UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-K

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|x | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------



For the fiscal year ended September 30,
2012



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------



For the transition period from _______________
to ___________________



Commission File No. 0-26053

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MDU COMMUNICATIONS INTERNATIONAL, INC.

(exact name of registrant as specified in
its charter)



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



60-D Commerce Way, Totowa, New Jersey
07512

(Address of Principal Executive Offices)
(Zip Code)



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

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



none



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



Common Stock, par value $0.001 per share



(Title of Class)



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



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



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



Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YesxNo ̈



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



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



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



The aggregate market value of the voting and nonvoting common
equity (based upon the closing price on the OTC Bulletin Board on March 31, 2012) held by non-affiliates was approximately $5.2
million.



The number of shares of common stock ($0.001 par value) outstanding
as of December 21, 2012 was 5,672,820.



DOCUMENTS INCORPORATED BY REFERENCE



Portions of the definitive Proxy
Statementof MDU Communications International, Inc., to be filed on or before January 30, 2013, are
forward incorporated by reference in Part III of this Form 10-K.













TABLE OF CONTENTS



|         |                                                                                                              |  | Page
|-------- | ------------------------------------------------------------------------------------------------------------ |  | ----
|PART I   |                                                                                                              |  |     
|ITEM 1.  | Business                                                                                                     |  | 3   
|ITEM 1A. | Risk Factors                                                                                                 |  | 9   
|ITEM 1B. | Unresolved Staff Comments                                                                                    |  | 14  
|ITEM 2.  | Properties                                                                                                   |  | 15  
|ITEM 3.  | Legal Proceedings                                                                                            |  | 15  
|ITEM 4.  | Mine Safety Disclosures                                                                                      |  | 16  
|         |                                                                                                              |  |     
|PART II  |                                                                                                              |  |     
|ITEM 5.  | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 16  
|ITEM 6.  | Selected Financial Data                                                                                      |  | 17  
|ITEM 7.  | Management’s Discussion and Analysis of Financial Condition and Results of Operation                         |  | 17  
|ITEM 7A. | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 28  
|ITEM 8.  | Financial Statements and Supplementary Data                                                                  |  | 29  
|ITEM 9.  | Changes In and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 48  
|ITEM 9A. | Controls and Procedures                                                                                      |  | 48  
|ITEM 9B. | Other Information                                                                                            |  | 49  
|         |                                                                                                              |  |     
|PART III |                                                                                                              |  |     
|ITEM 10. | Directors, Executive Officers and Corporate Governance                                                       |  | 49  
|ITEM 11. | Executive Compensation                                                                                       |  | 49  
|ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 49  
|ITEM 13. | Certain Relationships and Related Transactions, and Director Independence                                    |  | 49  
|ITEM 14. | Principal Accounting Fees and Services                                                                       |  | 50  
|         |                                                                                                              |  |     
|PART IV  |                                                                                                              |  |     
|ITEM 15. | Exhibits, Financial Statement Schedules                                                                      |  | 50  



2







FORWARD LOOKING STATEMENTS



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



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



PART I

|Item 1. | Business
|------- | --------



OVERVIEW



MDU Communications International, Inc. (together with its subsidiaries
mentioned below, the “Company”) is a national provider of digital satellite television, high-speed Internet, digital
phone and other information and communication services to residents living in the United States multi-dwelling unit (“MDU”)
market—estimated to include 32 million residences. MDUs include apartment buildings, condominiums, gated communities, universities
and other properties having multiple units located within a defined area. The Company negotiates long-term access agreements with
the owners and managers of MDU properties allowing it the right to design, install, own and operate the infrastructure and systems
required to provide digital satellite television, high-speed Internet, digital phone, and potentially other services, to their
residents.



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





3







Directors AND Executive
Officers



The following table and the narrative below sets forth the information
concerning the Company’s directors and executive officers for the fiscal year ended September 30, 2012:



|Directors and Executive Officers |  | Age |  | Position(s)                               
|-------------------------------- |  | --- |  | ------------------------------------------
|Sheldon Nelson                   |  | 51  |  | President, CEO, CFO, Director             
|Carolyn Howard                   |  | 49  |  | Director                                  
|Richard Newman                   |  | 60  |  | Director                                  
|J.E. “Ted” Boyle                 |  | 65  |  | Director (beginning November 1, 2012)     
|Gregory L. Osborn                |  | 55  |  | Director (beginning November 1, 2012)     
|Patrick Cunningham               |  | 44  |  | Vice President, Sales and Marketing       
|Brad Holmstrom                   |  | 47  |  | General Counsel and Corporate Secretary   
|Carmen Ragusa, Jr.               |  | 64  |  | Vice President, Finance and Administration
|Mike Stanway                     |  | 47  |  | Vice President, Operations and Technology 



Sheldon B. Nelson, 51, has served as President and Chief
Executive Officer of the Company and a member of the Board of Directors, including a term as Chairman, since November 1998. From
1983 to 1998 he was President of 4-12 Electronics Corporation, a provider of products and services to the Canadian satellite, cable,
broadcasting and SMATV industries. In addition to his day-to-day responsibilities during his tenure at 4-12 Electronics, Mr. Nelson
developed that company into one of Canada’s largest private cable system operators. Mr. Nelson is a 1983 graduate of Gonzaga
University in Spokane, Washington where he graduated from the School of Business Administration, Magna cum Laude, and was the recipient
of the School of Business Administrations’ Award of Excellence. Mr. Nelson also sits on the board of Diamcor Mining, Inc.
Mr. Nelson is not involved in any material legal proceedings other than described in Item 3.



Carolyn C. Howard,49, was elected to the Board of Directors
in July 2005. Ms. Howard has been employed by Howard Interests since 1987, a venture capital firm, of which she is a co-founder
and manager. She has held positions in banking with a focus on Fannie Mae/Freddie Mac lending. She has managed positions with securities
firms trading and covering institutional accounts. In 1992 through 1997, she acted as CEO and COO of one of New Hampshire’s
largest food service and bottled water companies. In 1997, she facilitated the sale of that company to Vermont Pure Springs, Inc.,
a publicly traded company. Ms. Howard also sits on the board and chairs the audit committee of Video Display Corporation (VIDE),
a publicly traded company. Ms. Howard studied accounting and finance at both New Hampshire College and Franklin Pierce University.
Presently she serves as President to the Jaffrey Gilmore Foundation and Board Chair to the Sharon Arts Center, both non-profit
educational and art organizations in New Hampshire. Ms. Howard is not involved in any material legal proceedings other than described
in Item 3.



Richard Newman,60, joined the Board of Directors in
December 2007 and resides in New York City. He is currently a Managing Partner of Atlantis Associates, a private equity firm he
founded, that is mainly focused on business services, manufacturing, education and media investment opportunities. Previously,
he was Managing Director at Andlinger & Co., a private equity firm with investments in media, business services, and manufacturing.
Prior to joining Andlinger, Mr. Newman was a Managing Director at East Wind Advisors, a boutique investment banking firm and a
partner at Hart Capital, a private equity firm. In addition to the experience noted above, Mr. Newman has 20 years of experience
in financial advisory and operating roles for both profitable and financially-challenged corporations. He holds an MBA from the
Stanford University Graduate School of Business, an MA from the Stanford University School of Education and a BA from Brown University.
Mr. Newman is not involved in any material legal proceedings other than described in Item 3.



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





4







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



Carmen Ragusa, Jr., Vice President of Finance and Administration,
64, 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.



Michael Stanway, Vice President of Operations and Technology,
47, joined the Company in 2000 as Manager and then Director of MIS/IT Services. Mr. Stanway then assumed the position of Director
and thereafter Vice President of Operations prior to becoming Vice President of Operations and Technology. Mr. Stanway has a post-secondary
degree as a Network Specialist with Microsoft and Novell certifications.



CORPORATE HISTORY



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



REVENUE



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





5







STRATEGIC ALLIANCE WITH DIRECTV



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



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



Under the DIRECTV Agreement, the Company may not solicit sales
for any other DTH digital satellite television service in the United States. Consequently, the Company is primarily dependent on
DIRECTV for its digital set-top programming in the United States. During the fiscal year ended September 30, 2012, revenues from
all DIRECTV services were approximately 60% of total revenues. DIRECTV is not required to use the Company on an exclusive basis
and could either contract with others to install distribution systems and market programming in MDUs or undertake such activities
directly itself or through retail stores, as it does for single-family television households.



DIRECTV offers in excess of 800 entertainment channels of digital
quality video and compact disc quality audio programming and currently transmits via ten high power satellites. DIRECTV is currently
delivering over 170 national HDTV channels giving DIRECTV the distinct edge in high definition programming. We believe that DIRECTV’s
extensive line up of high definition programming, international programming, pay per view movies and events and sports packages,
including the exclusive “NFL Sunday Ticket,” have enabled DIRECTV to capture a majority market share of existing DTH
subscribers and will continue to drive strong subscriber growth for DIRECTV programming in the future. Through our strategic relationship
with DIRECTV, we expect to capitalize on the significant name recognition that DIRECTV creates and maintains as well as their immense
advertising budget and advertised programming specials. Additionally, we benefit from the large-scale national marketing campaigns
that are continuously run by DIRECTV.



MARKET



The United States MDU market represents a large niche market
of potential telecommunications customers. There are over 32 million MDU television households out of a total of 130 million U.S.
television households. Historically, the MDU market has been served by local franchised cable television operators and the relationship
between the property owners and managers that control access to these MDU properties and the cable operator have been significantly
strained over the past 20 years due to the monopolistic sentiment of the cable operator.



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



| | · | Advances in communication and information technology have created demand for new services such as digital satellite television, high definition television, 3-D television, digital video recorders, on-demand services and bundled services.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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





6







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



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



COMPETITION



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



Franchised Cable Systems.Cable companies currently dominate
the market in terms of subscriber penetration, the number of programming services available, audience ratings and expenditures
on programming. The traditional cable companies currently serve an estimated 68% of U.S. television households, down from approximately
72% five years ago. Satellite services are gaining market share and DTH providers still have an 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.



Traditional Telephone Companies.Our next largest competition
is traditional telephone companies such as Verizon and AT&T, who have over the past few years diversified their service offerings
to compete with traditional franchised cable companies in a triple play market. These phone companies have in the past also been
resellers of DIRECTV and DISH/Echostar video programming, however, rarely in the MDU market. Video offerings from traditional phone
companies are now becoming a significant competitor in the MDU market.



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



GOVERNMENTAL REGULATION



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





7







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



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



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



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



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





8







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



EMPLOYEES



We had 105 employees, all full-time, as of September 30, 2012.
None of our employees are represented by a labor union. The Company has experienced no work stoppages and believes that its employee
relations are good.



INVESTOR INFORMATION



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



Item 1A. Risk Factors



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



The Company will require additional capital in the near
term to meet liquidity needs for the next twelve months and will also require additional capital in the long-term to maintain its
current business plans or to pursue alternative plans and strategies; such additional capital may not be available on acceptable
terms or at all.



The Company had a net loss of $6.4 million, an accumulated deficit
of $75 million and a working capital deficit of $30.7 million at and for the year ended September 30, 2012. Based on our current
projections, we do not expect our available cash and remaining Credit Facility (defined below) as of September 30, 2012 to be sufficient
to cover our estimated liquidity needs for the next 12 months. We also do not expect our operations to generate positive cash flows
during the next 12 months. Without additional funds or financing sources, we forecast that our cash and remaining Credit Facility
would be depleted sometime in our first or second fiscal quarter of 2013. Thus, we will be required to raise additional capital
in the near term in order to continue operations. Further, we also need to raise additional capital over the long-term to fully
implement our business plans. We may also elect to sell certain assets to raise additional capital. However, our ability to raise
sufficient additional capital or sell certain assets in the near and long-term on acceptable terms, or at all, remains uncertain.



To date, asset sale negotiations have met with some success
for certain assets, but have not resulted in larger asset sales. We are also actively pursuing initiatives to reduce costs to conserve
cash. Even if these initiatives result in the anticipated cost savings, we will still be required to obtain additional capital
in the near term in order to continue operations. Additionally, unless the Company is able to refinance its $30 million Credit
Facility, which is uncertain, it will be facing maturity and repayment on June 30, 2013.



If the Company cannot obtain significant capital in the near
term, in order for the Company to continue operations, it needs to explore a merger with another entity. The Company has previously
discussed and disclosed a merger as a viable alternative to continue its business operations and growth. In furtherance thereof,
on July 9, 2012, the Company executed a merger agreement with Multiband Corporation, whereby the Company would effectively become
an operating subsidiary of Multiband. The Company makes no representation as to the likelihood of the merger being consummated.





9







Our ability to continue to operate our business is substantially
dependent on our ability to raise additional capital in the near term or consummate a merger. There can be no assurance that these
efforts will be successful. Our expected continued losses from operations and the uncertainty about our ability to obtain sufficient
additional capital raise substantial doubt about our ability to continue as a going concern.



Failure to complete our pending merger with Multiband
Corporation will subject us to financial risks and could cause the price of our common stock to decline.



