 2005, we sold 447 subscribers to Comcast of Maryland, Inc. for $1,049,048.
        The total gain on the sale of the customers and the related property and
        equipment was $1,046,088 of which, pursuant to the Joint Venture termination
        agreement, AvalonBay Communities, the former joint venture
        partner, received $411,708. The Company’s gain on the sale of this system,
        after expenses, was $634,380 (see Note 8).
 
 On
        November 8, 2004, we sold 102 subscribers to Comcast of Maryland, Inc. for
        $183,600. The total gain on the sale of customers and the related property
        and
        equipment was $161,120 of which, pursuant to the Joint Venture termination
        agreement, AvalonBay Communities, the former joint venture
        partner, received $79,804. The Company's gain on the sale of this
        system,
        after expenses, was $81,316 (see Note 8). The Company does not anticipate
        selling any subscribers in fiscal 2006.
 
 **OUTLOOK**
 
 The
        Company has incurred operating losses since inception. However, with a solid
        balance sheet, consolidated operations in the most profitable markets, expansion
        into the Southeast and Midwest, important strategic alliances, an experienced
        management team and other efforts to position the Company to increase its
        subscriber base, the Company expects to be EBITDA positive or neutral in
        fiscal
        year 2006.
 
 24
 
 **LIQUIDITY
        AND CAPITAL RESOURCES**
 
 During
        the years ended September 30, 2005 and 2004, we recorded a net loss
        of
        $4,680,438 and $8,941,135, respectively. We had negative cash flows from
        operating activities of $814,221 and $703,162 during the years ended
        September 30, 2005 and 2004, respectively. At September 30,
        2005, we
        had an accumulated deficit of $30,945,299.
 
 ***Cash
        Position.*** At
        September 30, 2005, we had cash and cash equivalents of $9,358,021
        compared
        to $4,705,722 at September 30, 2004. The increase in our cash position
        over
        the previous year was primarily due to the net proceeds of the November equity
        private placements and the exercise of warrants and options. On November
        24,
        2004, the Company completed a $16.25 million private equity placement, pursuant
        to which the Company sold 6,063,400 units. Each unit consisted of one share
        of
        common stock and three-tenths of one three-year warrant to purchase one share
        of
        common stock at an exercise price of $3.40 per share, to accredited investors
        at
        a per unit price of $2.68. After the payment of fees and expenses, the Company
        received net proceeds of $15,045,444.
 
 Due
        to
        our increased cash position as of the year ended September 30, 2005, primarily
        from the private placement and the exercise of warrants and options, we believe
        that the Company has adequate financial resources to fund operations through
        at
        least September 30, 2006. However, this is a capital-intensive business and
        any
        increased rate of growth may be partially dependent on raising additional
        financing.
 
 The
        following table displays payments for our contractual obligations outstanding
        at
        September 30, 2005:
 
 **Capital**
                
                **Operating**
                
                **Note****Lease**
                
                **Lease**
                
                **Payable**
                
                **Total**Less
                    than 1 year
                
                $
                —
                
                $
                **—**
                
                $
                **—**
                
                $
                —1
                    to 3 years
                
                
                69,731
                
                
                974,604
                
                
                145,996
                
                
                1,190,3313
                    to 5 years
                
                
                —
                
                
                147,156
                
                
                50,310
                
                
                197,466More
                    than 5 years
                
                
                —
                
                
                —
                
                
                —
                
                
                —Total
                
                $
                69,731
                
                $
                1,121,760
                
                $
                196,306
                
                $
                1,387,797
  ***Operating
        Activities.*** Our operations used net cash of $814,221 during the year ended September
        30,
        2005, including a $1,206,723 increase in our accounts payable and accrued
        liabilities during the period. Additionally, during the year ended September
        30,
        2005, the net increase in accounts receivable was $687,404.  Our net
        loss
        of $4,680,438 for the same period was offset by net noncash charges associated
        primarily with depreciation and amortization and other non-cash charges
        associated with stock options and warrants of $3,904,720.
 
 ***Investing
        Activities.*** During the year ended September 30, 2005, we purchased $11,599,496 of equipment
        relating to subscriber additions and paid $193,580 for the acquisition of
        other
        long-term assets. Additionally,
        the Company received $1,232,648 in proceeds from the sale of 549 subscribers
        in
        AvalonBay properties, which had been part of a joint venture.
        The
        Company purchased AvalonBay's interest in the Joint Venture on July 28, 2003.
        The Company's gain on the sale of these private cable systems, after expenses,
        was $715,696.
 
 ***Financing
        Activities.*** During
        the year ended September 30, 2005, we used $73,532 and $3,694 for the repayment
        of certain notes payable and entered into a capital lease agreement in the
        amount of $35,368 and received proceeds of $200,000 from the issuance of
        a note
        payable to Wachovia Bank.  Regarding equity financing activities,
        we (i)
        issued 449,667 common shares upon the exercise of warrants to purchase common
        shares, which resulted in net proceeds to the Company of $448,958, (ii) issued
        1,004,104 common shares upon the exercise of options, which resulted in net
        proceeds to the Company of $409,772, and (iii) closed a $16.25 million private
        equity placement financing for net proceeds of $15,045,444.
 
 25
 ***Working
        Capital.*** As
        of
        September 30, 2005 and 2004, we had working capital of $7,784,821 and
        $3,910,911, respectively. The private equity placement discussed earlier
        provided $15,000,000 in proceeds towards working capital.
 
 ***Capital
        Commitments and Contingencies.*** We
        have access agreements with the owners of multiple dwelling unit properties
        to
        supply our satellite television and Internet systems and services to the
        residents of those properties. However, we have no obligation to build out
        those
        properties and no penalties will accrue if we elect not to do so.
 
 ***Future
        Capital Requirements.*** We believe that we have sufficient cash resources to cover current levels
        of
        operating expenses and working capital needs for at least through September
        30,
        2006. However, this is a capital-intensive business and an increasing rate
        of
        growth is dependent partially on raising additional financing. There is no
        assurance that we will be successful in any of these initiatives.
  26
 **Item
        7.**  **Financial
        Statements**
 
 
 
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 Board
        of
        Directors and Stockholders
 MDU
        Communications International, Inc.
 
 We
        have
        audited the accompanying consolidated balance sheets of MDU Communications
        International, Inc. and Subsidiaries as of September 30, 2005
        and
        2004, and the related consolidated statements of operations, stockholders’
        equity and cash flows for the years then ended. These consolidated financial
        statements are the responsibility of the Company’s management. Our
        responsibility is to express an opinion on these consolidated financial
        statements based on our audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the
        consolidated financial statements are free of material misstatement. An audit
        includes examining, on a test basis, evidence supporting the amounts and
        disclosures in the financial statements. An audit also includes assessing
        the
        accounting principles used and significant estimates made by management,
        as well
        as evaluating the overall financial statement presentation. We believe that
        our
        audits provide a reasonable basis for our opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of MDU Communications
        International, Inc. and Subsidiaries as of September 30, 2005
        and
        2004, 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 LLPRoseland,
                  New Jersey
                December 2,
                  2005
 
  27
  **MDU
        COMMUNICATIONS INTERNATIONAL, INC.**
 **Consolidated
        Balance Sheets**
 **September
        30, 2005 and 2004**
 
 **September
                  30,**
                **2005**
              
              **September
                  30,**
                **2004****ASSETS**CURRENTCash
                  and cash equivalents
              
              $
              9,358,021
              
              $
              4,705,722Accounts
                  receivable- trade, net of an allowance of $151,045 and
                  $76,319
              
              
              1,562,398
              
              
              938,652Prepaid
                  expenses and deposits
              
              
              200,345
              
              
              98,834TOTAL
                  CURRENT ASSETS
              
              
              11,120,764
              
              
              5,743,208Telecommunications
                  equipment inventory
              
              
              963,081
              
              
              325,218Property
                  and equipment, net of accumulated depreciation of $4,954,301 and
                  $2,771,311
              
              
              14,435,784
              
              
              6,401,833Intangible
                  assets, net of accumulated amortization of $2,279,918 and
                  $1,407,621
              
              
              2,740,787
              
              
              3,226,217TOTAL
                  ASSETS
              
              $
              29,260,416
              
              $
              15,696,476**LIABILITIES
                  and STOCKHOLDERS’ EQUITY**CURRENT
                  LIABILITIESAccounts
                  payable
              
              $
              1,196,504
              
              $
              609,115Other
                  accrued liabilities
              
              
              1,114,343
              
              
              548,907Current
                  portion of deferred revenue
              
              
              934,270
              
              
              615,995Current
                  portion of note payable
              
              
              45,670
              
              
              --Current
                  portion of capital lease obligation
              
              
              45,156
              
              
              58,280TOTAL
                  CURRENT LIABILITIES
              
              
              3,335,943
              
              
              1,832,297Deferred
                  revenue, net of current portion
              
              
              --
              
              
              43,700Note
                  payable, net of current portion
              
              
              150,636
              
              
              --Capital
                  lease obligation, net of current portion
              
              
              24,575
              
              
              49,615TOTAL
                  LIABILITIES COMMITMENTS
                  AND CONTINGENCIES
              
              
              3,511,154
              
              
              1,925,612**STOCKHOLDERS’
                  EQUITY**Preferred
                  stock, par value $0.001; 5,000,000 shares authorized, none issued
              
              
              —
              
              
              —Common
                  stock, par value $0.001; 70,000,000 shares authorized, 49,812,922
                  and
                  42,672,671 shares issued and outstanding
              
              
              49,815
              
              
              42,673Additional
                  paid-in capital
              
              
              57,194,221
              
              
              42,122,896Unearned
                  compensation
              
              
              (549,475
              )
              
              (2,129,844
              )Accumulated
                  deficit
              
              
              (30,945,299
              )
              
              (26,264,861
              )TOTAL
                  STOCKHOLDERS’ EQUITY
              
              
              25,749,262
              
              
              13,770,864TOTAL
                  LIABILITIES AND STOCKHOLDERS’ EQUITY
              
              $
              29,260,416
              
              $
              15,696,476
 
 See
        accompanying notes to the consolidated financial statements
  28
 
 **MDU
                  COMMUNICATIONS INTERNATIONAL, INC.**
                **Consolidated
                  Statements of Operations**
                **Years
                  Ended September 30, 2005 and 2004****2005**
              
              
              **2004**REVENUE
              
              $
              9,142,228
              
              $
              4,490,235OPERATING
                  EXPENSESDirect
                  costs
              
              
              3,582,407
              
              
              1,391,464Sales
                  expenses
              
              
              1,963,127
              
              
              884,523Customer
                  service expenses
              
              
              2,858,881
              
              
              1,268,694General
                  and administrative expenses(including
                  non-cash charges of $849,433 and $4,004,276 )
              
              
              3,318,866
              
              
              5,561,102Depreciation
                  and amortization
              
              
              3,055,287
              
              
              1,620,164TOTALS
              
              
              14,778,568
              
              
              10,725,947OPERATING
                  LOSS
              
              
              (5,636,340
              )
              
              (6,235,712
              )Other
                  income (expense)
              
              
              --
              
              
              --Gain
                  on sale of customers
              
              
              715,696
              
              
              —Gain
                  on settlement of accounts payable
              
              
              15,190
              
              
              33,840Interest
                  income
              
              
              232,787
              
              
              48,033Interest
                  expense (including non-cash interest charges of $0 and
                  $2,735,796)
              
              
              (7,771
              )
              
              (2,755,115
              )Other
              
              
              —
              
              
              (32,181
              )NET
                  LOSS
              
              $
              (4,680,438
              )
              $
              (8,941,135
              )BASIC
                  AND DILUTED LOSS PER COMMON SHARE
              
              $
              (0.10
              )
              $
              (0.24
              )WEIGHTED
                  AVERAGE COMMON SHARES OUTSTANDING
              
              
              48,479,204
              
              
              37,607,929
 
 See
        accompanying notes to the consolidated financial statements
 
 
 29
  **MDU
                    COMMUNICATIONS INTERNATIONAL, INC.**
                  **Consolidated
                    Statement of Stockholders’ Equity**
                  **Years
                    Ended September 30, 2005 and
                    2004**
 **Common
                    stock**
                
                
                **Additional**
                  **paid-in**
                
                
                **Unearned**
                
                
                **Accumulated****Shares**
                
                
                **Amount**
                
                
                **capital**
                
                
                **compensation**
                
                
                **deficit**
                
                
                **Total****Balance,
                    October 1, 2003**
                
                
                27,751,479
                
                $
                27,750
                
                $
                21,822,509
                
                $
                (83,333
                )
                $
                (17,323,726
                )
                $
                4,443,200Conversion
                    of notes payable and accrued interest
                
                
                78,314
                
                
                79
                
                
                25,765
                
                
                
                
                
                
                
                
                25,844Issuance
                    of common stock for accrued compensation
                
                
                103,353
                
                
                103
                
                
                79,031
                
                
                
                
                
                
                
                
                79,134Issuance
                    of common stock for compensation
                
                
                182,190
                
                
                182
                
                
                413,284
                
                
                (405,626
                )
                
                
                
                
                7,840Issuance
                    of common stock as settlement of accounts payable
                
                
                40,135
                
                
                40
                
                
                28,054
                
                
                
                
                
                
                
                
                28,094Issuance
                    of common stock in exchange for services
                
                
                100,000
                
                
                100
                
                
                229,900
                
                
                
                
                
                
                
                
                230,000Issuance
                    of common stock and warrants in connection with private placement
                
                
                4,829,064
                
                
                4,829
                
                
                8,344,785
                
                
                
                
                
                
                
                
                8,349,614Effect
                    of variable accounting for options
                
                
                
                
                
