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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-K/A(Amendment No. 4)

x ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 (NO FEE
REQUIRED) 
FOR THE YEAR ENDED JUNE 30, 2009

COMMISSION FILE NO. 000-30202

mPHASE
TECHNOLOGIES, INC.(Name of issuer in its charter)

|                                           |                       
|------------------------------------------ | ----------------------
|NEW
  JERSEY                               | 22-2287503            
|(State or other
  jurisdiction of          | (I.R.S. Employer      
|incorporation or
  organization)           | Identification Number)
|                                           |                       
|587
  CONNECTICUT AVE., NORWALK,           | CT
  06854-1711       
|(Address of principal
  executive offices) | (Zip Code)            

Registrant's
telephone number, including area code: (203)
838-2741

SECURITIES
REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

COMMON
STOCK, $.01 PAR VALUE
(Title of Class)

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 shorter period
that the registrant was required to file such report), and (2) has been subject
to such filing requirements for the past 90 days. Yes x   No o

Indicate by check mark if the 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 amendments to the Form 10-K.

As of September 19, 2009 there were approximately
1,103,089,650 shares of common stock, $01 par value, outstanding and the
aggregate market price of shares held by non-affiliates was approximately
$23,813,528 (Based upon a closing common stock price of $.024 on September 19,
2009 solely for the purpose of calculating the preceding amount, all directors
and officers of the registrant are deemed to be affiliates.)

1

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Explanatory Note

This Form 10-K/A(Amendment No.4) 
  is being filed for the purpose of restating the financial statements for the
  fiscal years ended June 30, 2008 and 2009 as contained in the Company's Form
  10-K filed with the U.S. Securities and Exchange Commission on October 7,
  2009. The restatement involves reclassifying certain equity instruments out of
  additional paid in capital into other contingent liabilities for free standing
  warrants to issue shares at a fixed price as such warrants were issued
  subsequent to the Company entering into Convertible Debenture agreements which
  have features that may result in the obligation to issue shares in excess of
  authorized shares available. The contingent liability was recorded at the fair
  market value at the issuance date of the free standing warrants and
  recalculated at June 30, 2008 and during the FYE June 30, 2009, on the quarterly
  measurement dates, with the net change in the contingent liability credited to
  the change in derivative value in the Consolidated Statement of Operations for
  each period in accordance with FASB codification standards topic 815
  (previously known as EITF 00-19). The restatements decrease the Net
  Loss  for the fiscal year ended June 30, 2008 by
  $572,900, as well as increase total liabilities and Total Stockholders' Deficit at June, 30
  2008 by $433,300.The restatements decrease the Net Loss for the fiscal year ended June 30, 2009 by $433,300.

As discussed in the footnote to the
  financial, the contingent liability was recorded at the fair market value at
  the issuance date of the free standing warrants and recalculated  on the
  quarterly measurement date, with the net change in the contingent liability
  credited to the change in derivative value in the Consolidated Statement of
  Operations for each period in accordance with  EITF 00-19.

In addition, the Company is also
  concurrently filing certain additional improvements to its disclosure in this
  amended Form 10K for the fiscal year ended June 30, 2009.

This form 10-K/A(Amendment No.4) 
  has not been updated for any events or subsequent information other than the
  restatements discussed above.

2

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mPHASE
TECHNOLOGIES, INC. 
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 30, 2009 TABLE OF CONTENTS

|               |                                                                                              |     
|-------------- | -------------------------------------------------------------------------------------------- | ----
|               |                                                                                              | PAGE
|               | PART I                                                                                       | 3   
|ITEM 1.        | Business                                                                                     |     
|ITEM 2.        | Properties                                                                                   | 26  
|ITEM 3.        | Legal Proceedings                                                                            | 26  
|ITEM 4.        | Submission of Matters to a Vote of Security Holders                                          | 26  
|               | PART II                                                                                      | 27  
|ITEM 5.        | Market for Registrant's Common Equity and Related
  Stockholder Matters                      | 27  
|ITEM 6.        | Selected Consolidated Financial Data                                                         | 43  
|ITEM 7.        | Management's Discussion and Analysis of Financial
  Condition and Results of Operations Data | 48  
|ITEM 7A        | Qualitative and Quantitative Disclosures About
  Market Risks                                | 58  
|ITEM 8 and 8A. | Financial Statements and Supplementary Data Internal
  Control Assessment                    | 58  
|ITEM 9.        | Changes in and Disagreements with Accountants on
  Accounting and Financial Disclosure       |     
|               | PART
  III                                                                                   | 60  
|ITEM 10.       | Directors and Executive Officers                                                             | 60  
|ITEM 11.       | Executive Compensation                                                                       | 62  
|ITEM 12.       | Security Ownership of Certain Beneficial Owners and
  Management                             | 64  
|ITEM 13.       | Certain Relationships and Related Transactions                                               | 65  
|               | PART
  IV                                                                                    |     
|ITEM 14        | Exhibits, Financial Statement Schedules and Reports
  on Form 8-K                            | 70  
|               | Report of Independent Registered Public Accounting
Firm                                      | 74  
|               | Report of Certified Public Accountants                                                       | 76  
|               | Consolidated Financial Statements                                                            | 77  
|               | Notes to Consolidated Financial Statements                                                   |     

2

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PART
I

FORWARD-LOOKING
STATEMENTS

This report contains "forward-looking statements". In
some cases, you can identify forward-looking statements by terms such as "may,"
"intend," "might," "will," "should," "could," "would," "expect," "believe,"
"estimate," "predict," "potential," or the negative of these terms and similar
expressions intended to identify forward-looking statements. These statements
reflect the Company's current views with respect to future events and are based
on assumptions and subject to risks and uncertainties. The Company discusses
many of these risks and uncertainties in greater detail in Part I, Item 1 of
this 10-K under the heading "Risk Factors." These risks and uncertainties may
cause the Company's actual results, performance, or achievements to be
materially different from any future results, performance, or achievements
expressed or implied by the forward-looking statements. You should not place
undue reliance on these forward-looking statements. Also, these forward-looking
statements represent the Company's estimates and assumptions as of the date of
this report. The Company is under no duty to update any of the forward-looking
statements after the date of this report to conform such statements to actual
results or to changes in our expectations.