On July 9, 2012, we entered into a merger agreement with Multiband
Corporation. The proposed merger is subject to certain conditions precedent and approvals. We cannot provide assurances as to whether
we will obtain the necessary approvals or be able to remove conditions precedent. Also, we cannot assure our stockholders that
the merger agreement will be approved and adopted by our stockholders or that the other conditions to the completion of the merger
set forth in the merger agreement will be satisfied. We are subject to a number of other risks associated with the pending merger,
including the following:



| | • |  | the current market price of our common stock may reflect a market assumption that the merger will occur, and a failure to complete the merger could result in a decline in the market price of our common stock;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • |  | the announcement of the merger and our planning for integration of our business with Multiband Corporation could disrupt our business plans and operations, adversely affect our ability to retain key employees, and divert the attention of our management from opportunities that could be beneficial to our business;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • |  | the announcement of the merger could adversely affect our relationships with customers, suppliers and other parties;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| | • |  | the occurrence of some events, changes, or other circumstances described in the merger agreement could cause a termination of the merger agreement;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| | • |  | the benefits we expect our stockholders to realize from the merger may not be realized; and
| | - |  | -------------------------------------------------------------------------------------------



| | • |  | we expect to incur significant legal, accounting, financial advisory, and other costs, fees, expenses and charges related to the merger.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



As a part of our cost savings initiatives, we have in
the past, and may in the future, need to institute across the board salary reductions, which may have an adverse effect on our
workforce and cause our business to be materially and adversely affected.



As part of a Company-wide cost savings initiative, we implemented
for a period of time, across the board, but graduated, salary reductions that we may have to reinstate. These reductions may be
met with resistance by employees, lower morale, lower productivity and incite certain employees to terminate their employment.
We may have a problem retaining and/or attracting qualified personnel. As a result, our business could be materially and adversely
affected.



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 ended September 30, 2012, it has accumulated losses of $74,699,163. It cannot assure that it will
achieve or attain profitability. If it cannot achieve operating profitability, the Company will not be able to meet its working
capital requirements, which will have a material adverse effect on its business and will impair its ability to continue as a going
concern. If we are unable to continue as a going concern, our stockholders could lose their entire investment in the Company.



The Company may default on its revolving line of credit.



On September 11, 2006, the Company entered into a Loan and Security
Agreement with FCC, LLC, d/b/a First Capital, and Full Circle Funding, LP for a senior secured $20,000,000 credit facility (“Credit
Facility”) to fund the Company’s subscriber growth. On June 30, 2008, the Company entered into an Amended and Restated
Loan and Security Agreement with FCC, LLC, d/b/a First Capital, and Full Circle Funding, LP for a senior secured $10 million increase
to its original $20 million revolving five year Credit Facility for a total line of $30 million. There are several terms of default
set forth in the Loan and Security Agreement and it becomes due on June 30, 2013. Should the Company default on any of the terms,
including repayment, the balance owed under the Loan and Security Agreement may be accelerated, the interest rate increased and
the Company may not have further access to the Credit Facility. In such a case, if the Company cannot refinance, the Company may
have to sell significant assets to repay the outstanding balance or be placed in default, which may adversely affect any stockholder
investment in the Company.





10







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



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



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



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



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



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



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





11







Absence of dividends on common stock.



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



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



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



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



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



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



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





12







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



Rules adopted by the Securities and Exchange Commission pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002 require the Company to assess its internal controls over financial reporting annually.
The rules governing the standards that must be met for management to assess its internal controls over financial reporting are
complex. They require significant documentation, testing, and possible remediation of any significant deficiencies in and/or material
weaknesses of its internal controls in order to meet the detailed standards under these rules. Although the Company has evaluated
its internal controls over financial reporting as effective as of September 30, 2012, it may encounter unanticipated delays or
problems in assessing its internal controls as effective or in completing assessments by required dates. In addition, the Company
cannot assure that an audit of its internal controls by its independent registered public accountants will result in an unqualified
opinion. If the Company cannot assess its internal controls as effective, investor confidence and share value may be negatively
impacted.



Change of control may adversely affect certain contractual
relationships.



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



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



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



The Company depends upon its relationship with DIRECTV.



The Company has entered into several agreements with DIRECTV
since 2000. Under all of these agreements the Company may not market DTH services for any other provider. Consequently, the Company
is primarily dependent upon DIRECTV for its set-top DTH programming service. During the year ended September 30, 2012, revenues
from all DIRECTV services were approximately 60% of the Company’s total revenues. DIRECTV is not required to use the Company
on an exclusive basis for marketing its programming to MDUs. The Company’s agreement with DIRECTV can be terminated under
various circumstances, including, in particular, an uncured material breach by the Company of the agreement. Any such termination
may have a material effect on the Company’s business.



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





13







The Company could face increased competition.



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



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



System disruptions could affect the Company.



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



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



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



|Item 1B. | Unresolved Staff Comments
|-------- | -------------------------



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





14







|Item 2. | Properties
|------- | ----------



Our headquarters are in the greater New York City metropolitan
area in Totowa, New Jersey, where we centralize our corporate administrative functions. The office houses our senior management,
accounting and billing functions, call center, subscription management system and warehouse. We currently hold a lease in Totowa,
New Jersey of 14,909 square feet at a current monthly cost of $17,394, expiring June 30, 2013. We believe that this space is adequate
to suit our needs for the foreseeable future.



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



We currently hold a lease for office and warehouse space in
Pompano Beach, Florida for approximately 4,088 square feet that runs through December 31, 2012 at a cost of $2,793 per month. We
recently signed a lease beginning January 1, 2013 for space within the same complex for 2,304 square feet that runs through December
31, 2015 at a cost of $1,440 per month.



We currently hold a lease for office and warehouse space in
Rockville, Maryland for approximately 2,500 square feet that runs through April 30, 2013 at a cost of $2,300 per month. This space
is adequate to suit our needs for the foreseeable future in the Mid-Atlantic area, but we are looking at alternatives for when
the lease ends.



We currently hold a lease for office and warehouse space in
Amherst, New York for approximately 1,710 square feet that runs through September 15, 2014 at a cost of $1,603 per month. This
space is adequate to suit our needs for the foreseeable future.



We currently hold a lease for office and warehouse space in
Carrollton, Texas for approximately 3,400 square feet that runs through November 30, 2014 at a cost of $2,000 per month. This space
is adequate to suit our needs for the foreseeable future.



|Item 3. | Legal Proceedings
|------- | -----------------



From time to time, the Company may be subject to legal proceedings,
which could have a material adverse effect on its business. As of September 30, 2012 and through the date of this filing, the Company
is involved in the following material litigation:



Holub v. MDU Communications International, Inc. et al., is a
stockholder derivative lawsuit filed in the Superior Court of New Jersey on or about July 19, 2012 over the announced merger with
Multiband Corporation, alleging, among other things, that the defendants breached their fiduciary duties as board members in connection
with the business terms and approval process of the announced merger agreement with Multiband Corporation. Results from this proceeding
may include an adverse effect on the merger, a potential award of monetary damages, and significant attorneys’ fees, which
could result in higher than anticipated expenses and otherwise harm our business. No assurance can be given that any adverse outcome
would not be material to our consolidated financial position.



Advanced Communications v. MDU Communication (USA) Inc.
is a writ of summons vendor lawsuit filed in Montgomery County, Pennsylvania on or about July 26, 2012 over a
previously accrued outstanding payable of approximately $400,000 for work allegedly completed. Results from this proceeding
may include a potential award of monetary damages and significant attorneys’ fees, which could result in higher than
anticipated expenses and otherwise harm our business. No assurance can be given that any adverse outcome would not be
material to our consolidated financial position.



We are subject to other legal proceedings and claims that arise
in the ordinary course of our business. The amount of ultimate individual liability with respect to such actions is not expected
to materially affect our financial position, results of operations or liquidity, however, an unfavorable outcome in a majority
of these legal proceedings could have a material negative impact on the Company’s financial position, results of operations
and liquidity.





15







|Item 4. | MINE SAFETY DISCLOSURES
|------- | -----------------------



Not applicable

PART II



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



Market Information



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



|Quarter Ended      |  | High |      |  | Low |  
|------------------ |  | ---- | ---- |  | --- | -
|December 31, 2010  |  | $    | 4.05 |  |     | $
|March 31, 2011     |  | $    | 3.87 |  |     | $
|June 30, 2011      |  | $    | 2.69 |  |     | $
|September 30, 2011 |  | $    | 2.75 |  |     | $
|December 31, 2011  |  | $    | 2.16 |  |     | $
|March 31, 2012     |  | $    | 1.70 |  |     | $
|June 30, 2012      |  | $    | 1.29 |  |     | $
|September 30, 2012 |  | $    | 1.70 |  |     | $



Holders



On December 21, 2012, the closing price for the Company’s
common stock on the OTC Bulletin Board was $1.49 per share. As of December 21, 2012, the Company had approximately 110 stockholders
of record of its shares of common stock, with an approximate total of 700 stockholders of its common stock.



Dividends



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



Securities Authorized for Issuance under Equity Compensation
Plans



EQUITY COMPENSATION PLAN INFORMATION

(September 30, 2012)



|                                                           |  | 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 (2) | 
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- | ------- | --- | ---------------------------------------------------------------------------- | - | ---- | ------------------------------------------------------------------------------------------------ | 
|Equity compensation plans approved by security holders     |  |                                                                                             | 170,780 | (1) |                                                                              | $ | 3.05 |                                                                                                  | 
|Equity compensation plans not approved by security holders |  |                                                                                             | 0       |     |                                                                              |   | 0    |                                                                                                  | 

---



|(1) | The 2001 Stock Option Plan was approved by the stockholders on May 10, 2001, see Note 4 to Consolidated Financial Statements, contained herein, with a total reservation of 560,000 shares of common stock. As of September 30, 2012, 274,770 options have been exercised.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Per the terms of the 2001 Stock Option Plan, it expired on of March 20, 2011, therefore no further grants from the 2001 Stock Option Plan can be made.                                                                                                                    





16







|Item 6. | Selected Financial Data
|------- | -----------------------



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



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



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



RECENT DEVELOPMENTS



For the fiscal year ended September 30, 2012, the Company realized
total revenue of $27,305,201, a 2% decrease over the prior fiscal year’s revenue of $27,880,132. EBITDA (as adjusted) for
the fiscal year ended September 30, 2012 was $4,089,180, an increase of 8% over EBITDA (as adjusted) for the prior fiscal year
ended September 30, 2011 of $3,758,862. EBITDA (as adjusted) for the year ended September 30, 2012, compared to the prior fiscal
year, was positively impacted by an approximate $1.6 million gain on sales of assets, but negatively impacted by (i) the outsourcing
of a significant number of call center functions, which resulted in one-time set up and training charges and generated higher than
normal customer service and operating expense, (ii) additional operating costs associated with the planned transfer of properties
to the DIRECTV Connected Properties program and other costs associated with the Company’s participation in the discontinued
DIRECTV Connected Properties program as a dealer, (iii) increased expenses related to the Company’s proposed merger, and
(iv) reduced revenues as a result of asset sales during the year.



The Company’s average revenue
per unit (“ARPU”) was $30.36 at September 30, 2012, a 2% increase over $29.88 for the year ended September 30, 2011.
ARPU is calculated by dividing average monthly revenues for the period (total revenues during the period divided by the number
of months in the period) by average subscribers for the period. The average subscribers for the period is calculated by adding
the number of subscribers as of the beginning of the period and for each quarter end in the current year or period and dividing
by the sum of the number of quarters in the period plus one. The Company believes that its recurring revenue and ARPU will continue
to be positively impacted by an increasing DIRECTV ARPU (the average revenue generated by a DIRECTV subscriber was up 4.6% in DIRECTV’s
fiscal quarter ending September 30, 2012 to $96.41, as disclosed in DIRECTV’s public filings).



The Company’s sales expense, general and administrative
expense, and customer service and operating expense remained virtually unchanged for the year ended September 30, 2012, compared
to the year ended September 30, 2011, as the Company focused on maintenance rather than growth. The additional costs incurred from
the one-time set up and training charges for outsourcing call center functions and the additional costs associated with the planned
transfer of properties to the DIRECTV Connected Properties program were offset by operating cost reductions including salary reductions
and employee benefit reductions. Direct costs increased in dollars and 3% as a percent of revenue for the year ended September
30, 2012, compared to the year ended September 30, 2011, due mainly to the acquisition of subscribers in early fiscal 2012 for
which the Company bears the entire programming cost.



The Company’s operating income before depreciation and
amortization was approximately 13% of total revenue (approximately $3.53 million) in fiscal 2012, an increase when compared to
operating income of 11% of total revenue (approximately $3.04 million) in fiscal 2011. Depreciation and amortization expense decreased
4%, as a percent of revenue, between the periods. The Company reduced its loss per common share from $1.35 in fiscal 2011 to $1.15
in fiscal 2012.