                
                
                
                2,801,682
                
                
                
                
                
                
                
                
                2,801,682Issuance
                    of common stock for warrants exercised, including effects of
                    cashless
                    exercises
                
                
                7,997,067
                
                
                7,998
                
                
                5,299,477
                
                
                
                
                
                
                
                
                5,307,475Issuance
                    of common stock for options exercised, including effects of cashless
                    exercises
                
                
                1,091,069
                
                
                1,092
                
                
                605,009
                
                
                
                
                
                
                
                
                606,101Issuance
                    of common stock, options and warrants in exchange for services
                
                
                500,000
                
                
                500
                
                
                2,473,400
                
                
                (2,398,700
                )
                
                
                
                
                75,200Amortization
                    of unearned compensation
                
                
                
                
                
                
                
                
                
                
                
                757,815
                
                
                
                
                
                757,815Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (8,941,135
                )
                
                (8,941,135
                )**Balance,
                    September 30, 2004**
                
                
                42,672,671
                
                
                42,673
                
                
                42,122,896
                
                
                (2,129,844
                )
                
                (26,264,861
                )
                
                13,770,864Issuance
                    of common stock for accrued compensation
                
                
                18,040
                
                
                18
                
                
                38,690
                
                
                
                
                
                
                
                
                38,708Issuance
                    of common stock and warrants in connection with private placement
                
                
                6,063,440
                
                
                6,063
                
                
                15,039,381
                
                
                
                
                
                
                
                
                15,045,444Issuance
                    of common stock for warrants exercised
                
                
                449,667
                
                
                450
                
                
                448,508
                
                
                
                
                
                
                
                
                448,958Issuance
                    of common stock for options exercised
                
                
                1,004,104
                
                
                1,006
                
                
                408,766
                
                
                
                
                
                
                
                
                409,772Effect
                    of variable accounting for options
                
                
                
                
                
                
                
                
                271,885
                
                
                
                
                
                
                
                
                271,885Issuance
                    of common stock in exchange for termination of agreement
                
                
                105,000
                
                
                105
                
                
                468,595
                
                
                (198,500
                )
                
                
                
                
                270,200Cancellation
                    of common stock and warrants in exchange for termination of
                    agreement
                
                
                (500,000
                )
                
                (500
                )
                
                (1,604,500
                )
                
                1,178,959
                
                
                
                
                
                (426,041
                )Amortization
                    of unearned compensation
                
                
                
                
                
                
                
                
                
                
                
                599,910
                
                
                
                
                
                599,910Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (4,680,438
                )
                
                (4,680,438
                )**Balance,
                    September 30, 2005**
                
                
                49,812,922
                
                $
                49,815
                
                $
                57,194,221
                
                $
                (549,475
                )
                $
                (30,945,299
                )
                $
                25,749,262
  See
          accompanying notes to the consolidated financial statements
  30
  **MDU
                      COMMUNICATIONS INTERNATIONAL, INC.**
                    **Consolidated
                      Statements of Cash Flows**
                    **Years
                      ended September 30, 2005 and
                      2004**
  **For
                        the years ended**
                      **September
                        30,****2005**
                    
                    **2004**OPERATING
                        ACTIVITIESNet
                        loss
                    
                    $
                    (4,680,438
                    )
                    $
                    (8,941,135
                    )Adjustments
                        to reconcile net loss to net cash used in operating activities:Provision
                        for doubtful accounts
                    
                    
                    63,658
                    
                    
                    131,739Provision
                        for inventory obsolescence
                    
                    
                    69,821
                    
                    
                    —Depreciation
                        and amortization
                    
                    
                    3,055,287
                    
                    
                    1,620,164Amortization
                        of unearned compensation
                    
                    
                    599,910
                    
                    
                    757,815Effect
                        of variable accounting for stock options
                    
                    
                    271,885
                    
                    
                    2,801,682Effect
                        of issuance of common stock, options and warrants in
                        exchange for services
                    
                    
                    —
                    
                    
                    313,040Effect
                        of issuance of common stock in exchange for termination of
                        agreement
                    
                    
                    270,200
                    
                    
                    —Effect
                        of cancellation of common stock and warrants in exchange
                        for termination
                        of agreement
                    
                    
                    (426,041
                    )
                    
                    —Charge
                        to interest expense for amortization of deferred finance
                        costs and debt
                        discount
                    
                    
                    —
                    
                    
                    14,645Charge
                        to interest expense from cashless exercise of warrants by
                        lenders
                    
                    
                    —
                    
                    
                    2,721,151Gain
                        on settlement of accounts payable
                    
                    
                    (15,190
                    )
                    
                    (33,840
                    )Gain
                        on sale of customers and property and equipment
                    
                    
                    (715,696
                    )
                    
                    —Changes
                        in operating assets and liabilities:Accounts
                        receivable
                    
                    
                    (687,404
                    )
                    
                    (618,957
                    )Prepaid
                        expenses and deposits
                    
                    
                    (101,511
                    )
                    
                    364,480Accounts
                        payable
                    
                    
                    602,579
                    
                    
                    157,866Other
                        accrued liabilities
                    
                    
                    604,144
                    
                    
                    (71,566
                    )Deferred
                        revenue
                    
                    
                    274,575
                    
                    
                    79,754Net
                        cash used in operating activities
                    
                    
                    (814,221
                    )
                    
                    (703,162
                    )INVESTING
                        ACTIVITIESPurchases
                        of equipment and improvements
                    
                    
                    (11,402,476
                    )
                    
                    (2,132,351
                    )Proceeds
                        from sale of customers and property and equipment
                    
                    
                    1,232,648
                    
                    
                    —Acquisition
                        of other assets
                    
                    
                    (390,600
                    )
                    
                    (319,232
                    )Acquisition
                        of Direct Satellite, Inc.
                    
                    
                    —
                    
                    
                    (2,515,000
                    )Acquisition
                        of PCM Acquisitions Corp.
                    
                    
                    —
                    
                    
                    (1,455,691
                    )Net
                        cash used in investing activities
                    
                    
                    (10,560,428
                    )
                    
                    (6,422,274
                    )FINANCING
                        ACTIVITIESProceeds
                        from issuance of notes payable
                    
                    
                    200,000
                    
                    
                    —Payments
                        of notes payable
                    
                    
                    (3,694
                    )
                    
                    (91,721
                    )Proceeds
                        from private placements of common stock and warrants
                    
                    
                    15,045,444
                    
                    
                    8,349,614Proceeds
                        from options exercised
                    
                    
                    409,772
                    
                    
                    606,100Proceeds
                        from warrants exercised
                    
                    
                    448,958
                    
                    
                    2,586,328Payments
                        of capital lease obligations
                    
                    
                    (73,532
                    )
                    
                    (126,938
                    )Net
                        cash provided by financing activities
                    
                    
                    16,026,948
                    
                    
                    11,323,383**NET
                        INCREASE IN CASH AND CASH EQUIVALENTS**
                    
                    
                    4,652,299
                    
                    
                    4,197,947**CASH
                        AND CASH EQUIVALENTS, BEGINNING OF YEAR**
                    
                    
                    4,705,722
                    
                    
                    507,775**CASH
                        AND CASH EQUIVALENTS, END OF YEAR**
                    
                    $
                    9,358,021
                    
                    $
                    4,705,722
 
 31
 
 
 **2005**
              
              
              **2004****SUPPLEMENTAL
                  DISCLOSURE OF NON-CASH INVESTING AND FINANCING
                  ACTIVITIES:**Conversion
                  of notes payable and accrued interest into 78,314 shares of common
                  stock
              
              $
              0
              
              $
              25,844Issuance
                  of 18,040 and 103,353 shares of common stock for accrued
                  compensation
              
              $
              38,708
              
              $
              79,134Issuance
                  of and 40,135 shares of common stock as settlement of accounts
                  payable
              
              $
              0
              
              $
              28,094Equipment
                  acquired through capital lease obligations
              
              $
              35,368
              
              $
              92,418**SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOW INFORMATION**Interest
                  paid
              
              $
              7,771
              
              $
              19,319
 
 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 and high-speed
        (broadband) Internet service to residents of multi-dwelling unit properties
        (“MDUs”) such as apartment buildings, condominiums, gated communities, hotels
        and universities.
 
 **2.** **** **SIGNIFICANT
        ACCOUNTING POLICIES**
 
 These
        consolidated financial statements have been prepared in accordance with
        accounting principles generally accepted in the United States and reflect
        the
        significant accounting polices described below:
 
 *(a)
        Use of Estimates*
 
 The
        preparation of the consolidated financial statements in conformity with
        accounting principles generally accepted in the United States requires
        management to make estimates and assumptions that affect the reported amounts
        of
        assets and liabilities and disclosure of contingent assets and liabilities
        at
        the date of the financial statements and the reported amounts of revenues
        and
        expenses during the reporting period. Significant estimates are used for,
        but
        not limited to, revenue recognition with respect to a new subscriber activation
        subsidy, allowance for doubtful accounts, fair value of equity instruments
        and
        valuation of deferred tax assets and long lived assets. Actual results could
        differ from those estimates.
 
 *(b)
        Principles of Consolidation*
 
 The
        consolidated financial statements include the accounts of the Company and
        its
        subsidiaries, MDU Communications Inc. and MDU Communications
        (USA) Inc. All inter-company balances and transactions are eliminated.
 
 *(c)
        Property and Equipment*
 
 Telecommunications
        equipment inventory consists of receivers and other supplies that will either
        be
        sold or installed by the Company under subscription agreements and, accordingly,
        is not depreciated. Such inventory is stated at the lower of cost or market.
        The
        cost of inventory sold or transferred to telecommunications equipment upon
        installation in connection with subscription agreements is determined on
        a
        first-in, first-out basis.
 
 Property
        and equipment are recorded at cost less accumulated depreciation and
        amortization. Direct costs of placing telecommunications equipment into service
        and major improvements are capitalized. Costs of connecting and disconnecting
        service are expensed. Depreciation of property and equipment is provided
        using
        the straight-line method over the estimated useful lives as follows:
 
 Telecommunications
                  equipment, installed
              
              
              7
                  yearsComputer
                  equipment
              
              
              5
                  yearsFurniture
                  and fixtures
              
              
              5
                  years
 
 *(d)
        Intangible Assets*
 
 Intangible
        assets consist of acquired building access agreements and subscriber lists
        and
        are being amortized on the straight-line basis over five years.
 
 33
 
 *(e)
        Long-lived Assets*
 
 The
        Company performs a review for the impairment of long-lived assets with
        definitive lives whenever events or changes in circumstances indicate that
        the
        carrying amount of an asset may not be recoverable. Under Statement of Financial
        Accounting Standards (“SFAS”) 144, “Accounting for the Impairment of Long-Lived
        Assets and for Long-Lived Assets to be Disposed of,” an impairment loss is
        recognized when estimates of future undiscounted cash flows expected to result
        from the use of an asset and its eventual disposition are less than its carrying
        amount. No impairment losses were identified by the Company for the years
        ended
        September 30, 2005 and 2004.
 
 *(f)
        Revenue Recognition*
 
 The
        Company recognizes revenue for satellite programming and other services to
        customers in the period the related services are provided when the amount
        of
        revenue is determinable and collection is reasonably assured.
 
 The
        Company offers installation services to building owners and managers for
        the
        construction of wiring and installation of equipment to allow for
        telecommunications services, including the sale of related equipment. Revenue
        from the sale of equipment is recognized when title transfers and installation
        revenue is recognized in the period that the services are performed when
        the
        amount of revenue is determinable and collection is reasonably assured.
 
 In
        certain arrangements with suppliers of satellite programming or other services,
        the Company does not bear inventory or credit risk in connection with the
        service provided to the customer.  For those arrangements where the
        Company
        does not act as a principal in the transaction, such revenue is recorded
        on the
        net basis and, accordingly, the amount of revenue is equivalent to the
        contractual commission earned by the Company. Revenues from providing services
        under contracts where the Company acts as a principal in the transaction,
        exercises pricing control and bears the risk of collection are recorded based
        on
        the gross amount billed to the customer when the amount is determinable.
 
 On
        September 29, 2003, the Company entered into a new System Operator Agreement
        with DIRECTV, Inc. for the delivery of DIRECTV digital satellite programming.
        Under the new agreement, the upfront activation commission that the Company
        receives from DIRECTV for each new subscriber is paid to the Company based
        on
“gross” subscriber additions in a given month. However, the Company must obtain
        an annual commitment from a subscriber for DIRECTV programming in order to
        receive the commission. The commission can be proportionally “charged back” by
        DIRECTV only if a subscriber disconnects within the annual commitment period.
        Because after twelve months no portion of the commission can be “charged back,”
        the Company recognizes this revenue over one year.
 
 In
        late
        December 2004, the Company executed an addendum to the September 29, 2003
        System
        Operator Agreement with DIRECTV, Inc. effective as of November 15, 2004.
        The new
        addendum provides for an “Analog Commission” to the Company for the addition of
        a new Bulk Choice Advantage (“BCA”) subscriber. However, the commission is not
        subject to an annual commitment from a subscriber and there is no proportional
        “charge back” by DIRECTV if a subscriber disconnects at any time. Due to the
        fact that no portion of the BCA “Analog Commission” is subject to the annual
        commitment or “charge back” provision, the “Analog Commission” is recognizable
        immediately upon the approval and acceptance of the subscriber by DIRECTV.
        The
        addendum also offers the “Individual Subscriber PPC” (prepaid programming
        commission). Contrary to the “Analog Commission”, the payment of the “Individual
        Subscriber PPC” by DIRECTV requires an annual commitment of the individual
        services and is subject to a “charge back” if a subscriber disconnects within
        the annual commitment. Accordingly, the revenue from the “Individual Subscriber
        PPC” is recognized over one year.
 