17







The Company reports 70,328 subscribers to its services as of
September 30, 2012, a reduction in total subscribers when compared to the previous year ended September 30, 2011, due mainly to
(i) the sale of twenty properties and subscribers, (ii) the transfer of six properties to DIRECTV under the Connected Properties
program, and (iii) the non-renewal of certain private cable bulk properties and certain choice properties that the Company chose
not to upgrade to digital services for economic reasons. As of September 30, 2012, the Company had 14 properties and 2,802 units
in work-in-process that should contribute to organic growth in the upcoming quarters. Due to capital constraints, the Company is
currently only deploying services to new properties where those properties are willing to pay for systems and installation services.
The Company’s breakdown of total subscribers by type is outlined below:



|Service Type                    |  | Subscribers as of  Sept. 30, 2011 |        |  | Subscribers  as of  Dec. 31, 2011 |  |        | Subscribers  as of March 31, 2012 |  |  | Subscribers  as of June 30, 2012 |  |  | Subscribers  as of Sept. 30, 2012 |       
|------------------------------- |  | --------------------------------- | ------ |  | --------------------------------- |  | ------ | --------------------------------- |  |  | -------------------------------- |  |  | --------------------------------- | ------
|                                |  |                                   |        |  |                                   |  |        |                                   |  |  |                                  |  |  |                                   |       
|Bulk DTH                        |  |                                   | 20,272 |  |                                   |  | 20,491 |                                   |  |  | 21,136                           |  |  |                                   | 21,361
|Bulk BCA                        |  |                                   | 9,880  |  |                                   |  | 9,880  |                                   |  |  | 9,106                            |  |  |                                   | 8,681 
|DTH -Choice/Exclusive           |  |                                   | 22,541 |  |                                   |  | 20,527 |                                   |  |  | 20,320                           |  |  |                                   | 19,427
|Bulk Private Cable              |  |                                   | 13,125 |  |                                   |  | 12,188 |                                   |  |  | 12,188                           |  |  |                                   | 12,178
|Private Cable Choice/ Exclusive |  |                                   | 2,351  |  |                                   |  | 2,782  |                                   |  |  | 2,740                            |  |  |                                   | 1,995 
|Bulk ISP                        |  |                                   | 5,576  |  |                                   |  | 5,363  |                                   |  |  | 5,363                            |  |  |                                   | 5,361 
|ISP Choice or Exclusive         |  |                                   | 4,966  |  |                                   |  | 5,034  |                                   |  |  | 4,986                            |  |  |                                   | 4,565 
|Voice                           |  |                                   | 14     |  |                                   |  | 19     |                                   |  |  | 20                               |  |  |                                   | 22    
|Total Subscribers               |  |                                   | 78,725 |  |                                   |  | 76,284 |                                   |  |  | 75,859                           |  |  |                                   | 73,590



On February 6, 2012 and April 6, 2012, the Company entered into
agreements to sell three properties to certain divisions of Charter Communications at an average price of $966 per subscriber.
Consents from the properties were received and the properties closed in two closings on June 15, 2012 and July 18, 2012. Additionally,
on June 19, 2012 the Company sold two properties to Summit Broadband at a price of $1,000 per subscriber. On September 7, 2012,
the Company entered into an agreement with Access Media 3, Inc. to sell fifteen properties at a price of $625 per subscriber. A
second closing under the September 7, 2012 agreement with Access Media 3, Inc. occurred on November 1, 2012 for twelve additional
properties at a price of $625 per subscriber. A third closing under the September 7, 2012 agreement with Access Media 3, Inc. occurred
on December 11, 2012 for an additional thirteen properties at a price of $625 per subscriber.



On July 9, 2012, the Company signed a definitive agreement pursuant
to which the Company will merge into Multiband Corporation (“Multiband”) and will effectively continue to operate as
a subsidiary of Multiband in its MDU business segment. Originally, Multiband was to have issued 4.3 million shares of its common
stock for all issued and outstanding shares of MDU Communications common stock, with certain potential adjustments. On September
17, 2012, Multiband amended its offer to a cash-for-stock offer with a total cash payout of $12.9 million. Terms are still being
negotiated and conditions precedent still exist. Assuming the remaining conditions precedent can be satisfied, the Company will
submit the merger to a vote of the stockholders at the soonest practicable date. Multiband, as a whole, operates with 3,700 employees
in 33 states with 33 field offices. The companies anticipate the merger to close in January or February 2013, subject to Company
stockholder approval. For further information please review the Company’s 8-K filed with the Securities and Exchange Commission
on July 10, 2012.



To assist the Company in assessing its future strategic plans,
the Company previously retained the investment advisory firm of Berkery, Noyes & Co. (“BN”). BN is representing
the Company in the merger with Multiband, in the asset sales with Access Media 3, Inc. and continues to advise the Company in financing,
merger and divestiture related discussions. The Company makes no representations that the above-mentioned merger will result in
a closed transaction.



The Company does not expect its revenues, available cash and
remaining availability under its Credit Facility to be sufficient to cover estimated liquidity needs for the next twelve months.
Without additional funding sources, significant asset sales, or a merger, the Company forecasts that its capital may be depleted
sometime during its first or second fiscal quarter of 2013. To conserve capital, the Company has been actively pursuing a number
of initiatives intended to reduce costs, including layoffs, reductions in benefits, limitation on travel, scaled back marketing
efforts, restricted stock for forfeited salary and across-the-board employee salary reductions. The Company’s goal is to
maintain operations only and is no longer deploying services into new properties unless the cost of the system is funded by the
property. Although these measures assist in conserving cash, the Company’s ability to continue to operate is dependent on
the ability to raise additional capital, sell a significant number of assets, or enter into a merger, however, there can be no
assurance that these efforts will be successful. Additionally, the Company will be facing maturity and repayment of its $30 million
Credit Facility on June 30, 2013.





18







Use of Non-GAAP Financial Measures



The Company uses the performance gauge of EBITDA (as adjusted
by the Company) to evidence earnings exclusive of mainly noncash events, as is common in the technology, and particularly the cable
and telecommunications, industries. EBITDA (as adjusted) is an important gauge because the Company, as well as investors who follow
this industry frequently, use it as a measure of financial performance. The most comparable GAAP reference is simply the removal
from the Company’s net income (or loss) of interest, depreciation, amortization and noncash charges related to its shares,
warrants and stock options. The Company adjusts EBITDA by then adding back any provision for bad debts and inventory reserves.
EBITDA (as adjusted) is not, and should not be considered, an alternative to income from operations, net income, net cash provided
by operating activities, or any other measure for determining our operating performance or liquidity, as determined under accounting
principles generally accepted in the United States of America. EBITDA (as adjusted) also does not necessarily indicate whether
cash flow will be sufficient to fund working capital, capital expenditures or to react to changes in our industry or the economy
generally. For the years ended September 30, 2012 and 2011, the Company reported EBITDA (as adjusted) of $4,089,180 and $3,758,862,
respectively. The following table reconciles the comparative EBITDA (as adjusted) of the Company to its consolidated net loss as
computed under accounting principles generally accepted in the United States of America:



|                                                                                       |  | For the Years Ended  September 
    30, |           
|-------------------------------------------------------------------------------------- |  | --------------------------------------- | ----------
|                                                                                       |  | 2012                                    |           
|EBITDA                                                                                 |  | $                                       | 4,089,180 
|Interest Expense                                                                       |  |                                         | (3,212,237
|Deferred finance costs and debt discount amortization (interest expense)               |  |                                         | (387,261  
|Provision for doubtful accounts                                                        |  |                                         | (344,529  
|Depreciation and Amortization                                                          |  |                                         | (6,326,242
|Share-based compensation expense - employees                                           |  |                                         | (45,806   
|Compensation expense for issuance of common stock through Employee Stock Purchase Plan |  |                                         | —         
|Compensation expense for issuance of common stock for employee bonuses                 |  |                                         | (10,625   
|Compensation expense for issuance of common stock for employee services                |  |                                         | —         
|Compensation expense accrued to be settled through the issuance of common stock        |  |                                         | —         
|Compensation expense through the issuance of restricted common stock                   |  |                                         | (153,529  
|Net Loss                                                                               |  | $                                       | (6,391,049





19







RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2012
AND 2011



|                                                     |  | For the Year Ended
 September 30, 2012 |            |   | For the Year Ended
 September 30, 2011 |  |     | Change ($) |  |   | Change
 (%) |  
|---------------------------------------------------- |  | -------------------------------------- | ---------- | - | -------------------------------------- |  | --- | ---------- |  | - | ----------- | -
|REVENUE                                              |  | $                                      | 27,305,201 |   |                                        |  | 100 | %          |  | $ | 27,880,132  |  
|Direct costs                                         |  |                                        | 13,475,920 |   |                                        |  | 49  | %          |  |   | 12,719,041  |  
|Sales expenses                                       |  |                                        | 1,393,292  |   |                                        |  | 5   | %          |  |   | 1,477,150   |  
|Customer service and operating expenses              |  |                                        | 6,175,216  |   |                                        |  | 23  | %          |  |   | 6,124,063   |  
|General and administrative expenses                  |  |                                        | 4,338,265  |   |                                        |  | 16  | %          |  |   | 4,594,681   |  
|Depreciation and amortization                        |  |                                        | 6,326,242  |   |                                        |  | 23  | %          |  |   | 7,370,275   |  
|Gain on sale of customers and property and equipment |  |                                        | (1,612,183 | ) |                                        |  | -6  | %          |  |   | (74,106     | )
|OPERATING LOSS                                       |  |                                        | (2,791,551 | ) |                                        |  | -10 | %          |  |   | (4,330,972  | )
|Total other expense                                  |  |                                        | (3,599,498 | ) |                                        |  | -13 | %          |  |   | (3,025,938  | )
|NET LOSS                                             |  | $                                      | (6,391,049 | ) |                                        |  | -23 | %          |  | $ | (7,356,910  | )



Net Loss.Primarily as a result of the matters
discussed below, and noncash charges for the years ended September 30, 2012 and 2011 of $7,267,992 and $8,447,675, respectively,
the Company reported a net loss of $6,391,049 and $7,356,910 for the years ended September 30, 2012 and 2011, respectively.



Revenues.Revenue for the year ended September
30, 2012 decreased 2% to $27,305,201, compared to revenue of $27,880,132 for the year ended September 30, 2011. This decrease in
recurring revenue is mainly attributable to the sale/transfer of twenty six properties and subscribers during the fiscal year.
Revenue has been derived, as a percent, from the following sources:



|                                             |  | For the Year
    Ended 
September 30, 2012 |            |  | For the Year Ended
 September 30, 2011 | 
|-------------------------------------------- |  | ------------------------------------------ | ---------- |  | -------------------------------------- | 
|Private cable programming revenue            |  | $                                          | 3,094,434  |  |                                        | 
|DTH programming revenue and subsidy          |  |                                            | 18,983,135 |  |                                        | 
|Internet access fees                         |  |                                            | 3,049,144  |  |                                        | 
|Installation fees, wiring  and other revenue |  |                                            | 2,178,488  |  |                                        | 
|Total Revenue                                |  | $                                          | 27,305,201 |  |                                        | 



DTH revenue continued to increase due mainly to an increase
in APRU and the conversion of certain properties from low average revenue private cable subscribers to DIRECTV service subscribers,
which conversely explains the decrease in private cable programming revenue, in addition to several of the properties sold during
the fiscal year were private cable systems. The decrease in installation and other revenue was due to higher revenue received in
the year ended September 30, 2011 from the DIRECTV Connected Properties program. The Company expects revenues to continue to decline
during fiscal 2013.



Direct Costs.Direct costs are comprised of programming
costs, monthly recurring Internet broadband circuits and costs relating directly to installation services. Direct costs increased
to $13,475,920 for the year ended September 30, 2012, as compared to $12,719,041 for the year ended September 30, 2011. Direct
costs are linked to the type of subscribers the Company adds. Choice and exclusive DTH DIRECTV subscribers have no associated programming
cost and therefore little to no direct cost, while DTH DISH subscribers, private cable and broadband subscribers have associated
programming and circuit costs and therefore a higher direct cost. The acquisition of ATTVS DISH subscribers (whereby the Company
incurs the full programming cost) in early fiscal 2012, contributed to the increase in direct costs over the year ended September
30, 2011. Direct costs are expected to remain constant or decrease during fiscal 2013 as the Company maintains current operations
only or continues to sell certain properties and subscribers.





20







Sales Expenses.Sales expenses were $1,393,292
and $1,477,150 for the years ended September 30, 2012 and 2011, respectively. The Company expects these expenses to remain fairly
constant or decrease slightly during fiscal 2013 as the Company maintains current operations only, sales and marketing efforts
are scaled back and sales personnel becoming primarily responsible for account maintenance and asset sale transition.



Customer Service and Operating Expenses.Customer
service and operating expenses are comprised of expenses related to the Company’s call center, technical support, project
management and general operations. Customer service and operating expenses were $6,175,216 and $6,124,063 for the years ended September
30, 2012 and 2011, respectively. The slight increase was primarily in connection with one-time expenses associated with the outsourcing
of call center functions. Customer service and operating expenses are expected to remain constant or decrease during fiscal 2013
as the Company maintains current operations only or continues to sell certain properties and subscribers. A breakdown of customer
service and operating expenses is as follows:



|                                             |  | Year Ended
 September 30, 2012 |           |  | Year Ended 
September 30, 2011 | 
|-------------------------------------------- |  | ------------------------------ | --------- |  | ------------------------------ | 
|Call center expenses                         |  | $                              | 2,537,529 |  |                                | 
|General operation expenses                   |  |                                | 938,598   |  |                                | 
|Property system maintenance expenses         |  |                                | 2,699,089 |  |                                | 
|Total customer service and operation expense |  | $                              | 6,175,216 |  |                                | 



Call center expenses increased due to the outsourcing reasons
mentioned above. Property system maintenance is generally proportional to the number of properties the Company services (not necessarily
the number of subscribers), so the decrease was primarily due to cost reductions and a slightly lower number of properties due
to property sales, transfers and non-renewals, which also resulted in lower general operations expenses.



Additionally, the Company wrote-off obsolete fixed assets during
the year ended September 30, 2012 in the amount of $97,933, which is reported in customer service and operating expenses.



General and Administrative Expenses.General and
administrative expenses for the years ended September 30, 2012 decreased slightly to $4,338,265 from $4,594,681 for the year ended
September 30, 2011. Of the general and administrative expenses for the years ended September 30, 2012 and 2011, the Company had
total noncash charges included of $529,453 and $705,165, respectively. Excluding the $529,453 and $705,165 in noncash charges,
general and administrative expenses were $3,808,812 (14% of revenue) compared to $3,889,516 (14% of revenue), respectively. General
and administrative expenses are fairly fixed and should remain constant, but may increase with any expenses related to an asset
sale or merger. The Company recognized noncash share-based compensation expense for employee options based upon the fair value
at the grant dates for awards to employees for the years ended September 30, 2012 and 2011, amortized over the requisite vesting
period, of $45,806 and $54,131, respectively. The total share-based compensation expense not yet recognized and expected to vest
over the next 17 months is approximately $31,000.



Gain on Sale of Customers and Property and Equipment.During the year ended September 30, 2012, the Company sold (i) three properties and subscribers and certain related property
and equipment to Charter Communications, for total proceeds of $273,526 ($906 per subscriber) resulting in a net gain of $208,883,
(ii) two properties and subscribers and certain related property and equipment to Summit Broadband, for total proceeds of $198,000
($1,000 per subscriber) resulting in a net gain of $187,924, (iii) fifteen properties and subscribers and certain related property
and equipment to Access Media 3, Inc., for total proceeds of $1,625,377 ($625 per subscriber) resulting in a net gain of $1,124,607,
and (iv) as part of the Connected Properties initiative with DIRECTV, the Company sold DIRECTV six properties and certain related
plant and equipment for total proceeds of $145,811 resulting in a gain of $90,769.



During the year ended September 30, 2011, the Company sold subscribers
and certain related property and equipment to Comcast of California IX, Inc. The gain on the sale was $60,416 on total proceeds
of $89,651. Additionally, as part of the Connected Properties transfer initiative with DIRECTV, the Company transferred one property
for total proceeds of $22,650 and a gain of $13,690.





21







Other Noncash Charges.Depreciation and amortization
expenses decreased from $7,370,275 during the fiscal year ended September 30, 2011 to $6,326,242 during the fiscal year ended September
30, 2012, a 3% decrease as a percent of revenue. The decrease is indicative of large capital expenditures in prior periods becoming
fully depreciated. Interest expense for 2012 and 2011 included noncash charges of $387,261 and $358,093, respectively, for the
amortization of deferred finance costs and debt discount.



Other Income, Net.During the year ended September
30, 2012, interest expense increased to $3,599,498 from interest expense of $3,026,190 for the year ended September 30, 2011, due
mainly to increased Credit Facility borrowing.



LIQUIDITY AND CAPITAL RESOURCES



During the years ended September 30, 2012 and 2011, the Company
recorded net losses of $6,391,049 and $7,356,910, respectively. Company operations used net cash of $907,523 and $235,063 during
the years ended September 30, 2012 and 2011, respectively. At September 30, 2012, the Company had an accumulated deficit of $74,699,163.



On September 11, 2006, the Company entered into a Loan and Security
Agreement with FCC, LLC, d/b/a First Capital, and Full Circle Funding, LP for a senior secured $20 million non-amortizing revolving
five-year credit facility (“Credit Facility”) to fund the Company's subscriber growth. On June 30, 2008, the Company
entered into an Amended and Restated Loan and Security Agreement with the same parties for a $10 million increase to the Credit
Facility and a new five-year term.



The Credit Facility requires interest payable monthly only on
the principal outstanding and is specially tailored to the Company's needs by being divided into six $5 million increments. The
Company is under no obligation to draw an entire increment at one time. The first $5 million increment carries an interest rate
of prime plus 4.1%, the second $5 million at prime plus 3%, the third $5 million at prime plus 2%, the fourth $5 million at prime
plus 1%, and the new $10 million in additional Credit Facility is also divided into two $5 million increments with the interest
rate on these increments being prime plus 1% to 4%, depending on the Company's ratio of EBITDA to the total outstanding loan balance.
As defined in the Credit Facility, “EBITDA” shall mean the Company’s net income (excluding extraordinary gains
and non-cash charges) before provisions for interest expense, taxes, depreciation and amortization. As defined in the Credit Facility,
“prime” shall be a minimum of 7.75%.



The Company borrowed $1,388,395 on its Credit Facility for the
year ended September 30, 2012, and as of that date, the Company has borrowed a total of $28,604,361 (not including debt discount
of $33,218), which is due on June 30, 2013. The Company has access to its Credit Facility up to $29.1 million as of September 30,
2012 and $459,450 remains available for borrowing.



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



|· | incur other indebtedness;                                  
|- | -----------------------------------------------------------
|· | incur other liens;                                         
|· | undergo any fundamental changes;                           
|· | engage in transactions with affiliates;                    
|· | issue certain equity, grant dividends or repurchase shares;
|· | change our fiscal periods;                                 
|· | enter into mergers or consolidations;                      
|· | sell assets; and                                           
|· | prepay other debt.                                         



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





22







The Company did not incur or record a provision or benefit for
income taxes for the years ended September 30, 2012 and 2011 due to the net loss. The net operating loss carry forward expires
on various dates through 2032, therefore, the Company should not incur cash needs for income taxes for the foreseeable future.



As of September 30, 2012, the Company had available cash and
remaining available Credit Facility, collectively, of $563,574. Based on current projections, the Company does not expect its available
cash, estimated revenues and remaining Credit Facility to be sufficient to cover liquidity needs for the next twelve months. Without
additional funding sources, proceeds from asset sales, or a merger, the Company forecasts that its available capital will be depleted
sometime during its first or second fiscal quarter of 2013. Additionally, the Company will be facing maturity and repayment of
its $30 million Credit Facility on June 30, 2013.



In order for the Company to continue operations and to fully
implement its business plan, it needs to raise additional capital or merge. The Company has been actively pursuing various initiatives
aimed at resolving its need for additional capital, namely asset sales or a merger. Asset sale negotiations have met with some
success for certain assets, but have not yet resulted in larger asset sales. The Company has previously discussed and disclosed
the option of merger as a viable alternative to continue its business operations and growth. In furtherance thereof, on July 9,
2012, the Company executed a merger agreement with Multiband Corporation, whereby the Company would effectively become an operating
subsidiary of Multiband Corporation. Although several conditions precedent still exist, the Company is working toward closing the
merger in January or February 2013. The Company’s ability to close asset sales or to consummate the merger remains uncertain.
Unless the Company is able, in the near-term, to raise additional capital or enter into a merger, there is substantial doubt about
the Company’s ability to continue as a going concern.



Cash Position.At September 30, 2012 and 2011,
the Company had cash and cash equivalents of $104,124 and $84,747, respectively. The Company maintains little cash, as revenues
are deposited against the balance of the Credit Facility to reduce interest cost. During the year ended September 30, 2012, the
Company increased the amount borrowed against the Credit Facility by $1,388,395. Based on current projections, the Company does
not expect its available cash, estimated revenues and remaining Credit Facility to be sufficient to cover liquidity needs for the
next twelve months. Without additional funding sources or significant asset sales, the Company forecasts that its available cash
may be depleted sometime during its first or second fiscal quarter of 2013. Additionally, the Company will be facing maturity and
repayment of its $30 million Credit Facility on June 30, 2013.



Operating Activities.Company operations used
net cash of $907,573 and $235,063 for the years ended September 30, 2012 and 2011, respectively.



Net cash used in operations for the year ended September 30,
2012 included a decrease in accounts receivables of $86,610, a decrease in prepaid expenses of $496,858, a decrease in accounts
payable and accrued liabilities of $451,143 and a decrease in deferred revenue of $402,591.



Net cash used in operations for the year ended September 30,
2011 included an increase in accounts receivables of $764,926, a decrease in prepaid expenses of $29,641, a decrease in accounts
payable and accrued liabilities of $635,477 and an increase in deferred revenue of $55,378.



The Company’s net losses of $6,391,049 and $7,356,910
for the years ended September 30, 2012 and 2011, respectively, are inclusive of net noncash charges associated primarily with depreciation
and amortization, stock options and warrants, and other non-cash charges totaling $7,267,992 and $8,447,675, respectively.



Investing Activities.During the year ended September
30, 2012, the Company (i) purchased $2,454,159 of equipment relating to subscriber additions and HD upgrades for the fiscal year
and to be used for future periods, (ii) received total proceeds of $273,526 from the sale of subscribers and certain related property
and equipment to Charter Communications, (iii) received $198,000 in total proceeds for the sale of subscribers and certain related
property and equipment to Summit Broadband, (iv) received $1,625,377 in total proceeds for the sale of subscribers and certain
related property and equipment Access Media 3, Inc., and (v) as part of the Connected Properties initiative with DIRECTV, sold
certain related plant and equipment for total received proceeds of $145,811.





23







During the year ended September 30, 2011, the Company (i) purchased
$3,288,559 of equipment relating to subscriber additions and HD upgrades for the fiscal year and to be used for future periods,
(ii) paid $619,732 for the acquisition of intangible assets and related fees, (iii) received $89,651 in proceeds from the sale
of subscribers and related property and equipment to Comcast, and (iv) received $22,650 in proceeds for the sale of subscribers
and related property and equipment to DIRECTV.



Financing Activities.During the year ended September
30, 2012, the Company incurred $250,000 in deferred financing costs and increased the amount borrowed through the Credit Facility
by $1,388,395. During the year ended September 30, 2011, the Company incurred $250,000 in deferred financing costs and increased
the amount borrowed through the Credit Facility by $4,034,141. Equity financing activity provided $7,135 from 2,785 shares of common
stock purchased by employees through the Employee Stock Purchase Plan.



Working Capital.The Company had negative working
capital of $30,714,006 and $2,089,623 as of September 30, 2012 and 2011, respectively. The increase is due to the Credit Facility,
which is due on June 30, 2013, being classified as current debt. To minimize the draw on the Credit Facility and the liability,
the Company expects to have negative working capital. The Credit Facility provided $1,388,395 and $4,034,141 in proceeds towards
working capital for the years ended September 30, 2012 and 2011, respectively. Based on current projections, the Company does not
expect its available cash, estimated revenues and remaining Credit Facility to be sufficient to cover liquidity needs for the next
twelve months. Without additional funding sources or significant asset sales, the Company forecasts that its available cash will
be depleted sometime during its first or second fiscal quarter of 2013, and it will be facing maturity and repayment of its $30
million Credit Facility on June 30, 2013.



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



Future Capital Requirements.For the Company to
continue operations and capitalize on future strategic plans, it will be required to raise additional capital. The Company has
been actively pursuing various initiatives aimed at resolving its need for additional capital, specifically asset sales. These
negotiations have met with some success for certain assets, but have not resulted in larger asset sales. The Company’s ability
to raise sufficient additional capital, through asset sales or otherwise, on acceptable terms or at all, remains uncertain. Additionally,
the Company will be facing maturity and repayment of its $30 million Credit Facility on June 30, 2013.



The Company has previously disclosed the option of merger as
a viable alternative to continue its business operations and growth. On July 9, 2012, the Company executed a merger agreement with
Multiband Corporation, whereby the Company would effectively become an operating subsidiary of Multiband Corporation. Although
several conditions precedent still exist, the Company is working toward closing the merger in January or February 2013; however,
there can be no assurance that the merger will close. Unless the Company is able, in the near-term, to raise additional capital
or enter into a merger, there is substantial doubt about the Company’s ability to continue as a going concern.



CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS



As of September 30, 2012, the resources required for scheduled
payment of contractual obligations were as follows:



|                              |  | Total |            |  | Due in 1 year  or less |   |            | Due after  1 year through
 3 years |  |   | Due after  3 years through  5 years | 
|----------------------------- |  | ----- | ---------- |  | ---------------------- | - | ---------- | ---------------------------------- |  | - | ----------------------------------- | 
|Operating leases              |  | $     | 341,708    |  |                        | $ | 285,450    |                                    |  | $ | 56,258                              | 
|Credit line borrowing         |  |       | 28,604,361 |  |                        |   | 28,604,361 |                                    |  |   | -                                   | 
|Total contractual obligations |  | $     | 28,946,069 |  |                        | $ | 28,889,811 |                                    |  | $ | 56,258                              | 





24







CRITICAL ACCOUNTING POLICIES AND ESTIMATES



The consolidated financial statements of the Company have been
prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these
consolidated financial statements requires the Company 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, the Company
evaluates its estimates. The Company bases its estimates on historical experience and on other assumptions that are believed to
be reasonable under the circumstances. Accordingly, actual results could differ from these estimates under different assumptions
or conditions. This section summarizes the critical accounting policies and the related judgments involved in their application.



Revenue recognition with respect to initial service or connection:



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



Deferred revenue:



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



Use of estimates:



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



Allowance for doubtful accounts:



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





25







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



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



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



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



For purposes of determining the fair values of options and warrants
using the Black-Scholes option pricing model, the Company used the following assumptions in the year ended September 30, 2011 (no
options or warrants were granted in the year ended September 30, 2012):



|                              |  | Year Ended September 30, 2011 | 
|----------------------------- |  | ----------------------------- | 
|Expected volatility           |  | 189%                          | 
|Risk-free interest rate       |  | 1.86%                         | 
|Expected years of option life |  | 4.1                           | 
|Expected dividends            |  | 0%                            | 



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



Valuation of deferred tax assets:



The Company regularly evaluates its ability to recover the reported
amount of deferred income tax assets considering several factors, including an estimate of the likelihood that the Company will
generate sufficient taxable income in future years in which temporary differences reverse and net operating loss carry forwards
may be used. Due to the uncertainties related to, among other things, the extent and timing of future taxable income, the Company
offset its net deferred tax assets by an equivalent valuation allowance as of September 30, 2012 and 2011.