 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.
 
 
 34
 *(g)
        Loss Per Common Share*
 
 The
        Company presents “basic” earnings (loss) per share and, if applicable, “diluted”
        earnings per share pursuant to the provisions of Statement of Financial
        Accounting Standards No. 128, “Earnings per Share.” Basic earnings (loss) per
        share is computed by dividing the net income or loss by the weighted average
        number of common shares outstanding for the period. The calculation of diluted
        earnings per share is similar to that of basic earnings per share, except
        that
        the denominator is increased to include the number of additional common shares
        that would have been outstanding if all potentially dilutive common shares,
        such
        as those issueable upon the exercise of stock options and warrants were issued
        during the period and the treasury stock method was applied.
 
 For
        the
        year ended September 30, 2005 and 2004, basic and diluted loss per common
        share
        are the same as the Company had net losses for these periods and the effect
        of
        the assumed exercise of options and warrants would be anti-dilutive. As of
        September 30, 2005, the Company had potentially dilutive common shares
        attributable to options and warrants that were exercisable (or potentially
        exercisable) into 8,949,227 shares of common stock (5,648,885 from warrants
        and
        3,300,342 from options). There were 6,765,654 potentially dilutive common
        shares
        (4,226,348 from warrants and 2,539,306 from options) as of September 30,
        2004.
 
 *(h)
        Foreign Exchange*
 
 The
        Company uses the United States dollar as its functional and reporting currency
        since a majority of the Company’s revenues, expenses, assets and liabilities are
        in the United States and the focus of the Company’s operations is in that
        country. 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, 2005 and 2004 and cumulative translation
        gains and losses as of September 30, 2005 and 2004 were not material.
 
 *(i)
        Stock-Based Compensation*
 
 As
        permitted under SFAS 123, “Accounting for Stock-Based
        Compensation,”(“SFAS 123”) the Company has accounted for employee and
        director stock options using the intrinsic value method in accordance with
        Accounting Principles Board (“APB”) Opinion 25, “Accounting for Stock Issued to
        Employees,” (“APB 25”) and has made the pro forma disclosures required by
        SFAS 148, “Accounting for Stock-Based Compensation - Transition and
        Disclosure,” (“SFAS 148”) in Note 4. Under APB 25, compensation charges
        arise from those situations where options are granted to employees and directors
        at an exercise price lower than the quoted market price of the underlying
        common
        shares. These amounts are amortized as a charge to operations over the vesting
        periods of the related stock options.
 
 For
        stock
        options with cashless exercise provisions and options that have been re-priced
        and, accordingly, are subject to variable plan accounting, the Company
        recognizes a charge or credit to compensation expense for the increase or
        decrease in the intrinsic value of the option in each period. The intrinsic
        value is represented by the excess of the market price of the Company’s stock
        over the exercise price of the option.
 
 Stock-based
        compensation charges arising from options and warrants issued to other than
        employees are recorded in accordance with the consensus in EITF 96-18 over
        the
        service period. The amount of the compensation is based on the fair value
        of the
        option or warrant at the applicable measurement date.
 
 *(j)
        Cash and Cash Equivalents*
 
 Cash
        and
        cash equivalents consist of bank deposits and short-term notes with maturities
        at the date of acquisition of 90 days or less that have insignificant
        interest rate risk.
 
 35
 *(k)
        Fair Value of Financial Instruments*
 
 The
        fair
        value of the Company’s cash and cash equivalents, accounts receivable, accounts
        payable, other accrued liabilities, notes payable and capital lease obligations
        at September 30, 2005 and 2004 are estimated to approximate their
        carrying
        values due to the relative liquidity or short-term nature of these instruments.
 
 *(l)
        Credit Concentration*
 
 Financial
        instruments that potentially subject the Company to a concentration of credit
        risk consist principally of cash and cash equivalents and accounts receivable.
 
 The
        Company places its cash and cash equivalents with high credit quality
        institutions.  At September 30, 2005, the Company has cash
        balances
        that exceed Federally insured limits in the amount of approximately $8,908,000.  Accounts
        receivable from DIRECTV (see Note 6) at September 30, 2005
        and 2004,
        respectively, represented 47% and 28% of total trade accounts receivable.
        Revenues realized from DIRECTV represented 25% and 24% of total revenues
        in the
        years ended September 30, 2005 and 2004, respectively. Management
        believes
        the Company has an adequate allowance for potential losses from such
        concentration.
 
 *(m)
        Income Taxes*
 
 The
        Company accounts for income taxes pursuant to the asset and liability method
        which requires deferred income tax assets and liabilities to be computed
        annually for temporary differences between the financial statement and tax
        bases
        of assets and liabilities that will result in taxable or deductible amounts
        in
        the future based on enacted tax laws and rates applicable to the periods
        in
        which the differences are expected to affect taxable income. Valuation
        allowances are established when necessary to reduce deferred tax assets to
        the
        amount expected to be realized. The income tax provision or credit is the
        tax
        payable or refundable for the period plus or minus the change during the
        period
        in deferred tax assets and liabilities.
 
 *(n)
        Impact of Recently Issued Accounting Standards*
 
 In
        December 2004, The Financial Accounting Standards Board (the “FASB”) issued SFAS
        No. 123R (revised 2004), “Share-Based Payment”, which amends FASB Statement No.
        123 and will be effective for the Company beginning with the fiscal quarter
        ending December 31, 2006. The new standard will require us to expense employee
        stock options and other share-based payments over the service period. The
        FASB
        believes the use of a binomial lattice model for option valuation is capable
        of
        more fully reflecting certain characteristics of employee share options compared
        to the Black-Scholes options pricing model. The new standard may be adopted
        in
        one of three ways - the modified prospective transition method, a variation
        of
        the modified prospective transition method or the modified retrospective
        transition method. We are currently evaluating how we will adopt the standard
        and evaluating the effect that the adoption of SFAS 123(R) will have on our
        financial position and results of operations. However, we believe that the
        provisions of the revised standard are likely to require us to recognize
        additional charges for employee compensation.
 
 The
        Financial Accounting Standards Board and the Emerging Issues Task Force (the
        “EITF”) have issued certain other accounting pronouncements as of
        September 30, 2005 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 2005
        and
        2004, and it does not believe that any of those pronouncements will have
        a
        significant impact on the Company’s consolidated financial statements at the
        time they become effective.
 
 **3.** **** **NOTES
        PAYABLE**
 
 Notes
        payable under term loans outstanding as of September 30, 2005 consisted
        of
        the following:
 
 36
 Wachovia
                  Bank Note (a) - current portion
              
              $
              45,670Wachovia
                  Bank Note (a) - net of current portion
              
              
              150,636Total
              
              $
              196,306
 ______________
 
 (a)
              On
                  August 1, 2005, the Company entered into an unsecured Term Loan
                  and
                  Promissory Note Agreement with Wachovia Bank, National Association
                  for
                  $200,000. The note had a term of four years commencing September
                  1, 2005
                  with equal monthly payments of $4,719 of principal and earned interest
                  at
                  a fixed rate of 6.15% per annum for a total payout of
                  $226,512.
 
 **4.** **** **SHARE
        CAPITAL**
 
 ***Preferred
        Shares:***
 
 As
        of
        September 30, 2005, the Company was authorized to issue up to 5,000,000
        shares of preferred stock with a par value of $.001 per share. The preferred
        stock may be issued in one or more series with dividend rates, conversion
        rights, voting rights and other terms and preferences to be determined by
        the
        Company’s Board of Directors, subject to certain limitations set forth in the
        Company’s Articles of Incorporation. However, there were no shares of preferred
        stock outstanding as of September 30, 2005.
 
 ***Common
        Shares (unearned compensation):***
 
 On
        April
        6, 2004 and May 7, 2004, respectively, the Company issued 250,000 shares
        of
        common stock and warrants for the purchase of 250,000 shares of common stock
        exercisable at $1.84 per share to each of PDI Communications Inc. (“PDI”) and
        B.A.A.M., LLC (“BAAM”) pursuant to an agreement executed on February 12, 2004
        for future assistance over the next three years in establishing the Company's
        presence in the Southeast multi-dwelling unit market. The market value of
        the
        shares was $1,100,000 on the date of issuance, which resulted in a charge
        to
        unearned compensation and an increase in additional paid-in capital in that
        amount. The fair value of the shares of common stock was being amortized
        to
        expense over three years.
 
 On
        June
        2, 2004, the Company issued 178,690 shares of common stock to Cablecom/Spacelink
        in return for future consulting services over the next two year period in
        establishing the Company’s presence in the Chicago multi-dwelling unit market.
        The market value of the shares was $405,626 on the date of issuance, which
        resulted in a charge to unearned compensation and an increase in additional
        paid-in capital in that amount. The fair value of the shares of common stock
        is
        being amortized to expense over two years.
 
 On
        November 18, 2004, the Company and PDI executed an agreement for the termination
        of the agreement executed on February 12, 2004. As final compensation, PDI
        (i)
        returned to the Company for cancellation the original stock certificate
        representing 250,000 shares of common stock, (ii) returned to the Company
        for
        cancellation the original warrant agreement for the purchase of 250,000 shares
        of common stock exercisable at $1.84 per share, and (iii) executed a standard
        release for any and all causes of action under the PDI Agreement. In return,
        the
        Company (i) re-issued to PDI a stock certificate for 50,000 registered shares
        of
        common stock, and (ii) agreed that PDI shall remain the Company’s preferred
        equipment provider for a period of one year. The Company had initially recorded
        the fair value of the 250,000 shares and the warrants to purchase 250,000
        shares
        of $1,055,000 as unearned compensation of which $219,791 was amortized to
        expense during the period from February 12, 2004 to September 30, 2004. The
        50,000 shares issued in connection with the termination of the PDI Agreement
        had
        a fair value of $152,500. Accordingly, the Company recorded a net credit
        to
        expense of $67,291 during the three months ended December 31, 2004 thereby
        reducing the total compensation charged to expense over the period from February
        12, 2004 to November 18, 2004 to $152,500. The Company also reversed the
        remaining $835,209 of unearned compensation.
 
 On
        May
        19, 2005, the Company and BAAM executed an agreement for the termination
        of the
        agreement executed on February 12, 2004. The termination resulted in the
        return
        to the Company for cancellation of the original stock certificate representing
        250,000 shares of common stock and the execution by BAAM of a standard release
        for any and all causes of action under the BAAM Agreement. In return, the
        Company re-issued to BAAM a stock certificate for 55,000 registered shares
        of
        common stock.  The
        Company had initially recorded the fair value of the 250,000 shares of $550,000
        as unearned compensation of which $206,250 was amortized to expense during
        the
        period from February 12, 2004 to March 31, 2005. The 55,000 shares issued
        in
        connection with the termination of the BAAM agreement had a fair value of
        $117,700. Accordingly, the Company recorded a net credit to expense of $88,550
        during the three months ended June 30, 2005 thereby reducing the total
        compensation charged to expense over the period from February 12, 2004 to
        May
        19, 2005 to $117,700. The Company also reversed the remaining $343,750 of
        unearned compensation.
 
 37
 ***Stock
        Option Plans:***
 
 **(a)** **** **Suppliers’
        Stock Option Plan (“Suppliers’ Plan”):**
 
 On
        December 31, 1998, the Company established a stock option plan pursuant
        to
        which certain key suppliers of the Company were granted options on completion
        of
        specified activities. Under the terms of the Suppliers’ Plan, eligible suppliers
        could earn options to purchase an aggregate of 250,000 common shares of the
        Company. As of September 30, 2003, all 250,000 options had been
        granted.  During the year ended September 30, 2003, the Board
        repriced
        75,000 of the supplier options from $1.50 per share to $0.33 per share. As
        a
        result of such repricing, the Company was subject to variable accounting
        for
        such options and, accordingly, recognized a non-cash charge of $118,750 during
        the year ended September 30, 2004 based on changes in the fair value
        of the
        options subsequent to the date of repricing. During the first quarter of
        the
        fiscal year ended September 30, 2005, the remaining 76,115 supplier options
        were
        exercised and there were no remaining options outstanding under the Suppliers’
        Plan.
 
 **(b)**  **Employee
        Stock Option Plans (“Employee Plans”):**
 
 On
        November 24, 1998, the Company established Employee Plans whereby
        certain
        employees, officers and directors were granted options to purchase up to
        an
        aggregate of 600,000 common shares of the Company. On February 5,
        2000, the
        Company approved the 2000 Incentive Stock Option Plan (“2000 Option Plan”).
        Under the 2000 Option Plan, the Company was authorized to grant certain
        employees, consultants, officers and directors of the Company and its affiliates
        options to purchase up to 4,000,000 common shares of the Company at $5.00
        per
        share. The options have vesting periods ranging from immediate to three years
        after the grant date. Of the options originally authorized as part of the
        November 24, 1998 Employee Plans, 90,276 were redesignated to be included
        in the 2000 Option Plan.
 