Valuation of long-lived assets:



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





26







Reporting segments:



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



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



RECENTLY ISSUED AND NOT YET EFFECTIVE ACCOUNTING PRONOUNCEMENT



In September 2011, the Financial
Accounting Standards Board (“FASB”) approved a
revised standard“Goodwill Impairment Testing” that simplifies how entities test goodwill for impairment. The
revised standard permits an entity to first assess qualitative factors to determine whether it is more likely than not that the
fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the
two-step goodwill impairment test. The standard does not address impairment testing of indefinite-lived intangibles. The amendment
is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The
Company does not expect the adoption of the revised standard to have an effect on its consolidated results of operations and financial
position, when adopted, as required, on October 1, 2012.



In December 2011, the FASB approved an amendment in certain
pending paragraphs in Accounting Standards “Comprehensive Income: Presentation of Comprehensive Income” to effectively
defer only those changes that relate to the presentation of reclassification adjustments out of accumulated other comprehensive
income. The amendments will be temporary to allow the FASB time to re-deliberate the presentation requirements for reclassifications
out of accumulated other comprehensive income for annual and interim financial statements. The amendment to “Comprehensive
Income: Presentation of Comprehensive Income” is effective for annual and interim goodwill impairment tests performed for
fiscal years beginning after December 15, 2011. The Company does not expect the adoption of the revised standard to have an effect
on its consolidated results of operations and financial position, when adopted, as required, on October 1, 2012.



The FASB, the EITF and the SEC have issued certain other accounting
pronouncements and regulations as of September 30, 2012 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 2012 and 2011, 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.



RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS



In March 2011, accounting standards update on “Troubled
Debt Restructuring” was issued. The update clarifies which loan modifications constitute troubled debt restructurings. It
is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered
a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings.
In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both
of the following exist, (a) the restructuring constitutes a concession, and (b) the debtor is experiencing financial difficulties.
For public companies, the new guidance is effective for interim and annual periods beginning on or after June 15, 2011. The Company
evaluated the effect that the adoption of this standard will have on its consolidated results of operations, financial position
and cash flows, and has determined the adoption will have no material impact.





27







In April 2011, accounting standards update on “Reconsideration
of Effective Control for Repurchase Agreements” was issued. The amendments in this update remove from the assessment of effective
control, (a) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially
the agreed terms, even in the event of default by the transferee, and (b) the collateral maintenance implementation guidance related
to that criterion. The guidance should be applied prospectively to transactions or modifications of existing transactions that
occur on or after the effective date. The guidance is effective for the first interim or annual period beginning on or after December
15, 2011. The Company evaluated the effect that the adoption of this standard will have on its consolidated results of operations,
financial position and cash flows, and has determined the adoption will have no material impact.



Off Balance Sheet Arrangements:



None.



Item 7A. Quantitative and Qualitative Disclosures about Market
Risk



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





28







Item 8. Financial Statements and Supplementary Data



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM



Board of Directors and Stockholders

MDU Communications International, Inc.



We have audited the accompanying consolidated balance sheets
of MDU Communications International, Inc. and Subsidiaries as of September 30, 2012 and 2011, and the related consolidated statements
of operations, stockholders’ deficiency and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.



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



In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of MDU Communications International, Inc. and Subsidiaries
as of September 30, 2012 and 2011, 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.



The accompanying consolidated financial statements have been
prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements,
the Company has incurred significant recurring losses, has a working capital deficit, and an accumulated deficit of $75 million
at September 30, 2012. Additionally, the Company’s $30 million Credit Facility matures on June 30, 2013. These factors raise
substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these
matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from
the outcome of this uncertainty.



|/s/ CohnReznick LLP 
|--------------------
|Roseland, New Jersey
|December 21, 2012   





29







MDU COMMUNICATIONS INTERNATIONAL, INC.

Consolidated Balance Sheets

September 30, 2012 and 2011



|                                                                                                                                                   |  | September 30, |             |   | September 30, |  
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | - | ------------- | -
|                                                                                                                                                   |  | 2012          |             |   | 2011          |  
|ASSETS                                                                                                                                             |  |               |             |   |               |  
|CURRENT ASSETS                                                                                                                                     |  |               |             |   |               |  
|Cash and cash equivalents                                                                                                                          |  | $             | 104,124     |   |               | $
|Accounts and other receivables, net of an allowance of $1,731,441 and $1,390,686                                                                   |  |               | 1,349,223   |   |               |  
|Prepaid expenses and deposits                                                                                                                      |  |               | 116,783     |   |               |  
|TOTAL CURRENT ASSETS                                                                                                                               |  |               | 1,570,130   |   |               |  
|                                                                                                                                                   |  |               |             |   |               |  
|Telecommunications equipment inventory                                                                                                             |  |               | 567,649     |   |               |  
|Property and equipment, net of accumulated depreciation of $37,195,095 and $32,941,454                                                             |  |               | 16,260,148  |   |               |  
|Intangible assets, net of accumulated amortization of $8,501,453 and $8,212,000                                                                    |  |               | 1,017,868   |   |               |  
|Deposits, net of current portion                                                                                                                   |  |               | 66,887      |   |               |  
|Deferred finance costs, net of accumulated amortization of $1,591,222 and $1,248,252                                                               |  |               | 182,227     |   |               |  
|TOTAL ASSETS                                                                                                                                       |  | $             | 19,664,909  |   |               | $
|                                                                                                                                                   |  |               |             |   |               |  
|LIABILITIES AND STOCKHOLDERS’ DEFICIENCY                                                                                                           |  |               |             |   |               |  
|CURRENT LIABILITIES                                                                                                                                |  |               |             |   |               |  
|Accounts payable                                                                                                                                   |  | $             | 2,450,501   |   |               | $
|Other accrued liabilities                                                                                                                          |  |               | 795,488     |   |               |  
|Credit line borrowing, net of debt discount                                                                                                        |  |               | 28,571,143  |   |               |  
|Current portion of deferred revenue                                                                                                                |  |               | 467,004     |   |               |  
|TOTAL CURRENT LIABILITIES                                                                                                                          |  |               | 32,284,136  |   |               |  
|                                                                                                                                                   |  |               |             |   |               |  
|Deferred revenue, net of current portion                                                                                                           |  |               | 33,707      |   |               |  
|Credit line borrowing, net of debt discount                                                                                                        |  |               | —           |   |               |  
|TOTAL LIABILITIES                                                                                                                                  |  |               | 32,317,843  |   |               |  
|                                                                                                                                                   |  |               |             |   |               |  
|COMMITMENTS AND CONTINGENCIES                                                                                                                      |  |               |             |   |               |  
|                                                                                                                                                   |  |               |             |   |               |  
|STOCKHOLDERS’ DEFICIENCY                                                                                                                           |  |               |             |   |               |  
|Preferred stock, par value $0.001; 5,000,000 shares authorized, none issued                                                                        |  |               | —           |   |               |  
|Common stock, par value $0.001; 35,000,000 shares authorized, 5,690,262 and 5,503,111 shares issued and 5,672,820 and 5,485,669 shares outstanding |  |               | 5,692       |   |               |  
|Additional paid-in capital                                                                                                                         |  |               | 62,108,861  |   |               |  
|Accumulated deficit                                                                                                                                |  |               | (74,699,163 | ) |               |  
|Less: Treasury stock; 17,442 shares                                                                                                                |  |               | (68,324     | ) |               |  
|TOTAL STOCKHOLDERS’ DEFICIENCY                                                                                                                     |  |               | (12,652,934 | ) |               |  
|TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIENCY                                                                                                     |  | $             | 19,664,909  |   |               | $



See accompanying notes to the consolidated
financial statements.





30







MDU COMMUNICATIONS INTERNATIONAL, INC.

Consolidated Statements of Operations

Years Ended September 30, 2012 and 2011



|                                                     |  | Years Ended September 30, |           
|---------------------------------------------------- |  | ------------------------- | ----------
|                                                     |  | 2012                      |           
|REVENUE                                              |  | $                         | 27,305,201
|                                                     |  |                           |           
|OPERATING EXPENSES                                   |  |                           |           
|Direct costs                                         |  |                           | 13,475,920
|Sales expenses                                       |  |                           | 1,393,292 
|Customer service and operating expenses              |  |                           | 6,175,216 
|General and administrative expenses                  |  |                           | 4,338,265 
|Depreciation and amortization                        |  |                           | 6,326,242 
|Gain on sale of customers and property and equipment |  |                           | (1,612,183
|TOTALS                                               |  |                           | 30,096,752
|                                                     |  |                           |           
|OPERATING LOSS                                       |  |                           | (2,791,551
|                                                     |  |                           |           
|Other income (expense):                              |  |                           |           
|Interest income                                      |  |                           | —         
|Interest expense                                     |  |                           | (3,599,498
|NET LOSS                                             |  | $                         | (6,391,049
|BASIC AND DILUTED LOSS PER COMMON SHARE              |  | $                         | (1.15     
|WEIGHTED AVERAGE COMMON SHARES OUTSTANDING           |  |                           | 5,546,660 



See accompanying notes to the consolidated
financial statements.





31







MDU COMMUNICATIONS INTERNATIONAL, INC.

Consolidated Statements of Stockholders’
Deficiency

Years Ended September 30, 2012 and 2011



|                                                                               |  | Common
    stock |           |  | Treasury
    stock |   |       | Additional |  |  | Accumulated |   |  |                     |        
|------------------------------------------------------------------------------ |  | ---------------- | --------- |  | ------------------ | - | ----- | ---------- |  |  | ----------- | - |  | ------------------- | -------
|                                                                               |  | Shares           |           |  | Amount             |   |       | Shares     |  |  | Amount      |   |  | paid-in
    capital |        
|Balance,
    October 1, 2010                                                   |  |                  | 5,395,886 |  |                    | $ | 5,396 |            |  |  | (17,442     | ) |  | $                   | (68,324
|Issuance
    of common stock through employee stock purchase plan              |  |                  | 2,785     |  |                    |   | 3     |            |  |  |             |   |  |                     |        
|Issuance
    of common stock for employee bonuses                              |  |                  | 48,125    |  |                    |   | 48    |            |  |  |             |   |  |                     |        
|Issuance
    of common stock for employee wages                                |  |                  | 23,315    |  |                    |   | 24    |            |  |  |             |   |  |                     |        
|Issuance
    of restricted common stock for compensation for services rendered |  |                  | 33,000    |  |                    |   | 33    |            |  |  |             |   |  |                     |        
|Share-based
    compensation - employees                                       |  |                  |           |  |                    |   |       |            |  |  |             |   |  |                     |        
|Net loss                                                                       |  |                  |           |  |                    |   |       |            |  |  |             |   |  |                     |        
|Balance,
    October 1, 2011                                                   |  |                  | 5,503,111 |  |                    |   | 5,504 |            |  |  | (17,442     | ) |  |                     | (68,324
|Issuance
    of common stock through employee stock purchase plan              |  |                  | 2,837     |  |                    |   | 3     |            |  |  |             |   |  |                     |        
|Issuance
    of common stock for employee bonuses                              |  |                  | 8,500     |  |                    |   | 8     |            |  |  |             |   |  |                     |        
|Issuance
    of restricted common stock for employee bonuses                   |  |                  | 69,152    |  |                    |   | 69    |            |  |  |             |   |  |                     |        
|Issuance
    of restricted common stock for compensation for services rendered |  |                  | 106,662   |  |                    |   | 108   |            |  |  |             |   |  |                     |        
|Share-based
    compensation - employees                                       |  |                  |           |  |                    |   |       |            |  |  |             |   |  |                     |        
|Net loss                                                                       |  |                  |           |  |                    |   |       |            |  |  |             |   |  |                     |        
|Balance, September
    30, 2012                                                |  |                  | 5,690,262 |  |                    | $ | 5,692 |            |  |  | (17,442     | ) |  | $                   | (68,324



See accompanying notes to the consolidated
financial statements.





32







MDU COMMUNICATIONS INTERNATIONAL, INC.

Consolidated Statements of Cash Flows

Years Ended September 30, 2012 and 2011



|                                                                                        |  | Years Ended September 30, |           
|--------------------------------------------------------------------------------------- |  | ------------------------- | ----------
|                                                                                        |  | 2012                      |           
|OPERATING ACTIVITIES                                                                    |  |                           |           
|Net loss                                                                                |  | $                         | (6,391,049
|Adjustments to reconcile net loss to net cash used in operating activities:             |  |                           |           
|Bad debt provision                                                                      |  |                           | 344,529   
|Depreciation and amortization                                                           |  |                           | 6,326,242 
|Share-based compensation expense - employees                                            |  |                           | 45,806    
|Charge to interest expense for amortization of deferred finance costs and debt discount |  |                           | 387,261   
|Compensation expense for issuance of common stock through employee stock purchase plan  |  |                           | —         
|Compensation expense for issuance of common stock for employee bonuses                  |  |                           | 10,625    
|Compensation expense for issuance of common stock for employee services                 |  |                           | —         
|Compensation expense for issuance of restricted common stock for compensation           |  |                           | 153,529   
|Gain on sale of customers and property and equipment                                    |  |                           | (1,612,183
|Loss on write-off of property and equipment                                             |  |                           | 97,933    
|Changes in operating assets and liabilities:                                            |  |                           |           
|Accounts and other receivables                                                          |  |                           | 86,610    
|Prepaid expenses and deposits                                                           |  |                           | 496,858   
|Accounts payable                                                                        |  |                           | (61,275   
|Other accrued liabilities                                                               |  |                           | (389,868  
|Deferred revenue                                                                        |  |                           | (402,591  
|Net cash used in operating activities                                                   |  |                           | (907,573  
|INVESTING ACTIVITIES                                                                    |  |                           |           
|Purchase of property and equipment                                                      |  |                           | (2,454,159
|Proceeds from the sale of customers and property and equipment                          |  |                           | 2,242,714 
|Acquisition of intangible assets                                                        |  |                           | —         
|Net cash used in investing activities                                                   |  |                           | (211,445  
|FINANCING ACTIVITIES                                                                    |  |                           |           
|Net proceeds from credit line borrowing                                                 |  |                           | 1,388,395 
|Deferred financing costs                                                                |  |                           | (250,000  
|Proceeds from purchase of common stock through employee stock purchase plan             |  |                           | —         
|Net cash provided by financing activities                                               |  |                           | 1,138,395 
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                    |  |                           | 19,377    
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                            |  |                           | 84,747    
|CASH AND CASH EQUIVALENTS, END OF YEAR                                                  |  | $                         | 104,124   



33







|                                                                            |  | Years Ended September 30, |          
|--------------------------------------------------------------------------- |  | ------------------------- | ---------
|                                                                            |  | 2012                      |          
|SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:      |  |                           |          
|                                                                            |  |                           |          
|Issuance of  26,090 shares of restricted common stock for services rendered |  | $                         | 53,224   
|                                                                            |  |                           |          
|Issuance of 2,837 shares of common stock for accrued compensation           |  | $                         | 5,400    
|                                                                            |  |                           |          
|Issuance of 34,255 shares of common stock for employee bonuses              |  | $                         | —        
|                                                                            |  |                           |          
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                            |  |                           |          
|                                                                            |  |                           |          
|Interest paid                                                               |  | $                         | 3,187,537



See accompanying notes to the consolidated
financial statements.





34







MDU COMMUNICATIONS INTERNATIONAL, INC.

Notes to Consolidated Financial Statements



|1. | BUSINESS
|-- | --------



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



The consolidated financial statements have been prepared on
the going concern basis of accounting, which contemplates realization of assets and liquidation of liabilities in the ordinary
course of business. As shown in the accompanying consolidated financial statements, the Company had a net loss of $6.4 million,
an accumulated deficit of $75 million and a working capital deficit of approximately $30.7 million at and for the year ended September
30, 2012.



For the Company to continue operations, it will be required
to raise additional capital. The Company has been actively pursuing various initiatives aimed at resolving its need for additional
capital, specifically asset sales. These negotiations have met with some success for certain assets, but have not resulted in larger
asset sales. The Company’s ability to raise sufficient additional capital, through asset sales or otherwise, on acceptable
terms or at all, remains uncertain. Without additional funding sources, proceeds from asset sales, or a merger, the Company forecasts
that its available capital will be depleted sometime during its first or second fiscal quarter of 2013. Additionally, the Company
will be facing maturity and repayment of its $30 million Credit Facility on June 30, 2013.



The Company has previously disclosed the option of merger as
a viable alternative to continue its business operations and growth. On July 9, 2012, the Company executed a merger agreement with
Multiband Corporation, whereby the Company would effectively become an operating subsidiary of Multiband Corporation. Although
several conditions precedent still exist, including Company stockholder approval, the Company is working toward closing the merger
in January or February 2013. There can be no assurance that the merger will close.



Unless the Company is able, in the near-term, to raise additional
capital or enter into a merger, there is substantial doubt about the Company’s ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.



|2. | SIGNIFICANT ACCOUNTING POLICIES
|-- | -------------------------------



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



Use of Estimates



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



Principles of Consolidation



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





35







Deferred Financing Costs and Debt Discount



Costs related to obtaining loans are presented as deferred finance
costs on the consolidated balance sheets and amortized to interest expense using the straight-line method over the term of the
related obligation. Debt discount is offset against the principal balance of the related loan and amortized using the straight-line
method over the term of the related loan.



Telecommunications Equipment Inventory and Property and Equipment



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



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



|Installed telecommunications equipment | 7 years
|-------------------------------------- | -------
|Computer equipment                     | 5 years
|Furniture and fixtures                 | 5 years



Intangible Assets



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



Long-lived Assets



The Company reviews the carrying value of its long-lived assets
for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated
future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows
are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair
value of the assets. No impairment losses were identified by the Company for the years ended September 30, 2012 and 2011.



Revenue Recognition



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



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



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.





36







Deferred Revenue



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



Accounts Receivable



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



Loss Per Common Share



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



For the years ended September 30, 2012 and 2011, 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, 2012 and 2011, the Company had potentially dilutive common shares attributable
to options and warrants that were exercisable (or potentially exercisable) into shares of common stock as presented in the following
table:



|                                   |  | For the Years Ended September 30, |        
|---------------------------------- |  | --------------------------------- | -------
|                                   |  | 2012                              |        
|Warrants                           |  |                                   | 75,000 
|Options                            |  |                                   | 170,780
|Potentially dilutive common shares |  |                                   | 245,780



Foreign Exchange



The Company uses the United States dollar as its functional
and reporting currency since the majority of the Company’s revenues, expenses, assets and liabilities are in the United States
and the focus of the Company’s operations is in that country. Assets and liabilities in foreign currencies 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, 2012 and 2011 and cumulative
translation gains and losses as of September 30, 2012 and 2011 were not material.



Stock-Based Compensation



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





37







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



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



Cash and Cash Equivalents



Cash and cash equivalents consist of bank deposits and short-term
notes with maturities at the date of acquisition of ninety days or less. The balances maintained in bank accounts may, at times,
exceed Federally insured limits. At September 30, 2012, the cash balances in bank accounts did not exceed Federally insured limits.



Concentrations



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



Accounts receivable from DIRECTV (see Note 6) at September 30,
2012 and 2011, represented 38% and 34%, respectively, of total trade accounts receivable. Revenues realized directly from DIRECTV
represented 22% and 24% of total revenues in the years ended September 30, 2012 and 2011, respectively.



Income Taxes



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



Recently Adopted Accounting Standards



In March 2011, accounting standards update on “Troubled
Debt Restructuring” was issued. The update clarifies which loan modifications constitute troubled debt restructurings. It
is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered
a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings.
In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both
of the following exist, (a) the restructuring constitutes a concession, and (b) the debtor is experiencing financial difficulties.
For public companies, the new guidance was effective for interim and annual periods beginning on or after June 15, 2011. The adoption
of Troubled Debt Restructuring did not have a material impact on the Company’s consolidated financial statements.



Other Recently Issued and Not Yet Effective Accounting Standards



In September 2011, the Financial Accounting Standards Board
(“FASB”) approved a revised standard“Goodwill Impairment Testing” that simplifies how entities
test goodwill for impairment. The revised standard permits an entity to first assess qualitative factors to determine whether it
is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether
it is necessary to perform the two-step goodwill impairment test. The standard does not address impairment testing of indefinite-lived
intangibles. The amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after
December 15, 2011. The Company does not expect the adoption of the revised standard to have an effect on its consolidated results
of operations and financial position, when adopted, as required, on October 1, 2012.





38







In December 2011, the FASB approved an amendment in certain
pending paragraphs in Accounting Standards “Comprehensive Income: Presentation of Comprehensive Income” to effectively
defer only those changes that relate to the presentation of reclassification adjustments out of accumulated other comprehensive
income. The amendments will be temporary to allow the FASB time to re-deliberate the presentation requirements for reclassifications
out of accumulated other comprehensive income for annual and interim financial statements. The amendment to “Comprehensive
Income: Presentation of Comprehensive Income” is effective for annual and interim goodwill impairment tests performed for
fiscal years beginning after December 15, 2011. The Company does not expect the adoption of the revised standard to have an effect
on its consolidated results of operations and financial position, when adopted, as required, on October 1, 2012.



|3. | DEBT
|-- | ----



Credit Facility



On September 11, 2006, the Company entered into a Loan and Security
Agreement with FCC, LLC, d/b/a First Capital, and Full Circle Funding, LP (“Lenders”) for a senior secured $20 million
credit facility (“Credit Facility”) to fund the Company’s subscriber growth. On June 30, 2008, the Company entered
into an Amended and Restated Loan and Security Agreement with these same parties for a senior secured $10 million increase to its
original $20 million Credit Facility. The Credit Facility, up to $30 million, has a five-year term ending June 30, 2013 under which
the Company will pay interest on actual principal drawn during the full term of the agreement. The amount that the Company can
draw from the Credit Facility is equal to the lesser of $30 million or the Company's borrowing base which, in large part, is determined
by future revenues and costs accruing from the Company's access agreements. The borrowing base of the Company was approximately
$29.1 million at September 30, 2012. The Credit Facility can be prepaid upon thirty days notice with a penalty of 0% to 2% of the
outstanding principal balance depending on the prepayment timing.



The Credit Facility requires interest payable monthly only on
the principal outstanding and was divided into six $5 million increments. The first $5 million increment carries an interest rate
of prime plus 4.1%, the second $5 million at prime plus 3%, the third $5 million at prime plus 2%, the fourth $5 million at prime
plus 1%, and the $10 million in additional Credit Facility is also divided into two $5 million increments with the interest rate
on these increments being prime plus 1% to 4%, depending on the Company's ratio of EBITDA to the total outstanding loan balance.
As defined in the Credit Facility, “EBITDA” shall mean the Company’s net income (excluding extraordinary gains
and non-cash charges) before provisions for interest expense, taxes, depreciation and amortization. As defined in the Credit Facility,
“prime” shall be a minimum of 7.75%.



The Credit Facility is secured by the Company’s cash and
temporary investments, accounts receivable, inventory, access agreements and certain property, plant and equipment. The Credit
Facility contains covenants limiting the Company’s ability to, without the prior written consent of the Lenders, among other
things:



|· | incur other indebtedness;
|- | -------------------------
|· | incur other liens;       

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

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

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

|· | prepay other debt.
|- | ------------------





39







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



The Company borrowed $1,388,395 on its Credit Facility for the
year ended September 30, 2012, and as of that date, the Company has borrowed a total of $28,604,361, which is reflected in the
accompanying consolidated balance sheet, net of debt discount of $33,218, which is due on June 30, 2013. The Company has access
to its Credit Facility up to $29.1 million as of September 30, 2012 and $459,450 remains available for borrowing.



The Company is subject to annual costs when it accesses and
continues to access a $5 million increment. In the year ended September 30, 2012, the Company incurred an annual deferred finance
cost of $250,000 that is being amortized to interest expense using the straight-line method over twelve month periods ending in
November 2011, February 2012, March 2012, May 2012 and July 2012.



In connection with the Amended and Restated Loan and Security
Agreement executed on June 30, 2008, the Company issued to FCC, LLC, d/b/a First Capital, a five year warrant to purchase 37,500
shares of the Company's common stock and issued to Full Circle Funding, LP a five year warrant to purchase 37,500 shares of the
Company's common stock, both at an exercise price of $6.00 per share. The warrants had a fair value of $45,000, as determined using
the Black-Sholes pricing model, which is being amortized as debt discount over the remaining term of the Amended and Restated Loan
Agreement. The warrants are subject to customary registration rights set forth in a Registration Rights Agreement that provides
for demand registration within one hundred and thirty five days and (i) a four (4%) percent share penalty if not effective within
that time period, and (ii) a two (2%) percent share penalty thereafter for each thirty days until effectiveness or one year, whichever
is earlier. As of September 30, 2012, there has been no “demand” for registration pursuant to the Registration Rights
Agreement.



|4. | STOCKHOLDERS’ EQUITY
|-- | --------------------



Preferred Stock



The Company is authorized to issue up to 5,000,000 shares of
preferred stock with a par value of $.001 per share. The preferred stock may be issued in one or more series with dividend rates,
conversion rights, voting rights and other terms and preferences to be determined by the Company’s Board of Directors, subject
to certain limitations set forth in the Company’s Certificate of Incorporation. There were no shares of preferred stock outstanding
as of September 30, 2012 or 2011.



Stock-Based Compensation



The cost of stock-based payments to employees, including grants
of employee stock options, are recognized in the financial statements based on the portion of their grant date fair values expected
to vest over the period during which the employees are required to provide services in exchange for the equity instruments. The
Company uses the Black-Scholes method of valuation for stock-based compensation. During the years ended September 30, 2012 and
2011, the Company recognized stock-based compensation expense for employees of $45,806 and $54,131, respectively, which was included
in general and administrative expenses.