 On
        April 11, 2001, the Board of Directors approved the 2001 Stock Option
        Plan
        (“2001 Option Plan”) to replace the 2000 Option Plan. The 2001 Option Plan is in
        all respects identical to the 2000 Option Plan, which had not been approved
        by a
        vote of the stockholders within one year of its adoption by the Board and
        therefore became ineffective. The 2001 Option Plan was approved by a vote
        of the
        stockholders at the Annual General Meeting on May 10, 2001. 
        In
        October 2000, the Board of Directors of the Company approved the
        re-pricing, at $2.00 per share, of the exercise price of all options previously
        granted at $5.00 per share under the 2000 Option Plan. On March 9,
        2001,
        the Board of Directors approved the re-pricing, at $0.60 per share, of these
        same options. On April 11, 2001, the Board of Directors of the Company
        approved the re-pricing, at $0.60 per share, of all options previously granted
        to directors at $2.50 per share under the 2000 Option Plan.  During
        the
        year ended September 30, 2003, the Board of Directors approved the
        repricing of certain options previously granted to directors, officers,
        employees and consultants from $0.60 per share to $0.33 per share. 
        As of
        September 30, 2003, a total of 1,925,624 of the 2,565,000 shares subject
        to
        outstanding options under the 2001 Stock Option Plan had been repriced to
        $0.33
        per share.  As a result of such repricing, the Company is subject
        to
        variable-plan accounting for such options and, accordingly, it recognized
        non-cash charges for compensation expense of $271,885 and $2,682,932 during
        the
        years ended September 30, 2005 and 2004, respectively, based on the
        net
        increases in the market value of the options subsequent to the respective
        dates
        of repricing.  On August 5, 2004, the stockholders voted at the Annual
        General Meeting to increase the number of shares available under the 2001
        Option
        Plan from 4.0 million to 5.6 million.
 
 The
        Company accounts for its stock-based employee compensation plans under the
        intrinsic value method per APB 25 whereby compensation cost is initially
        recorded for the excess, if any, of the quoted market price of the common
        shares
        over the exercise price at the date of grant for all employee stock options
        issued. In addition, the Company is also required to record compensation
        charges
        and credits for stock options subject to variable plan accounting.
 
 38
 Since
        the
        Company has elected to continue to use the provisions of APB 25 in accounting
        for stock options granted to employees, it is required by SFAS 123
        and SFAS
        148, to present additional pro forma information showing effects on its
        historical results of operations of the use of a method that estimates the
        fair
        value of the options at the grant date and then amortizes the fair value
        to
        expense over the options’ vesting period. Had the Company elected to recognize
        compensation expense based upon the fair value at the grant dates for awards
        under these plans, net loss and loss per common share would have been increased
        to the pro forma amounts shown in the table below.  The fair value
        of each
        grant was estimated on the date of grant using the Black-Scholes option pricing
        model and the assumptions set forth in Note 4(d).
 
 **Years
                  ended September 30,****2005**
              
              **2004**Net
                  loss as reported
              
              $
              (4,680,438
              )
              $
              (8,941,135
              )Add:
                  stock-based employee compensation expense included in net loss,
                  net of
                  related tax effects
              
              
              304,485
              
              
              2,682,932Deduct:
                  Total stock-based employee compensation expense determined under
                  fair
                  value based method for all awards, net of related tax effects
              
              
              (1,041,900
              )
              
              (385,320
              )Pro
                  forma net loss
              
              $
              (5,417,853
              )
              $
              (6,643,523
              )Basic
                  and diluted net loss per share:As
                  reported
              
              $
              (0.10
              )
              $
              (0.24
              )Pro
                  forma
              
              $
              (0.11
              )
              $
              (0.18
              )
 
 **(c)**  **Issuance
        of Options to Consultants:**
 
 On
        March 28, 2005, the Company granted options to purchase a total of
        75,000
        shares of common stock under the 2001 Option Plan to a consultant in exchange
        for services. The options were granted at an exercise price of $2.51. The
        fair
        value of the vested options, as calculated using a Black-Scholes option pricing
        model in accordance with SFAS 123 (see Note 4(d)), was $104,500, which
        was
        charged to general and administrative expenses in the year ended
        September 30, 2005.
 
 **(d)**  **Other
        Stock Option Activity:**
 
 The
        Employees’ Plans were initially authorized to issue a total of 4,000,000 shares
        and the Suppliers’ Plan was authorized to issue a total of 250,000 shares. The
        following table summarizes all of the Company’s stock option activity during the
        years ended September 30, 2005 and 2004:
  39
 
 **Options**
                **Available**
                **For
                  Issuance**
              
              **Number
                  of**
                **Options**
                **Outstanding**
              
              **Options**
                **Exercised**
              
              **Weighted
                  Avg.**
                **Exercise**
                **Price
                  Per Share**Outstanding
                  at Oct.1, 2003
              
              
              1,024,375
              
              
              2,815,000
              
              
              410,625
              
              $
              0.44Granted
                  (weighted average fair value of $1.70 per share) (A)
              
              
              (821,000
              )
              
              821,000
              
              
              —
              
              $
              1.62Expired
              
              
              5,625
              
              
              (5,625
              )
              
              -
              
              
              0.33Exercised
                  (B)
              
              
              —
              
              
              (1,091,069
              )
              
              1,091,069
              
              $
              0.56Increase
                  in available shares
              
              
              1,600,000
              
              
              --
              
              
              -Outstanding
                  at Sept. 30, 2004
              
              
              1,809,000
              
              
              2,539,306
              
              
              1,501,694
              
              $
              0.77Granted
                  (weighted average fair value of $2.09 per share)
              
              
              (2,100,000
              )
              
              2,100,000
              
              
              —
              
              $
              2.51Expired
              
              
              334,860
              
              
              (334,860
              )
              
              -
              
              
              2.69Exercised
                  (B)
              
              
              —
              
              
              (1,004,104
              )
              
              1,004,104
              
              $
              0.41Outstanding
                  at Sept. 30, 2005 (C)
              
              
              43,860
              
              
              3,300,342
              
              
              2,505,798
              
              $
              1.79
 _______________
 
 (A)
        - The
        intrinsic value of these options, which were granted to directors and employees,
        of $288,700 was initially charged to unearned compensation with a corresponding
        increase in additional paid-in capital. The intrinsic value will be
        amortized to expense over the respective periods of service.
 
 (B)
        - The
        Company received cash payments of $409,772 and $606,100 for the years ended
        September 30, 2005 and 2004, respectively, upon the exercise of these options.
 
 (C)
        - As
        discussed above, the Company re-priced certain options, and as a result,
        such
        options were subject to variable accounting provisions.  Accordingly,
        during the years ended September 30, 2005 and 2004, the Company recognized
        charges to general and administrative expenses of $271,885 and $2,801,682,
        respectively, for the increase in market price per share of the Company’s common
        stock.
 
 As
        at
        September 30, 2005, the following stock options were outstanding:
 
 **Exercise**
                **Prices**
              
              **Number**
                **Outstanding**
              
              **Number**
                **Exercisable**
              
              **Weighted-**
                **Average**
                **Remaining**
                **Contractual**
                **Life
                  (years)**$
                  0.33
              
              
              717,258
              
              
              647,257
              
              
              1.560.65
              
              
              100,000
              
              
              100,000
              
              
              3.251.28
              
              
              200,000
              
              
              200,000
              
              
              3.251.35
              
              
              135,000
              
              
              78,750
              
              
              3.251.83
              
              
              200,000
              
              
              100,000
              
              
              4.832.01
              
              
              625,000
              
              
              75,000
              
              
              4.582.05
              
              
              145,000
              
              
              60,417
              
              
              3.752.20
              
              
              67,667
              
              
              27,000
              
              
              3.922.29
              
              
              100,000
              
              
              41,666
              
              
              3.752.52
              
              
              75,000
              
              
              50,000
              
              
              4.502.71
              
              
              300,000
              
              
              49,998
              
              
              4.332.83
              
              
              35,417
              
              
              18,750
              
              
              4.083.01
              
              
              600,000
              
              
              100,000
              
              
              4.33Total
              
              
              3,300,342
              
              
              1,548,838
 
 40
 
 ***Warrants
        Issued:***
 
 The
        following table summarizes all of the Company’s warrant activity during the
        years ended September 30, 2005 and 2004:
 **Number
                  of**
                **Warrants**
                **Outstanding**
              
              **Weighted
                  Avg. Exercise**
                **Price
                  Per Share ($)**Outstanding
                  at October 1, 2003
              
              9,467,363
              
              0.37Issued
                  (A)
              
              
              3,085,985
              
              
              2.08Cancelled
                  (B)
              
              
              (329,933
              )
              
              0.33Exercised
                  (C)
              
              
              (7,997,067
              )
              
              0.40Outstanding
                  at September 30, 2004
              
              
              4,226,348
              
              
              1.57Issued
                  (D)
              
              
              2,122,204
              
              
              3.40Cancelled
                  (E)
              
              
              (250,000
              )
              
              1.84Exercised
                  (F)
              
              
              (449,667
              )
              
              1.00Outstanding
                  at September 30, 2005
              
              
              5,648,885
              
              
              2.29
 ____________________
 
 (A)
              In
                  connection with the November 24, 2003 private placement described
                  below,
                  the Company issued warrants to purchase 1,100,001 shares of common
                  stock
                  at an exercise price of $1.75 per share that expire on November
                  24,
                  2006.
                
                The
                  Company issued warrants to purchase 40,000 shares of common stock
                  for
                  consulting services that had been provided by JRJ Capital. The
                  warrants
                  have an exercise price of $0.65 per share and expire on October
                  1, 2006.
                  The fair value of the warrants was $75,200 on the date of the grant,
                  as
                  calculated using Black-Scholes option pricing model, which resulted
                  in a
                  charge to compensation expense and an increase in additional paid-in
                  capital.
                
                In
                  connection with the agreements with PDI and BAAM on February 12,
                  2004
                  described above, the Company issued warrants to purchase 500,000
                  shares of
                  common stock at an exercise price of $1.84 per share that expire
                  on
                  February 12, 2008 of which, warrants to purchase 250,000 shares
                  were
                  cancelled in the year ended September 30, 2005. The remaining warrants
                  vest quarterly over three years. The fair value of the remaining
                  warrants
                  was $505,000 on the date of the grant, as calculated using the
                  Black-Scholes option pricing model.
                
                In
                  connection with the May 27, 2004 private placement described below,
                  the
                  Company issued warrants to purchase 1,314,532 shares of common
                  stock at an
                  exercise price of $2.46 per share that expire on May 27, 2007.
                  In
                  addition, the Company issued similar warrants to purchase 131,452
                  shares
                  of common stock to the placement agent as partial consideration
                  for the
                  placement fee.
 
 (B)
              Certain
                  of the warrants issued to investors contain cashless exercise provisions.
                  During the year ended September 30, 2004, certain investors exercised
                  warrants to purchase 1,987,383 shares of common stock with an exercise
                  price of $0.33 per share and 150,000 shares of common stock with
                  an
                  exercise price of $0.31 per share. Pursuant to the cashless provisions,
                  warrants to purchase 329,933 shares were canceled as payment for
                  the
                  exercise price based on agreements with the investors and 1,807,450
                  shares
                  were issued.
 
 (C)
              During
                  the year ended September 30, 2004, certain investors exercised
                  warrants to
                  purchase 2,072,117 shares of common stock with an exercise price
                  of $0.33
                  per share, 4,017,500 shares of common stock with an exercise price
                  of
                  $0.43 per share, and 100,000 shares of common stock with an exercise
                  price
                  of $1.75 per share, and as a result, the Company received cash
                  proceeds of
                  $2,586,328.
 
 41
 (D)
              In
                  connection with the November 24, 2004 private placement described
                  below,
                  the Company issued warrants to purchase 2,122,204 shares of common
                  stock
                  at an exercise price of $3.40 per share that expire on November
                  24, 2007.
 
 (E)
              As
                  explained above, on November 18, 2004, the Company and PDI terminated
                  an
                  agreement executed on February 12, 2004. As part of the termination,
                  PDI
                  returned to the Company for cancellation the original warrant agreement
                  for the purchase of 250,000 shares of common stock exercisable
                  at $1.84
                  per share originally issued on February 12,
                  2004.
 
 (F)
              During
                  the year ended September 30, 2005, certain investors exercised
                  warrants to
                  purchase 253,000 shares of common stock with an exercise price
                  of $0.33
                  per share, 166,667 shares of common stock with an exercise price
                  of $1.75
                  per share, and 30,000 shares of common stock with an exercise price
                  of
                  $2.46 per share, and as a result, the Company received cash proceeds
                  of
                  $448,958
 
 ***Assumptions
        Used in Determining Fair Value of Stock Options and Warrants:***
 
 The
        fair
        value of the warrants issued in connection with the issuances of notes payable,
        the fair value of the options issued to employees used in connection with
        the
        computation of pro forma net loss and loss per common share and the fair
        value
        of the options and warrants issued to non-employees in exchange for consulting,
        marketing and financial services were estimated using a Black-Scholes
        option-pricing model with the following weighted-average assumptions used
        for
        2005 and 2004:
 
 **2005**
              
              
              **2004**Expected
                  volatility
              
              
              76%
              
              
              68%Risk-free
                  interest rate
              
              
              4.00%
              
              
              4.00%Expected
                  years of option life
              
              
              1
                  to 5
              
              
              1
                  to 5Expected
                  dividends
              
              
              0%
              
              
              0%
 
 ***Stock
        Purchase Plan:***
 
 On
        October 23, 2001, the Company established, and the stockholders approved,
        the 2001 Employee Stock Purchase Plan (the “Purchase Plan”) whereby certain
        employees (i) whose customary employment is greater than 20 hours
        per
        week, (ii) are employed for at least six consecutive months, and
        (iii) do not own five percent or more of any class of Company stock
        can
        participate in the Purchase Plan and invest from one percent to fifty percent
        of
        their net pay, through payroll deduction, in Company common stock. In addition,
        participating employees can invest from one percent to one hundred percent
        of
        any Company bonus in Company common stock. Employees are limited to a maximum
        investment per calendar year of $25,000.
 