40







The fair values of options granted during the years ended September
30, 2011 (no options were granted in the year ended September 30, 2012) were determined using a Black-Scholes option pricing model
based on the following weighted average assumptions:



|                              |  | Year Ended September 30, 2011
|----------------------------- |  | -----------------------------
|Expected volatility           |  | 189%                         
|Risk-free interest rate       |  | 1.86%                        
|Expected years of option life |  | 4.1                          
|Expected dividends            |  | 0%                           



Employee Stock Option Plan



The 2001 Stock Option Plan (“2001 Option Plan”)
was approved by the stockholders at the Annual General Meeting in 2001 with a reservation of 560,000 shares of common stock. Stock
option awards are generally granted with an exercise price equal to the market price of the Company’s stock on the date of
the grant. The option awards vest quarterly over three years and have a five-year contractual life. The following table summarizes
information about all of the Company’s stock option activity during the fiscal years ended September 30, 2012 and 2011:



|                                                                     |  | Number of
 shares |          |   | Weighted-
average exercise
 price ($) | 
|-------------------------------------------------------------------- |  | ----------------- | -------- | - | ------------------------------------- | 
|Options outstanding at October 1, 2010                               |  |                   | 227,600  |   |                                       | 
|Options granted (1) (weighted average fair value of $2.75 per share) |  |                   | 57,630   |   |                                       | 
|Options cancelled/expired                                            |  |                   | —        |   |                                       | 
|Options exercised                                                    |  |                   | —        |   |                                       | 
|Options outstanding at September 30, 2011 (2)                        |  |                   | 285,230  |   |                                       | 
|Options granted                                                      |  |                   | —        |   |                                       | 
|Options cancelled/expired (3)                                        |  |                   | (114,450 | ) |                                       | 
|Options exercised                                                    |  |                   | —        |   |                                       | 
|Options outstanding at September 30, 2012 (2)(4)                     |  |                   | 170,780  |   |                                       | 
|Options exercisable at September 30, 2012                            |  |                   | 157,869  |   |                                       | 
|Options available for issuance at September 30, 2012 (5)             |  |                   | —        |   |                                       | 

---



| | (1) | On November 17, 2010, the Board of Directors granted
5,000 five-year options each to two employees at an exercise price of $3.00 per share. On March 18, 2011, the Board of Directors
granted 17,630 five-year options collectively to twelve employees and 30,000 five-year options to a consultant, all at an exercise
of $2.94 per share.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | The weighted average remaining contractual term of outstanding
and exercisable options at September 30, 2012 and 2011 was 1.5 and 2.4 years, respectively. There was $0 aggregate intrinsic value
of outstanding and exercisable options at September 30, 2012 and 2011, respectively. An additional charge of approximately $31,000
is expected to vest and be recognized subsequent to September 30, 2012 over a weighted average period of 17 months. The charge
will be amortized to general and administrative expenses as the options vest in subsequent periods.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | During the year ended September 30, 2012, (i) 43,500
options expired with an exercise price of $7.50 and a fair market value of $3.80 per share. All 43,500 options were vested and
the entire fair market value of $165,300 in noncash expense had been recognized in general and administrative expense since their
issuance, (ii) 5,500 options expired with 500 having an exercise price of $4.00 and a fair market value of $1.29 per share, and
5,000 having an exercise price of $3.00 and a fair market value of $2.54 per share. Of the 500 options, 335 options were vested
and of the 5,000 options, 1,668 options were vested with $432 and $4,232 in fair market value noncash expense recognized, respectively,
in general and administrative expense since their issuance, (iii) 35,450 options expired with 9,500 options having an exercise
price of $4.50 and a fair market value of $1.10 per share, 12,500 options having an exercise price of $2.00 and a fair market
value of $0.50 per share, 10,500 options having an exercise price of $4.00 and a fair market value of $1.30 per share, and 2,950
options with an exercise price of $2.94 and a fair market value of $2.79 per share. Of the 35,450 options, 30,858 were vested
and $29,681 in fair market value noncash expense recognized in general and administrative expense since their issuance, and (iv)
30,000 options pending issuance to a consultant were forfeited.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Of the 170,780 option grants outstanding as of September
30, 2012, 12,911 options were unvested and are expected to vest.
| | --- | -------------------------------------------------------------------------------------------------------------------------

| | (5) | Per the terms of the 2001 Option Plan, it expired as
of March 20, 2011 and no further grants can be made.
| | --- | ---------------------------------------------------------------------------------------------------------





41







Warrants to Purchase Common Stock



The following table summarizes all of the Company’s warrant
activity during the years ended September 30, 2012 and 2011:



|                                  |  | Number of
 warrants
 outstanding |          |   | Weighted-average
 exercise price per
 share ($) | 
|--------------------------------- |  | -------------------------------- | -------- | - | ----------------------------------------------- | 
|Outstanding at October 1, 2010    |  |                                  | 175,000  |   |                                                 | 
|Issued                            |  |                                  | —        |   |                                                 | 
|Cancelled/expired                 |  |                                  | (100,000 | ) |                                                 | 
|Exercised                         |  |                                  | —        |   |                                                 | 
|Outstanding at October 1, 2011    |  |                                  | 75,000   |   |                                                 | 
|Issued                            |  |                                  | —        |   |                                                 | 
|Cancelled/expired                 |  |                                  | —        |   |                                                 | 
|Exercised                         |  |                                  | —        |   |                                                 | 
|Outstanding at September 30, 2012 |  |                                  | 75,000   |   |                                                 | 



Employee Stock Purchase Plan



In April of 2009, the stockholders approved the 2009 Employee
Stock Purchase Plan (“2009 ESPP”) with a reservation of 150,000 shares of common stock. The purchase price per share
under the 2009 ESPP is equal to 85% of the fair market value of a share of Company common stock at the beginning of the purchase
period (quarter) or on the last day in a purchase period, whichever is lower. The 2009 ESPP shall terminate on April 23, 2016,
or upon the maximum number of shares being issued, or sooner per the discretion of the Board of Directors.



During the year ended September 30, 2012, the Company issued
2,837 shares of common stock from the 2009 ESPP for employee purchases in the amount of $5,400. The entire $5,400 amount was accrued
in the year ended September 30, 2011, but such shares were not issued until fiscal 2012. Additionally, the Company issued 8,500
shares of common stock from the 2009 ESPP for bonus amounts of $10,625, which, pursuant to the 2009 ESPP, employees can apply up
to 100% of a bonus award to the 2009 ESPP in return for shares of common stock. As of September 30, 2012, only 2,152 shares remain
available for issuance under the 2009 ESPP.



During the year ended September 30, 2011, the Company issued
to employees from the 2009 ESPP through payroll deduction, (i) 34,255 shares of common stock for 2010 year end bonus amounts of
$99,060, which was accrued in the year ended September 30, 2010, but the shares were not issued until fiscal 2011, and the Company
recognized expense for the full discount of $17,470, with $11,668 expensed in the year ended September 30, 2011 and $5,802 accrued
in the year ended September 30, 2010; (ii) 13,870 shares of common stock for other bonus amounts of $31,767 and the Company recognized
expense for the full discount of $5,548; (iii) 2,785 shares of common stock for proceeds of $7,135 from employees who purchased
shares under the 2009 ESPP through accrued payroll deduction and the Company recognized expense for the full discount of $2,169;
and (iv) 23,315 shares of common stock for $59,790 in lieu of wages deferred and the Company recognized expense for the full discount
of $10,499.



Restricted Stock



During the third fiscal quarter of 2012, in an effort to conserve
cash and improve EBITDA for financial covenants, the Board approved a voluntary employee salary forfeiture and incentive plan with
the reduction and incentive to be compensated in Company restricted common stock at a price of $1.00 per share, which was the stock
closing price at both the first and last day of the quarter,with amounts being settled through
the issuance of 138,304 shares of restricted common stock. The Company recognized expense of $88,304 during the year ended September
30, 2012 and the remaining $50,000 had already been accrued in the year ended September 30, 2011. Additionally, the two independent
members of the Board of Directors each received 4,500 shares of restricted common stock as compensation in lieu of certain monthly
cash payments and as incentive during this quarter with a total fair value of $9,000 based on the quoted market price at the grant
date. The Company recognized expense of $9,000 during the year ended September 30, 2012.





42







During the year ended September 30, 2012, the two independent
members of the Board of Directors were each granted 1,210 shares of restricted common stock as compensation in lieu of certain
other monthly cash payments. As a result, 2,420 shares of restricted common stock were issued with a fair value of $3,001 based
on the quoted market price at the grant date. The Company recognized the full expense during the year ended September 30, 2012.



During the year ended September 30, 2012, the two independent
members of the Board of Directors were each granted (i) 9,000 shares of restricted common stock as part of their approved compensation
for Board terms beginning in 2011 and ending in 2012, and (ii) 2,942 shares of restricted common stock as compensation in lieu
of certain monthly cash payments. As a result, 23,884 shares of restricted common stock were issued with a fair value of $48,724
based on the quoted market price at the grant date. The Company recognized expense of $48,724 during the year ended September 30,
2012. Additionally, the Company issued 2,206 shares of restricted common stock to a former Board of Directors member as compensation
in lieu of certain monthly cash payments previously owed. As a result, the Company recognized expense of $4,500 based on the quoted
market price at the grant date.



During the year ended September 30, 2011, the three independent
members of the Board of Directors were each granted (i) 9,000 shares of restricted common stock as part of their approved compensation
for Board terms beginning in 2010 and ending in 2011, and (ii) 1,000 shares of restricted common stock as compensation in lieu
of certain monthly cash payments. As a result, 30,000 shares of restricted stock were issued during the year ended September 30,
2011 with a fair value of $80,700 based on the quoted market price at the grant date.



During the year ended September 30, 2011, the Company also issued
3,000 shares of restricted common stock to an executive. As a result, the Company recognized $8,070 as compensation expense based
on the quoted market price at the grant date.



Treasury Stock



On December 19, 2008, the Board of Directors approved a common
stock repurchase plan authorizing the Company to repurchase shares of its common stock, from time-to-time over a twelve month period.
The plan expired according to its terms on December 19, 2009. As of September 30, 2012, the Company holds 17,442 shares of common
stock as treasury stock.



|5. | COMMITMENTS AND CONTINGENCIES
|-- | -----------------------------



Litigation



From time to time, the Company may be subject to legal proceedings,
which could have a material adverse effect on its business. As of September 30, 2012 and through the date of this filing, the Company
is involved in the following material litigation:



Holub v. MDU Communications International, Inc. et al., is a
stockholder derivative lawsuit filed in the Superior Court of New Jersey on or about July 19, 2012 over the announced merger with
Multiband Corporation, alleging, among other things, that the defendants breached their fiduciary duties as board members in connection
with the business terms and approval process of the announced merger agreement with Multiband Corporation. Results from this proceeding
may include an adverse effect on the merger, a potential award of monetary damages, and significant attorneys’ fees, which
could result in higher than anticipated expenses and otherwise harm our business. No assurance can be given that any adverse outcome
would not be material to our consolidated financial position.



Advanced Communications v. MDU Communication (USA) Inc. is a
writ of summons vendor lawsuit filed in Montgomery County, Pennsylvania on or about July 26, 2012 over  a
previously accrued outstanding payable of
approximately $400,000 for work allegedly completed. Results from this proceeding may include a potential award of monetary damages
and significant attorneys’ fees, which could result in higher than anticipated expenses and otherwise harm our business.
No assurance can be given that any adverse outcome would not be material to our consolidated financial position.



43







We are subject to other legal proceedings and claims that arise
in the ordinary course of our business. The amount of ultimate individual liability with respect to such actions is not expected
to materially affect our financial position, results of operations or liquidity; however, an unfavorable outcome in a majority
of these legal proceedings could have a material negative impact on the Company’s financial position, results of operations
and liquidity.





Contracts



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



Operating Leases



The Company is obligated, under non-cancelable operating leases
for its various facilities that expire through the year ending September 30, 2015, to make future minimum rental payments in each
of the years subsequent to September 30, 2012 as summarized in the following table:



|Year ending September 30, |  | Minimal Rental
 Payments |        
|------------------------- |  | ------------------------ | -------
|2013                      |  | $                        | 285,450
|2014                      |  |                          | 51,258 
|2015                      |  |                          | 5,000  
|Total minimum payments    |  | $                        | 341,708



Rent expense under all operating leases amounted to $431,123
and $424,005, respectively, for the years ended September 30, 2012 and 2011.



|6. | STRATEGIC ALLIANCE WITH DIRECTV
|-- | -------------------------------



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





44







|7. | GAIN ON SALE OF CUSTOMERS AND PROPERTY AND EQUIPMENT
|-- | ----------------------------------------------------



During the year ended September 30, 2012, the Company sold (i)
three properties and subscribers and certain related property and equipment to Charter Communications, for total proceeds of $273,526
($906 per subscriber) resulting in a net gain of $208,883, (ii) two properties and subscribers and certain related property and
equipment to Summit Broadband, for total proceeds of $198,000 ($1,000 per subscriber) resulting in a net gain of $187,924, (iii)
fifteen properties and subscribers and certain related property and equipment to Access Media 3, Inc., for total proceeds of $1,625,377
($625 per subscriber) resulting in a net gain of $1,124,607, and (iv) as part of the Connected Properties initiative with DIRECTV,
sold DIRECTV six properties and certain related plant and equipment for total proceeds of $145,811 resulting in a gain of $90,769.



During the year ended September 30, 2011, the Company (i) sold
subscribers and certain related property and equipment to Comcast of California IX, Inc. for total proceeds of $89,651 and a gain
of $60,416, and (ii) as part of the Connected Properties initiative with DIRECTV, sold one property and certain related property
and equipment for total proceeds of $22,650 and a gain of $13,690.



|8. | ACQUISITIONS OF SUBSCRIBERS AND EQUIPMENT
|-- | -----------------------------------------



During the year ended September 30, 2012, the Company made no
acquisitions. During the year ended September 30, 2011, the Company acquired assets in multiple properties containing 32,100 units
for the amount of $1,397,326, representing fixed assets and intangible assets, inclusive of access agreements.