 The
        maximum number of shares of Company common stock reserved under the Purchase
        Plan was originally 2,000,000 shares. On August 5, 2004, the stockholders
        voted
        to increase the number of shares available under the Purchase Plan to 2,800,000
        shares. The Purchase Plan shall terminate in five years or (i) upon
        the
        maximum number of shares being issued, or (ii) sooner terminated per
        the
        discretion of the administrator. The purchase price per share under the Purchase
        Plan is equal to 85% of the fair market value of a share of Company common
        stock
        at the beginning of the purchase period or on the exercise date (the last
        day in
        a purchase period) whichever is lower.
 
 During
        the years ended September 30, 2005 and 2004, the Company issued 18,040
        and
        103,353 shares respectively, to employees under the Purchase Plan. The aggregate
        purchase price for those shares of $38,708 and $79,134, respectively, was
        paid
        by the employees through the offset of the amount they owed for the shares
        against an equivalent amount the Company owed them for accrued salaries or
        severance. Funds derived from the employee purchase of Company common stock
        under the Purchase Plan can be used for general corporate purposes.
 
 42
 ***Shares
        Issued in Lieu of Salary of Executive Officer:***
 
 On
        September 30, 2003, the Board of Directors authorized the grant of a $50,000
        year-end bonus to the Chief Executive Officer with the option to take the
        bonus
        in cash or common shares at the purchase price used for the Employee Stock
        Purchase Plan.  The Chief Executive Officer elected to take the net
        effect
        of the bonus in common shares.  The Company issued 60,650 shares for
        this
        obligation on February 6, 2004.
 
 ***Shares
        Issued for Settlement of Accounts Payable:***
 
 The
        Company issued 40,135 shares of common stock during the year ended September
        30,
        2004 with a fair value of $28,094 pursuant to agreements for settlements
        of
        outstanding trade accounts payable and recognized a gain of $33,840. The
        Company
        also issued 100,000 shares with a fair value of $230,000 to SCO Financial
        Group,
        LLC as settlement of an account payable and resulting litigation therefrom.
 
 There
        were no issuances of shares of common stock during the year ended September
        30,
        2005 for settlements of accounts payable.
 
 ***Shares
        Issued Pursuant to Private Placement:***
 
 On
        November 24, 2003, the Company closed a private placement of its securities
        pursuant to a Confidential Offering Memorandum.  The placement was
        made up
        of 22 units with each unit consisting of 100,000 common shares and 50,000
        warrants to purchase common shares at an exercise price of $1.75 per
        share.  The Company received net proceeds in the amount of $3,300,000
        and
        issued 2,200,000 common shares at effectively $1.50 per share, and 1,100,001
        warrants to purchase common shares.
 
 On
        May
        27, 2004, the Company closed a private placement of its securities pursuant
        to a
        Confidential Offering Memorandum. The placement was made up of 1,314,532
        units
        with each unit consisting of two common shares and one three-year warrant
        to
        purchase common shares at an exercise price of $2.46 per share. The Company
        received net proceeds of $5,049,584 and issued 2,629,064 common shares at
        effectively $2.10 per share, and 1,314,532 warrants to purchase common shares.
 
 On
        November 24, 2004, the Company completed a $16.25 million private equity
        placement, pursuant to which the Company sold 6,063,400 units. Each unit
        consisted of one share of common stock and three-tenths of one three-year
        warrant to purchase one share of common stock at an exercise price of $3.40
        per
        share, to accredited investors at a per unit price of $2.68. After the payment
        of fees and expenses, the Company received net proceeds of $15,045,444 and
        issued 6,063,440 common shares and 2,122,204 warrants to purchase common
        shares.
 
 **5.** **** **COMMITMENTS
        AND CONTINGENCIES**
 
 ***(a)*** ****** ***Litigation***
 
 On
        or
        about March 11, 2005, the Company brought suit against Star Choice
        Communications Inc. for (i) a dispute over the amount of goods and services
        tax
        that was owed to the Company’s Canadian subsidiary on associated programming
        commissions from 2000 and 2001, and (ii) non-payment of programming commissions
        on a specific property site for 2004 and 2005. In September 2005, pursuant
        to a
        verbal settlement, the Company expects to receive $73,500 (CDN). The parties
        are
        in the process of drafting formal settlement and dismissal documents.
 
 ***(b)*** ****** ***Contracts***
 
 43
 The
        Company has entered into a management agreement with a senior executive that
        provides for annual compensation, excluding bonuses, of $250,000. The Company
        can terminate this agreement at any time upon reasonable notice and the payment
        of an amount equal to 24 months of salary. In the event of a change in control
        of the Company, either party may, during a period of 12 months from the date
        of
        the change of control, terminate the agreement upon reasonable notice and
        the
        payment by the Company of an amount equal to 36 months of salary.
 
 During
        the year ended September 30, 2005, the Company entered into an additional
        management agreement with another senior executive that provides for annual
        compensation, excluding bonuses, of $225,000. The Company can terminate this
        agreement at any time upon reasonable notice and the payment of an amount
        equal
        to 12 to 18 months of salary, depending on timing. In the event of a change
        in
        control of the Company, either party may, during a period of 12 months from
        the
        date of the change of control, terminate the agreement upon reasonable notice
        and the payment by the Company of an amount equal to 12 months of salary.
 
 ***(c)*** ****** ***Operating
        Leases***
 
 The
        Company is required to make future minimum rental payments of $343,251 during
        the year ending September 30, 2006 under a non-cancelable lease for
        its
        facilities. Rent expense under all operating leases amounted to $193,374
        and
        $134,422, respectively, for the years ended September 2005 and 2004.
 
 **6.**  **STRATEGIC
        ALLIANCE WITH DIRECTV**
 
 In
        May 2000, the Company entered into a long-term System Operator Agreement
        with DirecTV, Inc. (“DIRECTV”), a California company. On September 29,
        2003, the Company entered into a new System Operator Agreement with DIRECTV,
        which replaced the System Operator Agreement previously executed by the Company
        and was due to initially expire on May 19, 2005.  The Company’s
        contract with DIRECTV gives the Company a share of monthly net subscriber
        receipts, depending upon the number of active subscribers, from the sale
        of
        DIRECTV programming services, plus a commission for each new subscriber
        addition. The Company incurs only the costs associated with the implementation
        of its services and will not share any of DIRECTV’s programming or broadcasting
        costs.
 
 **7.**  **CAPITAL
        LEASE OBLIGATIONS**
 
 The
        Company finances certain equipment acquisitions through capital lease agreements
        that expire through 2008. During the years ended September 30, 2005 and 2004,
        the Company entered into lease agreements for new equipment having a cost
        basis
        of $35,368 and $92,418, respectively.  In addition, during the year
        ended
        September 30, 2004, the Company assumed capital leases for equipment with
        a
        remaining cost basis of $47,693. Future minimum payments required under capital
        leases as of September 30, 2005 were not material.
 
 The
        net
        book value of equipment under capital leases as of September 30, 2005
        and
        2004 was $125,384 and $193,240, respectively, and is included in property
        and equipment.
 
 **8.**  **GAIN
        ON SALE OF CUSTOMERS AND RELATED PROPERTY AND EQUIPMENT**
 
 On
        May
        31, 2005, the Company sold 447 subscribers and certain related property and
        equipment to Comcast of Maryland, Inc. for $1,049,048. The total gain on
        the
        sale was $1,046,088 of which, pursuant to the Joint Venture termination
        agreement, AvalonBay Communities, the former joint venture partner, received
        $411,708. The Company’s gain on the sale of this system, after expenses, was
        $634,380.
 
 On
        November 8, 2004, the Company sold 102 subscribers and certain related property
        and equipment in a non-core 158-unit system to Comcast of Maryland, Inc.
        for
        $183,600. The total gain on the sale was $161,120 of which, pursuant
        to the
        Joint Venture termination agreement, AvalonBay Communities, the former joint
        venture partner, received $79,804. The Company's gain on the sale of this
        system, after expenses, was $81,316.
 
 
 44
 **9.** **** **ACQUISITIONS
        OF BUSINESSES, SUBSCRIBERS AND EQUIPMENT**
 
 On
        June
        1, 2004, the Company acquired Direct Satellite, Inc. (“DSI”) for $2.4 million in
        cash plus $115,000 of closing costs. DSI was primarily a private cable operator
        serving approximately 4,400 video and 400 high-speed Internet subscribers
        in 15
“Class A” multi-family properties signed to long term access agreements in the
        greater Chicago metropolitan area. The acquisition was accounted for under
        the
        purchase method and the assets, liabilities, revenues and expenses related
        to
        DSI were consolidated with the accounts of the Company effective June 1,
        2004.
        Acquisition costs were allocated to the fair value of the net assets assumed
        as
        set forth below:
 
 Property
                  and equipment
              
              $
              819,159Amortizable
                  intangible assets
              
              
              1,695,841Total
                  Acquisition Cost
              
              $
              2,515,000
 
 The
        intangible assets were attributable to the building access agreements and
        customer lists. The intangible assets acquired are being amortized over five
        years. The Company also entered into a consulting agreement with
        Cablecom/Spacelink for the development of the Company’s presence in the Chicago
        market (see Note 4).
 
 On
        September 20, 2004, the Company acquired PCM Acquisitions Corporation for
        $1,380,691 in cash plus $112,500 of closing costs. PCM was primarily a private
        cable operator serving approximately 3,200 subscribers. The acquisition included
        the accounts receivable and a pro-rated revenue and cost amount for the month
        of
        September 2004. Acquisition costs were allocated to the fair value of the
        net
        assets assumed as set forth below:
 
 Accounts
                  receivable
              
              $
              102,821Property
                  and equipment
              
              
              779,121Amortizable
                  intangible assets
              
              
              611,249Total
              
              $
              1,493,191
 
 The
        intangible assets were attributable to the building access agreements and
        customer lists. The intangible assets acquired are being amortized over five
        years.
 
 The
        following table presents the unaudited pro forma results of operations for
        informational purposes for the year ended September 30, 2004, assuming that
        the
        Company had acquired DSI and PCM at the beginning of the year:
 
 **2004**Total
                  revenue
              
              $
              5,716,785Net
                  loss
              
              
              (8,821,988
              )Net
                  loss per common share
              
              $
              (0.23
              )
 
 The
        pro
        forma results of operations give effect to certain adjustments including
        amortization of purchased intangibles. This information may not necessarily
        be
        indicative of the future combined results of operations of the Company.
 
 
 45
 **10.**  **PROPERTY
        AND EQUIPMENT**
 
 The
        components of property and equipment are set forth below:
 
 **September 30,****2005**
              
              
              **2004**Telecommunications
                  equipment, installed
              
              $
              18,304,151
              
              $
              8,624,653Computer
                  equipment
              
              
              734,265
              
              
              396,540Furniture
                  and fixtures
              
              
              189,092
              
              
              127,017Other
              
              
              162,577
              
              
              24,95419,390,085
              
              
              9,173,164Less:
                  Accumulated depreciation
              
              
              (4,954,301
              )
              
              (2,771,331
              )$
              14,435,784
              
              $
              6,401,833
  Depreciation
        expense amounted to $2,182,970 and $1,138,077 for the years ended
        September 30, 2005 and 2004, respectively.
 
 **11.** ****  **INTANGIBLE
        ASSETS**
 
 The
        components of intangible assets are set forth below:
 
 **September 30,****2005**
              
              **2004**Building
                  access agreements and subscriber lists
              
              $
              5,020,705
              
              $
              4,633,838Less:
                  Accumulated amortization
              
              
              (2,279,918
              )
              
              (1,407,621
              )$
              2,740,787
              
              $
              3,226,217
 
 Amortization
        expense amounted to $872,297 and $482,087 for the years ended September 30,
        2005 and 2004, respectively. Amortization of intangibles in the five years
        subsequent to September 30, 2005 is as follows:
 
 **Year**
              
              **Amortization**
                **Amount**2006
              
              $
              944,0932007
              
              
              659,6172008
              
              
              603,3902009
              
              
              469,8972010
              
              
              63,790
 
 **12.** **** **OTHER
        ACCRUED LIABILITIES**
 
 Other
        accrued liabilities consist of the following:
 
 **2005**
              ****
              **2004**Accrued
                  costs and expenses
              
              $
              867,939
              
              $
              348,111Other
              
              
              246,404
              
              
              200,796Totals
              
              $
              1,114,343
              
              $
              548,907
 
 46
 **13.** ****  **INCOME
        TAXES**
 
 The
        Company had pre-tax losses but did not record any credits for Federal or
        other
        income taxes for the years ended September 30, 2005 and 2004. The
        Company
        did not record Federal income tax benefits at the statutory rate of 34% and
        state income tax credits because (a) it has incurred losses in each
        period
        since its inception and cannot carry back any of its losses against previously
        recorded income tax expense and (b) although such losses, among other
        things, have generated future potential income tax benefits, there is
        significant uncertainty as to whether the Company will be able to generate
        income in the future to enable it to realize any of those benefits and,
        accordingly, it has had to take valuation reserves against those potential
        benefits as shown below.
 
 As
        of
        September 30, 2005 and 2004, 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:
 
 **2005**
              
              
              **2004**Deferred
                  tax assets:Benefits
                  from net operating loss carryforwards:United
                  States
              
              $
              8,101,000
              
              $
              6,630,000Canada
              
              
              3,287,000
              
              
              3,244,000Amortization
                  of intangible assets
              
              
              619,000
              
              
              394,000Other
              
              
              300,000
              
              
              334,000Totals
              
              
              11,885,000
              
              
              10,602,000Deferred
                  tax liabilities—depreciation of property and equipment
              
              
              (1,445,000
              )
              
              (712,000
              )Net
                  deferred tax assets
              
              
              10,862,000
              
              
              9,890,000Less
                  valuation allowance
              
              
              (10,862,000
              )
              
              (9,890,000
              )Totals
              
              $
              —
              
              $
              —
 
 At
        September 30, 2005 and 2004, the Company had net operating loss carry
        forwards of approximately $19,388,000 and $15,301,000, respectively, available
        to reduce future Federal taxable income and net operating loss carryforwards
        of
        approximately $7,225,000 and $7,129,000, respectively, available to reduce
        future Canadian taxable income. As of September 30, 2005, the Federal
        tax
        loss carry forwards will expire from 2006 through 2025 and the Canadian tax
        loss
        carryforwards will expire from 2006 through 2010. However, the Company
        terminated substantially all of its Canadian operations in the year ended
        September 30, 2002.
 
 The
        deferred tax valuation allowance increased by $895,000 and $2,428,000 in
        the
        years ended September 30, 2005 and 2004, respectively.
 
 **14.** **SEGMENT
        AND RELATED INFORMATION**
 
 The
        Company operates in one industry segment. The Company’s operations are comprised
        of providing delivery of home entertainment and information technology to
        multi-unit dwellings.
 
 **15.** ****  **SUBSEQUENT
        EVENTS**
 
 From
        October 1, 2005 through December 19, 2005, 350,000 warrants were exercised
        with
        the Company receiving proceeds of $87,500.
 
 47
 **16.****RESTATEMENT
        OF UNAUDITED QUARTERLY FINANCIAL
        INFORMATION**
 
 In
        connection with its review of our financial statements for the quarter ended
        June 30, 2005, J.H. Cohn LLP, our independent registered public accounting
        firm,
        brought to the attention of management that although the Company had been
        accounting for options with cashless exercise provisions and options that
        had
        been repriced by using variable plan accounting in accordance with the Financial
        Accounting Standards Board’s Interpretation 44, “Accounting for Certain
        Transactions Involving Stock Compensation - an interpretation of APB Opinion
        No.
        25,” it had not calculated the related adjustments appropriately during the
        quarters ended December 31, 2004 and March 31, 2005. J.H. Cohn LLP had informed
        the management of the Company that the calculation of the adjustment was
        based
        on the average stock price for each of the quarters instead of the lowest
        price
        on the last day of each quarter. After reviewing the matter, management agreed
        that the calculation had been based on the incorrect stock prices and determined
        that such calculation had understated the decrease in the market value of
        the
        options and, as a result, had overstated noncash compensation costs and net
        losses during those quarters by a total of $196,739. Management believed
        that
        the amount of the error applicable to compensation expense in each of the
        affected quarterly periods was not material and that the quarterly reports
        for
        each period did not have to be restated. Instead of restating the quarters
        ended
        December 31, 2004 and March 31, 2005, the Company chose to recognize the
        entire
        $196,739 decrease in compensation expense resulting from the error in applying
        variable accounting in the financial statements in the quarter ended June
        30,
        2005.
 
 Although
        we believe that the errors in each of the affected quarterly reports were
        not
        material, we are presenting certain statement of operations information under
        this separate unaudited financial statement note to correct them. Presented
        below are the total general and administrative expenses, the net loss and
        the
        basic and diluted loss per common share before adjustment and the adjusted
        amounts for each quarter.
 
  **Quarter
                    Ended December 31, 2004**
                
                
                
                
                **As
                    Previously**
                  **Reported
                    For**
                  **the
                    Three Months Ended**
                  **12/31/2004**
                
                **As
                    Restated For**
                  **the
                    Three Months Ended**
                  **3/31/2005****Statement
                    of Operations:**General
                    and administrative expenses
                
                
                
                
                
                
                $
                1,416,304
                
                $
                1,210,427Net
                    Loss
                
                
                
                
                
                
                $
                (1,800,696)
                
                $
                (1,594,819)Basic
                    and diluted loss per common share
                
                
                
                
                
                
                $
                (0.04)
                
                $
                (0.04)
 
 **Quarter
                  Ended March 31, 2005**
              **As
                  Previously**
                **Reported
                  For**
                **the
                  Three Months Ended**
                **3/31/2005**
              
              **As
                  Restated**
                **the
                  Three Months Ended**
                **3/31/2005**
              
              **As
                  Previously**
                **Reported
                  For**
                **the
                  Six Months Ended**
                **3/31/2005**
              
              **As
                  Restated**
                **the
                  Six Months Ended**
                **3/31/2005****Statement
                  of Operations:**General
                  and administrative expenses
              $
              1,112,458
              
              $
              1,568,802
              
              $
              2,528,762
              
              $
              2,779,229Net
                  Loss
              $
              (1,620,200)
              
              $
              (2,076,544)
              
              $
              (3,420,896)
              
              $
              (3,671,363)Basic
                  and diluted loss per common share
              $
              (0.03)
              
              $
              (0.04)
              
              $
              (0.07)
              
              $
              (0.08)
 
 
 48
 **Quarter
                  Ended June 30, 2005**
              **As
                  Previously**
                **Reported
                  For**
                **the
                  Three Months Ended**
                **6/30/2005**
              
              **As
                  Restated**
                **the
                  Three Months Ended**
                **6/30/2005**
              
              **As
                  Previously**
                **Reported
                  For**
                **the
                  Nine Months Ended**
                **6/30/2005**
              
              **As
                  Restated**
                **the
                  Nine Months Ended**
                **6/30/2005****Statement
                  of Operations:**General
                  and administrative expenses
              $
              (60,129)
              
              $
              (310,596)
              
              $
              2,468,633
              
              $
              2,468,633Net
                  Loss
              $
              213,467
              
              $
              463,934
              
              $
              (3,207,429)
              
              $
              (3,207,429)Basic
                  and diluted loss per common share
              $
              0.00
              
              $
              0.01
              
              $
              (0.07)
              
              $
              (0.07)
 
 **Item
        8.  Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure**
 
 None.
 
 **Item
        8A.  Controls and Procedures**
 
 **(a)
        Evaluation of Disclosure Controls and Procedures**
 
 The
        Company, under the supervision and with the participation of its management,
        including the Chief Executive Officer, who is also the Chief Financial Officer,
        as well as the Vice President of Finance and Administration, evaluated the
        effectiveness of the design and operation of the Company’s “disclosure controls
        and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act
        of 1934 (the Exchange Act)) as of the end of the period covered by this report.
        Based on that evaluation, the Chief Executive Officer, the Chief Financial
        Officer and the Vice President of Finance and Administration concluded that
        the
        Company’s disclosure controls and procedures were effective as of that
        date in making known to them on a timely basis, material information
        relating to the Company and the Company’s consolidated subsidiaries required to
        be disclosed in the Company’s reports filed or submitted under the Exchange Act,
        solely for the reasons set forth below.
 
 In
        connection with the preparation of its unaudited financial statements for
        the
        quarter ended March 31, 2005, the Company identified a material weakness
        in its
        internal controls surrounding the recording and valuation of stock options
        subject to variable plan accounting treatment. Such weakness resulted in
        a
        restatement of the Company’s financial statements for the year ended September
        30, 2004 and the quarter ended December 31, 2004 to increase by $1.36 million
        the amount of noncash compensation expense attributable to stock options
        for the
        five quarters. Steps and adjustments that the Company took to remediate this
        weakness after discovery included the hiring and appointment of a Vice President
        of Finance and Administration who is also the Chief Accounting Officer,
        improvements to training and approval of any and all relevant continuing
        educational seminars, enhanced oversight of staff, and the appointment to
        the
        Board of Directors of an independent financial expert. Despite these
        adjustments, a second error of a misapplied valuation was discovered in the
        amount of noncash compensation expense attributable to stock options for
        two of
        these quarters (see Note 16). The Company has directed the Vice President
        of
        Finance to implement additional oversight and additional training on this
        particular issue. The Company believes that these steps, in addition to steps
        previously taken, were sufficient to remediate this weakness
        during
        the quarter ended September 30, 2005.
 
 **(b)
        Changes in Internal Controls**
 
 There
        has
        been no change in the Company’s internal control over financial reporting or in
        other factors during the quarter ended September 30, 2005 that has materially
        affected, or is reasonably likely to materially affect, the Company’s internal
        control over financial reporting subsequent to the date of the evaluation
        referred to above.
 
 49
 **PART
        III**
 
 **Item
        9.  Directors, Executive Officers, Promoters and Control Persons;
        Compliance with Section 16(a) of the Exchange Act.**
 
 The
        following are the directors and executive officers of the Company:
 
 ***DIRECTORS***
 
 **Sheldon
        B. Nelson** ,
        44, has
        served as Chief Executive Officer and Chairman of the Board of the Company
        since
        November 1998. From 1983 to 1998 he was President of 4-12 Electronics
        Corporation, a provider of products and services to the Canadian satellite,
        cable, broadcasting and SMATV industries. In addition to his day-to-day
        responsibilities during his tenure at 4-12 Electronics, Mr. Nelson
        developed that company into one of Canada’s largest private cable system
        operators. Mr. Nelson is a 1983 graduate of Gonzaga University in
        Spokane,
        Washington where he graduated from the School of Business Administration,
        Magna
        cum Laude, and was the recipient of the School of Business Administrations’
        Award of Excellence.
 
 **Douglas
        G. Hooper** , 45,
        joined the Board of Directors in May 2000. He is currently
        Executive
        Chair of Canadian Bioenergy Corporation, a privately owned biodiesel
        business. Mr. Hooper has also served, from 1997 to present, in many capacities
        as an acquisitions and finance consultant, with extensive experience
        as a venture capitalist and mergers and acquisition specialist in the mineral
        exploration, industrial processing and software industries. He was President
        and
        CEO of Sand River Resources Ltd. from 1995 to 1997. Mr. Hooper
        was a
        founder and President of TelSoft Mobile Data Inc. from 1992 to 1995,
        now
        Mobile Data Solutions, Inc., a wireless communications software company.
        In
        that position, he developed and implemented corporate strategy and was
        responsible for raising capital, strategic alliances and mergers and
        acquisitions.
 
 **John
        Edward "Ted" Boyle** ,
        58,
        joined the Board of Directors in May of 2000. He is currently the Vice-President
        of Corporate Development of Cable Bahamas, in Nassau. From 2002 to 2004 he
        was
        President of the cable division of 180 Connect Inc., North America's largest
        cable and satellite installation and service contractor. From 1998 to 2001
        he
        was the President and CEO of Multivision (Pvt.) Ltd., the cable television
        provider for Sri Lanka. From 1996 -1997, Mr. Boyle was the President and
        CEO of
        PowerTel TV, a Toronto based digital wireless cable company. As founding
        President and CEO of ExpressVu Inc. (1994 -1996), Mr. Boyle was responsible
        for
        taking Canada's first Direct-to-Home satellite service from inception to
        launch.
        Prior to 1994, Mr. Boyle held executive positions with Tee-Comm Electronics,
        Regional Cablesystems and Canadian Satellite Communications (Cancom). As
        the
        founding officer of Regional Cablesystems at Cancom, and later as Vice-President
        of Market Development at Regional, he led the licensing and construction
        or
        acquisition of over 1000 Canadian and American cable systems.
 
 **Steve
        J. Cox,** 44,
        accepted appointment to the Board of Directors in July 2005. He was most
        recently executive vice president of Sales, Distribution and Business
        Development for DIRECTV, Inc. In this position, he was responsible for
        overseeing all elements of DIRECTV’s sales and distribution strategy, including
        management of national and regional consumer electronics retailers, telephony
        partners, independent accounts and internal sales; execution of new sales
        programs; management of commercial and multi-dwelling unit (MDU) sales programs;
        and sales operations and support. Prior to overseeing the Sales and Distribution
        Division, Mr. Cox served as executive vice president of DIRECTV Global Digital
        Media and as senior vice president of New Ventures, where he was responsible
        for
        structuring and negotiating DIRECTV’s strategic partnerships, acquisitions and
        investments, as well as developing new business opportunities. Mr. Cox joined
        DIRECTV in 1995 as vice president, Business Affairs and General Counsel,
        from
        his previous post as corporate counsel for Science Applications International
        Corporation (SAIC). His primary responsibilities at SAIC included acquisitions
        and divestitures, strategic alliances and joint ventures.
 
 **Carolyn
        C. Howard,** 42,
        accepted appointment to the Board of Directors in July 2005 and is serving
        on
        the Company’s Audit Committee as the independent financial expert. Ms. Howard
        has been employed by Howard Interests since 1987, a venture capital firm,
        of
        which she is a co-founder and manager. Prior to that, Ms. Howard owned and
        managed a personnel and staffing firm and held a position in banking with
        a
        focus on Fannie Mae/Freddie Mac lending. Additionally, she has held positions
        with securities firms trading and covering institutional accounts. In 1992
        through 1997, she acted as CEO and COO of one of New Hampshire’s largest food
        service and bottled water companies. In 1997, she sold the company to Vermont
        Pure Springs, Inc., a publicly traded company. Ms. Howard also sits on the
        board
        and chairs the audit committee of Video Display Corporation, (VIDE) a publicly
        traded company. In February 2005, she was named Treasurer to the Jaffrey
        Gilmore
        Foundation, a New Hampshire non-profit organization for the arts.
 