The acquisition costs of all acquired access agreements and
equipment for the year ended September 30, 2011 (there were no acquisitions during the year ended September 30, 2012) were allocated
to the fair value of the assets acquired, as set forth below:



|                                                                                |  | September 30, 2011 |          
|------------------------------------------------------------------------------- |  | ------------------ | ---------
|Property and equipment                                                          |  | $                  | 777,594  
|Amortizable intangible assets                                                   |  | $                  | 619,732  
|Total acquisition cost and fees of all acquired access agreements and equipment |  | $                  | 1,397,326



|9. | PROPERTY AND EQUIPMENT
|-- | ----------------------



The components of property and equipment are set forth below:



|                                        |  | September 30, |            
|--------------------------------------- |  | ------------- | -----------
|                                        |  | 2012          |            
|Telecommunications equipment, installed |  | $             | 51,539,437 
|Computer equipment                      |  |               | 1,376,803  
|Furniture and fixtures                  |  |               | 270,623    
|Leasehold improvements                  |  |               | 193,480    
|Other                                   |  |               | 74,900     
|                                        |  |               | 53,455,243 
|Less: Accumulated depreciation          |  |               | (37,195,095
|Totals                                  |  | $             | 16,260,148 



Depreciation expense amounted to $5,439,301 and $6,304,119 for
the years ended September 30, 2012 and 2011, respectively. During the years ended September 30, 3012 and 2011, the Company wrote
off assets in the amount of $97,933 and $63,662, respectively, which is reported in customer service and operating expenses.





45







|10. | INTANGIBLE ASSETS
|--- | -----------------



The components of intangible assets are set forth below:



|                                                       |  | September 30, |           
|------------------------------------------------------ |  | ------------- | ----------
|                                                       |  | 2012          |           
|Property access agreements, including subscriber lists |  | $             | 9,519,321 
|Less: Accumulated amortization                         |  |               | (8,501,453
|Totals                                                 |  | $             | 1,017,868 





Amortization expense amounted to $886,941 and $1,066,156 for
the years ended September 30, 2012 and 2011, respectively. Amortization of intangibles in the years subsequent to September 30,
2012 is as follows:



|      |  | Amortization
 Amount |          
|----- |  | -------------------- | ---------
|2013  |  | $                    | 407,440  
|2014  |  |                      | 402,274  
|2015  |  |                      | 169,477  
|2016  |  |                      | 38,617   
|2017  |  |                      | 60       
|Total |  | $                    | 1,017,868



|11. | OTHER ACCRUED LIABILITIES
|--- | -------------------------



Other accrued liabilities consist of the following:



|                                                                           |  | September 30, |        
|-------------------------------------------------------------------------- |  | ------------- | -------
|                                                                           |  | 2012          |        
|Accrued costs and expenses:                                                |  |               |        
|Equipment                                                                  |  | $             | —      
|Employee stock purchases and employee compensation payable in common stock |  |               | —      
|Subcontractors maintenance and installation                                |  |               | 70,592 
|Programming cost                                                           |  |               | 28,809 
|Professional fees                                                          |  |               | 301,432
|Wages                                                                      |  |               | 107,228
|Acquisition / Asset sale balance due                                       |  |               | 97,030 
|Sales, use and franchise tax                                               |  |               | 116,373
|Other                                                                      |  |               | 74,024 
|Totals                                                                     |  | $             | 795,488



|12. | INCOME TAXES
|--- | ------------



The Company had pre-tax losses for the years ended September
30, 2012 and 2011. The Company did not record Federal income tax benefits at the statutory rate of 34% and state income tax benefits
because (i) it has incurred losses in each period since its inception, and (ii) although such losses, among other things, have
generated future potential income tax benefits, there is significant uncertainty as to whether the Company will be able to generate
income in the future to enable it to realize any of those benefits and, accordingly, it has recorded a full valuation allowance
against those potential benefits as shown below.





46







As of September 30, 2012 and 2011, the Company had net deferred
tax assets, which generate potential future income tax benefits that consisted of the effects of temporary differences attributable
to the following:



|                                                                                                       |  | September 30, |            
|------------------------------------------------------------------------------------------------------ |  | ------------- | -----------
|                                                                                                       |  | 2012          |            
|Deferred tax assets:                                                                                   |  |               |            
|Benefits from net operating loss carryforwards:                                                        |  |               |            
|United States                                                                                          |  | $             | 25,161,336 
|Canada                                                                                                 |  |               | 101,085    
|Other                                                                                                  |  |               | 720,000    
|Totals                                                                                                 |  |               | 25,982,421 
|Deferred tax liabilities—depreciation and amortization of property and equipment and intangible assets |  |               | (2,002,000 
|Net deferred tax assets                                                                                |  |               | 23,980,421 
|Less valuation allowance                                                                               |  |               | (23,980,421
|Totals                                                                                                 |  | $             | —          



At September 30, 2012 and 2014, the Company had (i) net operating
loss carry forwards of approximately $63,125,500 and $58,151,000, respectively, available to reduce future Federal and state taxable
income, and (ii) net operating loss carry forwards of approximately $222,000 and $340,000, respectively, available to reduce future
Canadian taxable income. As of September 30, 2012, the Federal tax loss carry forwards will expire from 2013 through 2032 and the
Canadian tax loss carry forwards will expire from 2013 through 2015. However, the Company terminated substantially all of its Canadian
operations in the year ended September 30, 2002 and the Canadian subsidiary became nonreporting in 2012.



Income Taxes – Uncertainty. The Company maintains
a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition
by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained
on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefits
as the largest amount that has a greater than 50% likelihood of being realized upon effective settlement. The standards also provide
guidance on de-recognition, classification, interest and penalties, and other matters. Interest and penalties, if any, would be
included in the income tax provision. As a result of the adoption, there was no material effect on the financial statements of
the Company and no uncertain tax position. The tax years 2009 through 2011 remain open to examination by the major taxing jurisdictions
to which the Company is subject.



|13. | FAIR VALUE OF FINANCIAL INSTRUMENTS
|--- | -----------------------------------



The fair value of the Company’s cash and cash equivalents,
accounts receivable, accounts payable and other accrued liabilities for the year ended September 30, 2012 are estimated to approximate
their carrying values due to the relative liquidity of these instruments. The Credit Facility carrying value for the year ended
September 30, 2012 approximates fair value based on other rates and terms available for comparable companies in the marketplace
for similar debt and risk.



|14. | RELATED PARTY TRANSACTIONS
|--- | --------------------------



On October 15, 2006, the Company entered into a consulting agreement
with Howard Interests for business advisory services, the principal of which is the spouse of Board member Carolyn Howard. The
consulting agreement is a month to month agreement with a monthly payment required. During the years ended September 30, 2012 and
2011, the Company paid Howard Interests $24,000 each year. The consulting agreement was terminated as of September 30, 2012.



|15. | SUBSEQUENT EVENTS
|--- | -----------------



On November 1, 2012, J.E. “Ted” Boyle and Gregory
L. Osborn joined the board of directors of the Company.





47







On November 1, 2012, the Company had its second closing on the
sale of subscribers and certain related property and equipment to Access Media 3, Inc., for total proceeds of $1,072,500 ($625
per subscriber). The sale of these subscribers will result in a reduction of the Company’s borrowing base for its Credit
Facility and a loss of approximately $42,000 per month in revenue.



On December 11, 2012, the Company had its third closing on the
sale of subscribers and certain related property and equipment to Access Media 3, Inc., for total proceeds of $1,281,250 ($625
per subscriber). The sale of these subscribers will result in a reduction of the Company’s borrowing base for its Credit
Facility and a loss of approximately $45,000 per month in revenue.



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



None.



|Item 9A. | Controls and Procedures
|-------- | -----------------------



Evaluation of disclosure controls and procedures



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



As of September 30, 2012 (the end of the period covered by this
Report), we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer, who is
also our Chief Financial Officer, and our Vice President of Finance and Administration of the effectiveness of the design and operation
of our disclosure controls and procedures, as defined in Rule 13a-15(e). Based on this evaluation, our Chief Executive Officer
and our Vice President of Finance and Administration concluded that our disclosure controls and procedures were effective in ensuring
that information required to be disclosed by us in our periodic reports is recorded, processed, summarized and reported, within
the time periods specified for each report and that such information is accumulated and communicated to our management, including
our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.



Management’s Annual Report on internal controls over
financial reporting



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



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



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

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





48







Management has conducted, with the participation of our Chief
Executive Officer, who is also our Chief Financial Officer, and our Vice President of Finance and Administration, an assessment,
including testing of the effectiveness of our internal controls over financial reporting as of September 30, 2012. Management’s
assessment of internal controls over financial reporting was based on the framework in Internal Control over Financial Reporting
– Guidance for Smaller Public Companiesissued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this evaluation, management concluded that our system of internal controls over financial reporting was effective as of
September 30, 2012.



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



Changes in internal controls over financial reporting



There were no changes in our internal controls over financial
reporting during the period ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect,
our internal controls over financial reporting.



|Item 9B. | Other Information
|-------- | -----------------



None.



PART III



|Item 10. | Directors, Executive Officers and Corporate Governance
|-------- | ------------------------------------------------------



Information with respect to directors, executive officers and
corporate governance is set forth in the Company’s proxy statement under the heading "Election of Directors," which
information is forward incorporated herein by reference. Information regarding the directors and executive officers of the Company
as of September 30, 2012 is included in Item 1 of Part I of this Form 10-K. Information required by Item 405 of Regulation S-K
is set forth in the proxy statement under the heading "Compliance with Section 16(a) of the Securities Exchange Act of 1934,"
which information is forward incorporated herein by reference.



|Item 11. | Executive Compensation
|-------- | ----------------------



Information relating to executive compensation is set forth
under the captions "Board of Directors" and "Executive Compensation" in the Company's proxy statement, which
information is forward incorporated herein by reference.



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



Information relating to security ownership of certain beneficial
owners and management is set forth under the caption "Security Ownership of Management and Other Beneficial Owners" in
the Company's proxy statement, which information is forward incorporated herein by reference.



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



Information relating to certain relationships and related transactions
is set forth under the caption "Certain Relationships and Related Transactions" in the Company's proxy statement, which
information is forward incorporated herein by reference.





49







|Item 14. | Principal Accounting Fees and Services
|-------- | --------------------------------------



Information relating to principal
accounting fees and services is set forth under the caption "Principal Accounting Fees and Services"
in the Company's proxy statement, which information is forward incorporated herein by reference.



PART IV



|Item 15. | Exhibits, Financial Statement Schedules
|-------- | ---------------------------------------



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



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



INDEX TO EXHIBITS



|Exhibits |  |                                                                                                               
|-------- |  | --------------------------------------------------------------------------------------------------------------
|         |  |                                                                                                               
|2.1      |  | Acquisition Agreement dated November 2, 1998 between Alpha Beta Holdings, Ltd. and MDU Communications Inc. (1)
|3.1      |  | Certificate of Incorporation (1)                                                                              
|3.2      |  | Amendment to Certification of Incorporation (3)                                                               
|3.2      |  | Amendment to Certification of Incorporation (4)                                                               
|3.3      |  | Bylaws (1)                                                                                                    
|3.4      |  | Amendment to Bylaws (2)                                                                                       
|10.1     |  | Loan and Security Agreement for September 11, 2006 $20M credit facility (6)                                   
|21.1     |  | Subsidiaries of the Company (5)                                                                               
|23.1     |  | Consent of CohnReznick LLP, Independent Registered Public Accounting Firm (7)                                 
|31.1     |  | Certification by CEO pursuant to Sections 302 of the Sarbanes-Oxley Act of 2002 (7)                           
|31.2     |  | Certification by Vice President of Finance pursuant to Sections 302 of the Sarbanes-Oxley Act of 2002 (7)     
|32.1     |  | Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (7)                            
|32.2     |  | Certification Vice President of Finance pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (7)         



---

| |  | (1) | Incorporated by reference from Form 10-SB filed on May 12, 1999                     
| |  | --- | ------------------------------------------------------------------------------------
| |  | (2) | Incorporated by reference from Form 10-SB/A, Amendment No. 3 filed on April 14, 2000
| |  | (3) | Incorporated by reference from Report on Form 8-K, filed November 17, 2004          
| |  | (4) | Incorporated by reference from Report on Form 8-K, filed December 9, 2010           
| |  | (5) | Incorporated by reference from Report on Form 10-KSB, filed December 29, 2004       
| |  | (6) | Incorporated by reference from Report on Form 8-K, filed September 15, 2006         
| |  | (7) | Filed herewith                                                                      





50







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:                                   
| |                                       
| |                                       
| |                                       



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



Pursuant to the requirement of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.



|Signature             |  | Title                                |  | Date             
|--------------------- |  | ------------------------------------ |  | -----------------
|                      |  |                                      |  |                  
|/s/ SHELDON B. NELSON |  |                                      |  |                  
|Sheldon B. Nelson     |  | Chief Executive Officer and Director |  | December 21, 2012
|                      |  | (Principal Executive Officer)        |  |                  
|                      |  |                                      |  |                  
|/s/ CAROLYN C. HOWARD |  |                                      |  |                  
|Carolyn C. Howard     |  | Director                             |  | December 21, 2012
|                      |  |                                      |  |                  
|/s/ RICHARD NEWMAN    |  |                                      |  |                  
|Richard Newman        |  | Director                             |  | December 21, 2012
|                      |  |                                      |  |                  
|/s/ J.E. “TED” BOYLE  |  |                                      |  |                  
|J.E. “Ted” Boyle      |  | Director                             |  | December 21, 2012
|                      |  |                                      |  |                  
|/s/ GREGORY L. OSBORN |  |                                      |  |                  
|Gregory L. Osborn     |  | Director                             |  | December 21, 2012





51