 50
 **Edward
        L. Huguez** ,
        47,
        joined the Board in October of 2003 and retired from the Board in
        October
        of 2005. He is currently executive vice president, Starz Entertainment Group.
        Starz is the largest provider of premium movie services with up to thirteen
        digital movie channels and more than 750 movies per month. Starz is a wholly
        owned subsidiary of Liberty Media Corporation (NYSE: L, LMCb). Prior to Starz,
        he was President and CEO of MidStream Technologies, a privately held company
        concentrating on Video on Demand and Network Digital Video Recording. 
        Prior to joining Midstream, he served as senior vice president at Akamai
        Technologies, the leading provider of global, high performance services for
        the
        delivery of interactive Internet content, streaming media and Internet
        applications.  He joined Akamai upon its $2.8 billion acquisition
        of
        INTERVU in April 2000.  As chief operating officer at INTERVU,
        Mr.
        Huguez helped drive the evolution of the company from a start up with about
        30
        employees and no revenue, to the market leader with 400 employees and more
        than
        900 customers.  Before INTERVU, Mr. Huguez spent almost six years
        at
        DIRECTV, the nation’s leading digital satellite television service.  He
        joined DIRECTV in 1992 and was part of the senior executive team that launched
        the service in 1994.  He had two primary responsibilities while at
        DIRECTV;
        first, vice president of programming acquisition, then, after DIRECTV
        successfully launched its service and became the leading television satellite
        service, he was asked to lead DIRECTV’s newly formed New Media & Interactive
        Programming and Platforms Group, where he assumed the role of vice president
        and
        general manager. Mr. Huguez earned his MBA at UCLA and holds a bachelor’s degree
        in political science from Arizona State.
 
 ***OFFICERS***
 
 **Tom
        Tracey, President and Chief Operating Officer.** Mr.
        Tracey, 42, has been with the Company since May 2005. Mr. Tracey most recently
        served as Vice President of Broadband Services at national Internet service
        provider EarthLink. In this capacity he was responsible for a base of over
        one
        million subscribers to cable modem, DSL and satellite services with monthly
        growth rates in excess of 25,000 subscribers. Mr. Tracey also led and managed
        the Cable Product Management Team in successfully developing and launching
        the
        EarthLink Broadband Service over Time Warner Cable systems. Additionally,
        he was
        responsible for leading EarthLink's Next Generation Broadband Team in developing
        and managing fixed wireless and broadband over power lines services. Prior
        to
        joining EarthLink, Mr. Tracey was a Director at Directv, Inc. responsible
        for
        the launch, implementation and business development of DIRECTV services in
        South
        America, which achieved growth of over one million subscribers. He also served
        in management roles in launching and operating DIRECTV's affiliate and joint
        venture relationships in the United States. He holds a Bachelor of Sciences
        degree from San Diego State University and an MBA from the Anderson School
        at
        UCLA.
 
 **Patrick
        Cunningham, Vice President of Sales and Business
        Development** .
        Mr.
        Cunningham, 37, has been a Vice President with the Company since 2000. 
        He
        has over fourteen years of management experience focused on the
        telecommunications industry. Mr. Cunningham was formerly the Vice President
        of
        Distribution and Sales for SkyView World Media. At SkyView, he was responsible
        for the distribution, sales, marketing and technical service of the SkyView
        products. SkyView was one of the leading private providers of television
        services to the MDU and ethnic communities with over 100,000 subscribers
        nationwide. SkyView was the largest Master Systems Operator for DIRECTV and
        a
        leading producer and distributor of foreign language television programming.
        Prior to SkyView, and after some time as a maintenance manager with Schnieder
        National, Inc., Mr. Cunningham was an Officer in the U.S. Army where he served
        as a Battalion Communications Officer and an M1A1 Tank Platoon Leader. Mr.
        Cunningham has a Bachelor of Science from Union College in Schenectady, NY
        where
        he majored in Industrial Economics.
 
 **Brad
        Holmstrom, General Counsel.** Mr.
        Holmstrom, 40, has been with the Company since 2000 serving as the Company’s
        inhouse legal counsel. Prior to joining the Company, Mr. Holmstrom was partner
        in the Kansas City, Missouri office of Shughart Thomson & Kilroy,
        PC.
 
 51
 **Michael
        Stanway, Vice President of Product Engineering.** Mr.
        Stanway, 41, joined the Company in 2000 as Manager and then Director of MIS/IT
        Services. Mr. Stanway then assumed the position of Director of Operations
        and
        then Vice President of Operations. Mr. Stanway has a post-secondary degree
        as a
        Network Specialist with Microsoft and Novell certifications.
 
 **Carmen
        Ragusa, Jr., Vice President of Finance and Administration.** Mr.
        Ragusa, 57, has been with the Company since 2004. He is a
        CPA, holds an MBA and brought to the Company over twenty-five years of
        experience in both the public and private sectors of the manufacturing and
        construction industry, with the last ten years in a senior financial capacities
        of Vice President of Finance and Chief Financial Officer in privately held
        corporations with $40 to $50 million in recurring annual revenue. Mr. Ragusa
        has
        experience not only in the management of all aspects of accounting and finance
        departments, but has made significant contributions in the areas of business
        development, financial stability, and has assisted in the implementation
        of
        operational strategies that support business development and financial
        objectives.
 
 **Joe
        Nassau, Vice President of Subscriber Operations.** Mr. Nassau, 49, has been with the Company since June 2005 and is responsible
        for
        leading and managing the Company’s Call Center (sales, customer support and tech
        support), Subscriber Lifecycle Process Management, Subscriber Operational
        Support Systems, Training, Dispatch, and Backoffice operations.  He
        brings
        over 20 years of experience in the pay television and broadband industries
        in a
        variety of functional and operational management roles.  In particular,
        he
        led and managed the integration, growth and operation of HBO’s satellite
        television call center and backoffice operations in Chicago that supported
        sales
        and service for over 1 million subscribers.  He also held key leadership
        roles in the successful planning, launch, and deployment of Galaxy Latin
        America’s DIRECTV services in Latin America, as well as the highly successful
        launch of EarthLink’s High-Speed Internet Service throughout Time Warner Cable’s
        network nationwide.  Mr. Nassau holds a BA in Communications from
        Fordham
        University and an MBA in Decision and Information Sciences from the University
        of Florida.  He also served as an Infantry Officer in the Unites States
        Army.
 
 **John
        Silvers, Vice President of Field Operations.** Mr.
        Silvers, 37,
        joined MDU Communications in July 2005 and has over fifteen years of management
        and sales experience focused on the telecommunications and service industries.
        Mr. Silvers most recently managed foodservice operations for ARAMARK’s
        Correctional Services division. Prior to ARAMARK, Mr. Silvers provided satellite
        transponder services to cable and broadcast clients with GE Americom. While
        at
        GE, he completed the largest transaction in the company’s history with a two
        satellite sale to BellSouth. Prior to GE, Mr. Silvers was Vice President
        and
        General Manager at SkyView World Media. At SkyView, he was responsible for
        the
        distribution, sales, marketing and technical service of SkyView’s East Region.
        SkyView was one of the leading private providers of television services to
        the
        MDU and ethnic communities with over 100,000 subscribers nationwide. Prior
        to
        SkyView, Mr. Silvers was an Officer in the U.S. Army where he served as a
        Battalion Personnel Officer, Battalion Logistics Officer and an Air Defense
        Artillery Platoon Leader. Mr. Silvers has a Bachelor of Science from the
        United
        States Military Academy at West Point, NY where he majored in Engineering
        Management.
 
 **AUDIT
        COMMITTEE AND INDEPENDENT FINANCIAL EXPERT**
 
 Our
        Board
        of Directors has established a separately designated and standing Audit
        Committee (as defined and established in accordance with Section 3(a)(58)(A)
        of
        the Exchange Act) to oversee the accounting and financial reporting processes
        of
        the Company and the audits of our financial statements.  The members
        of the
        Audit Committee are Douglas Hooper, J.E. “Ted” Boyle and Carolyn
        Howard.
 
 Under
        the
        new rules of the SEC brought about by the Sarbanes-Oxley Act, companies are
        required to disclose whether their Audit Committees have an "audit committee
        financial expert" as defined in Item 401(h) of Regulation S-B under the Exchange
        Act and whether that expert is "independent" as that term is used in Item
        7(d)(3)(iv) of Schedule 14A under the Exchange Act. Board member Carolyn
        Howard
        meets the criteria of an independent financial expert and serves as such
        on
        behalf of the Company.
 
 **SECTION 16(a)
        BENEFICIAL OWNERSHIP REPORTING COMPLIANCE**
 
 52
 Section 16(a)
        of the Securities Exchange Act of 1934 requires the Company’s directors,
        executive officers and persons who own beneficially more than 10% of the
        Company’s common stock to file with the Securities and Exchange Commission
        (“SEC”) initial reports of ownership and reports of changes in ownership of
        common stock and other equity securities of the Company. Officers, directors
        and
        greater than 10% stockholders are required by SEC regulation to furnish the
        Company with copies of all Section 16(a) reports they file. To the
        Company’s knowledge, based solely on review of the copies of such reports
        furnished to the Company or advice that no filings were required, during
        fiscal
        year 2005 all officers, directors and greater than 10% beneficial owners
        complied with the Section 16(a) filing requirements.
 
 ***CODE
        OF ETHICS***
 
 The
        Company has adopted a Code of Ethics that applies to our officers (including
        our
        principal executive officer and our principal financial and accounting officer),
        management employees and directors.  A copy of our Code of Ethics
        will be
        provided without charge to any person who requests a copy by sending a written
        request to:
 
 MDU
        Communications International, Inc.
 60-D
        Commerce Way
 Totowa,
        New Jersey 07512
 Attn:
        Corporate Secretary
 
 **Item
        10.  Executive Compensation**
 
 **COMPENSATION
        OF EXECUTIVE OFFICERS**
 
 The
        following table sets forth certain information as of September 30, 2005,
        regarding compensation paid during each of the Company’s last three fiscal years
        to our chief executive officer and other executive officers whose total annual
        salary and bonuses exceeded $100,000 (the “named executive officers”):
 
 **SUMMARY
        COMPENSATION TABLE**
  **Annual
                  Compensation**
              
              **Long
                  Term Compensation Awards****Name
                  and Principal Position**
              
              **Fiscal
                  Year**
              
              **Salary**
              
              **Bonus**
              
              **Other**
                **Compensation****2******
              
              **Securities
                  Underlying**
                **Options
                  (shares, cumulative)****3**Sheldon
                  B. Nelson,
              
              
              2005
              
              $
              269,743
              
              $
              200,000
              
              $
              -0-
              
              
              1,400,000Chief
                  Executive Officer
              
              
              2004
              
              $
              200,000
              
              $
              30,000
              
              $
              -0-
              
              
              800,0002003
              
              $
              192,000
              
              $
              50,000
              
              $
              -0-
              
              
              800,000Tom
                  Tracey,
              
              
              2005
              
              $
              82,212**1**
              
              $
              35,000
              
              $
              2,306
              
              
              500,000Chief
                  Operating Officer, Pres.Patrick
                  Cunningham,
              
              
              2005
              
              $
              173,070
              
              $
              45,706
              
              $
              2,000
              
              
              450,000VP
                  of Sales and Business Dev.
              
              
              2004
              
              $
              160,000
              
              $
              6,000
              
              $
              6,000
              
              
              350,0002003
              
              $
              160,000
              
              $
              -0-
              
              $
              6,000
              
              
              300,000Bradley
                  Holmstrom,
              
              
              2005
              
              $
              157,744
              
              $
              63,907
              
              $
              -0-
              
              
              425,000General
                  Counsel
              
              
              2004
              
              $
              138,900
              
              $
              10,000
              
              $
              1,500
              
              
              325,0002003
              
              $
              109,250
              
              $
              -0-
              
              $
              5,750
              
              
              250,000Michael
                  Stanway,
              
              
              2005
              
              $
              110,609
              
              $
              7,875
              
              $
              -0-
              
              
              225,000VP
                  of Product Engineering
              
              
              2004
              
              $
              105,600
              
              $
              -0-
              
              $
              -0-
              
              
              225,000Carmen
                  Ragusa, Jr.,
              
              
              2005
              
              $
              145,006
              
              $
              10,000
              
              
              -0-
              
              
              200,000VP
                  of Finance and Admin.
              
              
              2004
              
              $
              54,034**1**
              
              $
              -0-
              
              
              -0-
              
              
              100,000John
                  Silvers,
              
              
              2005
              
              $
              32,307**1**
              
              $
              -0-
              
              $
              1,3852
              
              
              -0-VP
                  ofJoe
                  Nassau,
              
              
              2005
              
              $
              37,692**1**
              
              $
              -0-
              
              $
              -0-
              
              
              -0-VP
                  of Subscriber Operations
 _________________
 
 (1)
        Partial year salary.
 
 (2)
        Auto
        allowance.
 
 (3)
        Includes total options granted since commencement of employment, not reduced
        by
        exercise.
 
 53
 The
        following table sets forth certain information as of September 30, 2005,
        regarding grants of quarterly vesting stock options made during the fiscal
        year
        ended September 30, 2005 to named executive officers:
 
 **OPTIONS
        GRANT TABLE**
 
 **Executive
                  Officer**
              **Number
                  of Securities Underlying Options Granted**
              **%
                  of Total Options Granted to Employees in Fiscal
                  Year**
              **Exercise
                  or Base Price**
              **Expiration
                  Date**Sheldon
                  B. Nelson,
              600,000
              30%
              $3.01
              2/1/2010Chief
                  Executive OfficerTom
                  Tracey,
              500,000
              25%
              $2.01
              5/5/2010Chief
                  Operating Officer, Pres.Patrick
                  Cunningham,
              100,000
              5%
              $2.83
              2/24/2010VP
                  of Sales and Business Dev.Bradley
                  Holmstrom,
              100,000
              5%
              $2.83
              2/24/2010General
                  CounselCarmen
                  Ragusa, Jr.,
              100,000
              5%
              $2.83
              2/24/2010VP
                  of Finance and Admin.
 
 The
        following table sets forth certain information as of September 30, 2005,
        regarding the exercise of stock options made during the fiscal year and the
        valuation of unexercised stock options at September 30, 2005 to named executive
        officers:
 
 54
 **AGGREGATED
        OPTION EXERCISES**
 **IN
        FISCAL YEAR ENDED SEPTEMBER 30, 2005 AND YEAR ENDED OPTION
        VALUES**
 
 **Executive
                  Officer**
              **Shares
                  Acquired on Exercise**
              **Value
                  of Shares after Exercise on**
                **Exercise
                  Date**
              **Number
                  of Securities Underlying Unexercised Options at Fiscal Year
                  End**
              **Value
                  of Unexercised In the Money Options at Fiscal Year
                  End****Exercisable**
              **Unexercisable**
              **Exercisable**
              **Unexercisable**Sheldon
                  B. Nelson,
              570,000
              $1,658,700**1**
              175,000
              500,000
              $107,250
              $0Chief
                  Executive OfficerTom
                  Tracey,
              -0-
              -0-
              41,667
              458,333
              $0
              $0Chief
                  Operating Officer, Pres.Patrick
                  Cunningham,
              40,000
              $116,800**2**
              220,833
              104,167
              $258,918
              $6,834VP
                  of Sales and Business Dev.Bradley
                  Holmstrom,
              31,023
              $62,976**3**
              260,416
              114,584
              $304,791
              $11,959General
                  CounselMichael
                  Stanway,
              30,000
              $80,100**4**
              145,000
              50,000
              $189,475
              $89,375VP
                  of Product EngineeringCarmen
                  Ragusa, Jr.,
              -0-
              -0-
              58,344
              141,666
              $0
              $0VP
                  of Finance and Admin.
 **__________**
 
 1.
              Value
                  of exercised options at $3.24/share on day of exercise, less exercise
                  price of $0.33/share.
 
 2.
              Value
                  of exercised options at $3.25/share on day of exercise, less exercise
                  price of $0.33/share.
 
 3.
              Value
                  of exercised options at $2.36/share on day of exercise, less exercise
                  price of $0.33/share.
 
 **4.**
              Value
                  of exercised options at $3.00/share on day of exercise, less exercise
                  price of $0.33/share.
 
 **COMPENSATION
        OF DIRECTORS**
 
 *Cash.* Each
        director who is not an employee or full time consultant of the Company is
        paid
        $1,000 per month and an attendance fee of $1,000, plus out-of-pocket expenses
        for each Board or committee meeting attended. Ms. Howard also receives an
        additional $3,000 per year for her work as the independent financial expert
        on
        the Company’s Audit Committee.
 
 *Stock.* In
        2000,
        Messrs. Boyle and Hooper each received a total of five-year options
        to
        purchase 100,000 shares of common stock as compensation for two years of
        Board
        service. These options were at an exercise price of $0.33 per share and have
        been exercised.  In 2004, Messrs. Boyle and Hooper each received
        additional five-year, fully-vested options to purchase 100,000 shares of
        common
        stock as additional compensation for two additional years of Board service.
        These options are at an exercise price of $1.28 per share.  In 2003,
        Edward
        Huguez was granted a five-year option to purchase 100,000 shares of common
        stock
        as additional compensation for two years of Board service. These options
        are
        currently priced at $0.65 per share. In the fiscal year ending September
        30,
        2005, Mr. Cox and Ms. Howard have each been granted a five-year,
        partially-vested option to purchase 100,000 shares of common stock as additional
        compensation for two years of Board service. These options are currently
        priced
        at $1.83 per share.
 
 55
 **EMPLOYMENT
        CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
        ARRANGEMENTS**
 
 *Sheldon
        Nelson.* The
        Company has a Management Employment Agreement with its Chief Executive Officer,
        Sheldon Nelson, with a current annual salary of $250,000 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.
 
 *Tom
        Tracey.* The
        Company has a Management Employment Agreement with its President and Chief
        Operating Officer, Tom Tracey, with a current annual salary of $225,000
        terminable by the Company upon four (4) weeks notice and a termination payment
        equal to eighteen (18) months salary. Upon a change in control, Mr. Tracey
        can
        elect to terminate the Agreement with the Company paying a termination payment
        equal to twelve (12) 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
        $180,000 terminable by the Company upon four (4) weeks notice and a termination
        payment equal to twelve (12) months salary. Upon a change in control, either
        party may terminate the Agreement with the Company paying a termination payment
        equal to twenty four (24) months salary.
 
 *Brad
        Holmstrom.* The
        Company has a Management Employment Agreement with its General Counsel, Brad
        Holmstrom, with a current annual salary of $160,000 terminable by the Company
        upon four (4) weeks notice and a termination payment equal to four (4) months
        salary. Upon a change in control, either party may terminate the Agreement
        with
        the Company paying a termination payment equal to twelve (12) months
        salary.
 
 *Michael
        Stanway.* The
        Company has a Management Employment Agreement with its Vice President of
        Product
        Development, Michael Stanway, with a current annual salary of $110,000
        terminable by the Company upon four (4) weeks notice and a termination payment
        equal to three (3) months salary.
 
 **Item
        11.  Security Ownership of Certain Beneficial Owners and Management
        and
        Related Stockholder Matters**
 
 The
        following table sets forth information with respect to beneficial ownership
        of
        our outstanding common stock (only outstanding voting security) as of December
        19, 2005 by each person or group known to the Company to be the beneficial
        owner
        of more than 5% of the Company’s common stock based upon Forms SC 13G and Forms
        SC 13G/A filed with the Securities and Exchange Commission:
 
 **Name
                  and Address of Beneficial Owner of Common Stock**
              **Amount
                  and Nature of Beneficial Ownership**
              **Percent
                  of Class**Capital
                  Group International, Inc. and
                Capital
                  Guardian Trust Co.
                11100
                  Santa Monica Blvd., Los Angeles, CA 90025
              5,559,390
              11.2%SC
                  Fundamental, et. al.
                747
                  Third Ave., New York, NY 10017
              2,863,000
              5.7%Fuller
                  & Thaler, et. al.
                411
                  Borel Ave., Suite 402, San Mateo, CA 94402
              2,842,367
              5.7%
 
 The
        following table sets forth information with respect to beneficial ownership
        of
        our outstanding common stock (only outstanding voting security) as of December
        19, 2005, including; (i) each executive officer named in the Summary
        Compensation Table (except Mr. Silvers and Mr. Nassau who do not currently
        own
        any shares of the Company’s common stock); (ii) each of the Company’s directors,
        and; (iii) all of the Company’s executive officers and directors as a
        group:
 
 56
 **Name
                  and of Beneficial Owner of Common Stock**
              **Amount
                  and Nature of Beneficial Ownership**
              **Percent
                  of Class**Sheldon
                  B. Nelson**1**
              1,712,866
              3.0Tom
                  Tracey**2**
              41,667
              *Patrick
                  Cunningham**3**
              455,862
              1.0Brad
                  Holmstrom**4**
              342,841
              1.0Michael
                  Stanway**5**
              122,013
              *Carmen
                  Ragusa, Jr.**2**
              58,334
              *J.E.
                  (Ted) Boyle**6**
              150,000
              *Douglas
                  Hooper**7**
              150,000
              *Steve
                  Cox**2**
              50,000
              *Carolyn
                  Howard**8**
              150,200
              *All
                  executive officers and directors as group (10 persons)
              3,233,283
              6.3**9**
 
 *
        less
        than 1%
 ___________________
  (1)
                Includes
                    971,016 shares held of record by 55,930 BC Ltd., a British
                    Columbia
                    corporation wholly owned by the Sheldon Nelson Family Trust whose
                    trustees
                    are Sheldon Nelson and his sister, Nicole Nelson, 566,850 held
                    personally
                    and 175,000 shares subject to options exercisable within
                    60 days.
 
 (2)
                Includes
                    only exercisable options, within the next sixty days, to purchase
                    shares
                    of common stock.
 
 (3)
                Includes
                    234,979 shares of common stock and 220,883 exercisable options,
                    within the
                    next sixty days, to purchase shares of common
                    stock.
 
 (4)
                Includes
                    82,425 shares of common stock and 260,416 exercisable options,
                    within the
                    next sixty days, to purchase shares of common
                    stock.
 
 (5)
                Includes
                    54,819 shares of common stock and 145,000 exercisable options,
                    within the
                    next sixty days, to purchase shares of common
                    stock.
 
 (6)
                Includes
                    50,000 shares of common stock and 100,000 exercisable options,
                    within the
                    next sixty days, purchase shares of common stock.
 
 (7)
                Includes
                    50,000 shares of common stock and 100,000 exercisable options,
                    within the
                    next sixty days, to purchase shares of common
                    stock.
 
 (8)
                Includes
                    100,200 shares of common stock and 50,000 exercisable options,
                    within the
                    next sixty days, to purchase shares of common
                    stock.
 
 (9)
                Based
                    on 51,014,222 outstanding shares and above mentioned
                    options.
  **Item
        12.  Certain Relationships and Related Transactions**
 
 On
        November 1, 2005, Director Steve Cox entered into a Consulting Agreement
        with
        the Company to provide Business Development services for a period of six
        months
        at a base rate of $5,000 per month. Should these business development
        initiatives result in a strategic funding, Mr. Cox shall receive an “investment
        fee” equal to 2% of the first $5 million and 1% of any amount in excess of $5
        million. This Agreement may be terminated upon two weeks notice by either
        party.
 
 57
 **Item
        13.  Exhibits**
 
 **INDEX
        TO EXHIBITS**
 
 Exhibits2.1
              Acquisition
                  Agreement dated November 2, 1998 between Alpha Beta Holdings, Ltd.
                  and MDU
                  Communications Inc. (1)3.1
              Certificate
                  of Incorporation (1)3.2
              Amendment
                  to Certification of Incorporation (4)3.3
              Bylaws
                  (1)3.4
              Amendment
                  to Bylaws (2)4.1
              Form
                  of Warrant to Purchase Common Stock, dated November 24, 2004, to
                  various
                  purchasers in the Company’s November 24, 2004 private placement of units
                  (5)4.2
              Form
                  of Stock and Warrant Purchase Agreement, dated November 24, 2004,
                  with
                  various purchasers in the Company’s November 24, 2004 private placement of
                  units (5)4.3
              Form
                  of Registration Rights Agreement, dated November 24, 2004, related
                  to the
                  Company’s November 24, 2004 private placement of units (5)21.1
              Subsidiaries
                  of the Company (5)31.1
              Certification
                  by CEO pursuant to Sections 302 of the Sarbanes-Oxley Act of 2002
                  (6)31.2
              Certification
                  by Vice President of Finance pursuant to Sections 302 of the
                  Sarbanes-Oxley Act of 2002 (6)32.1
              Certification
                  of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
                  (6)32.2
              Certification
                  Vice President of Finance pursuant to Section 906 of the Sarbanes-Oxley
                  Act of 2002 (6)___________
                (1)
                  Incorporated by reference from Form 10-SB filed on May 12, 1999
                (2)
                  Incorporated by reference from Form 10-SB/A, Amendment No. 3 filed
                  on
                  April 14, 2000
                (3)
                  Incorporated by reference from the Registrant’s Form SB-2 (Reg. No.
                  333-87572) as filed with the Securities and Exchange Commission
                  on May 3,
                  2002.
                (4)
                  Incorporated by reference from Report on Form 8-K, filed November
                  17, 2004
                (5)
                  Incorporated by reference from Report on Form 10-KSB, filed December
                  29,
                  2004
                (6)
                  Filed Herewith
 
 **Item
        14.  Principal Accountant Fees and Services**
 
 J.H.
        Cohn
        LLP has served as the Company’s Principal Accountant since January 1, 2002.
        Their fees billed to the Company for the past two fiscal years are set forth
        below:
 
 **Fiscal
                  year ended**
                **September 30,
                  2005**
              
              **Fiscal
                  year ended**
                **September 30,
                  2004**Audit
                  Fees
              
              $
              148,417
              
              $
              117,057Audit
                  Related Fees
              
              
              —
              
              
              —Tax
                  Fees
              
              $
              23,612
              
              
              38,277All
                  Other Fees
              
              $
              --
              
              $
              --
 
 
 58
 
 **SIGNATURES**
 
 Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange
        Act
        of 1934, the registrant has duly caused this amended report to be signed
        on its
        behalf by the undersigned thereunto duly authorized.
 
 
 MDU
                  COMMUNICATIONS INTERNATIONAL, INC.By:
              /s/  SHELDON
                  NELSONSheldon
                  Nelson
                *Chief
                  Financial Officer*
                December
                  22, 2005
 
 
 MDU
                  COMMUNICATIONS INTERNATIONAL, INC.By:
              /s/  CARMEN
                  RAGUSA, JR.Carmen
                  Ragusa, Jr.
                *Vice
                  President of Finance*
                December
                  22, 2005
 
 
 Pursuant
        to the requirement of the Securities Exchange Act of 1934, this report has
        been
        signed below by the following persons on behalf of the registrant and in
        the
        capacities and on the dates indicated.
 
 **Signature**
              
              **Title**
              
              **Date**/s/  SHELDON
                  B. NELSONSheldon
                  B. Nelson
              
              Principal
                  Executive Officer and Director
              
              December
                  22, 2005/s/  DOUGLAS
                  G. HOOPERDouglas
                  G. Hooper
              
              Director
              
              December
                  22, 2005/s/  JOHN
                  EDWARD BOYLEJohn
                  Edward Boyle
              
              Director
              
              December
                  22, 2005/s/  CAROLYN
                  C. HOWARDCarolyn
                  C. Howard
              
              Director
              
              December
                  22, 2005/s/ STEVEN
                  J. COXSteven
                  J. Cox
              
              Director
              
              December
                  22, 2005
 
 
 59