The following discussion should be read in conjunction
with mPhase Technologies' financial statements and related notes included
elsewhere in this report.

General
Description of the Business

mPhase Technologies, Inc., is a publicly-held New
Jersey company founded in 1996 with over 19,000 shareholders and approximately
870 million shares of common stock outstanding as of June 30, 2009. The
Company's common stock is traded on the Over the Counter Bulletin Board under
the ticker symbol XDSL. The Company has offices in Little Falls and Newark, New
Jersey as well as Norwalk, Connecticut.

mPhase is a development-stage company specializing in
microfluidics, microelectromechanical systems (MEMS) and nanotechnology. The
Company develops nanotechnology-enabled products for commercial and military
applications. The Company's flagship product is its Smart NanoBattery providing
Power On Command. The new well-patented battery technology, based on the
phenomenon of electrowetting, offers a unique way to store energy and manage
power.. Features of the Smart NanoBattery include: potentially infinite shelf
life, environmentally friendly design, fast ramp to power, programmable
control, and direct integration with microelectronic devices. The platform
technology behind the Smart NanoBattery is a porous nanostructured material
used to repel and precisely control the flow of liquids. The material has a Smart Surfacethat can potentially be
designed for other innovative products such as self-cleaning applications,
water purification/desalination, liquid filtration/separation, and
environmental cleanup.

mPhase has been awarded a Phase II Small Business
Technology Transfer Program (STTR) grant, part of the Small Business Innovation
Research (SBIR) program, from the U.S. Army for continued development of its
Smart NanoBattery as a reserve battery for a critical computer memory
application.

In a separate effort, mPhase has also developed a
mechanically activated reserve battery. As a result of a unique combination of
battery and mechanical engineering, such reserve battery also has a potentially
infinite shelf-life. The battery is part of the Company's new Emergency
Flashlight product line that is currently being designed by and co-branded with
Porsche Design Studio a premiere world-class company specializing in high-end
accessory products for the luxury automotive manufacturer.

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Description
of Operations

Microfluidics,
MEMS, and Nanotechnology

In February of 2004, mPhase entered the business of
developing new products based on materials whose properties and behavior are
controlled at the micrometer and nanometer scales. (For reference, a micrometer
or micron is equal one millionth (10-6) of a meter and a nanometer
is one billionth (10-9) of a meter  the scale of atoms and
molecules. A human hair is approximately 50 microns in diameter, or 50,000
nanometers thick.)

The Company has expertise and capabilities in
microfluidics, microelectromechanical systems (MEMS), and nanotechnology.
Microfluidics refers to the behavior, precise control and manipulation of
fluids that are geometrically constrained to a small, typically micrometer
scale. MEMS is the integration of mechanical elements, sensors, actuators, and
electronics on a common silicon substrate through microfabrication technology.
Nanotechnology is the creation of functional materials, devices and systems through
control of matter (atoms and molecules) on the nanometer length scale (1-100
nanometers), and exploitation of novel phenomena and properties (physical,
chemical, biological, mechanical, electrical) at that length scale.

In its Smart NanoBattery, mPhase exploits the physical
phenomenon of electrowetting by which a voltage is used to change the wetting
properties of a liquid/solid interface at the nanometer scale. Consider water
as the liquid. Through electrowetting, mPhase can change a surface from what is
referred to as a hydrophobic ("water fearing") state to a hydrophilic ("water
loving") state. In the hydrophobic state, the water beads up or is repelled by
the surface. In the hydrophillc state, the water spreads out or is absorbed by
the surface. The ability to electronically control the wetting characteristics
of a surface at the nanometer scale forms the basis of mPhase's nanotechnology
operations and intellectual property portfolio.

In the Smart NanoBattery application, mPhase uses
electrowetting as a new technique to s activate or literally "turn on" a
battery once it is ready to be used for the first time.. At the heart of the
Smart NanoBattery is a porous, nanostructured superhydrophic or superlyophobic
membrane designed and fabricated by mPhase. The so-called superhydrophobic
membrane applies to water and the superlyophobic membrane applies to nonaqueous
or organic liquids such as ethanol or mineral oil. The difference between the
two membrane types lies in the nanoscale architecture at the surface. By virtue
of its superhydrophobic or superlyophobic character, the membrane, although
porous, is able to physically separate the liquid electrolyte from the solid
electrodes so that the battery remains dormant or inactive, thus providing no
voltage, or current until called upon. This electrolyte-electrode separation
gives the battery the feature of potentially unlimited shelf life and the
benefit of being always ready when needed, which is not necessarily the case
for conventional batteries. Electrowetting alters the liquid/membrane interface
so that the liquid is now able to flow over the membrane's surface and rapidly
move through the pores where it is able to contact the solid electrode
materials located on the other side of the membrane.

mPhase uses MEMS, to precisely control the machining
of silicon-based materials at the micrometer and nanometer scales. This ability
has led to the Company's proprietary membrane design that controls the wetting
and movement of liquids on a solid surface. mPhase uses microfluidics to
control the flow of liquid electrolyte through the porous membrane and is also
the basis for other possible applications such as self-cleaning surfaces,
filtration and separation and liquid delivery systems.

mPhase has also developed a manually-activated lithium
reserve battery using an innovative industrial and mechanically-engineered
design. The battery is activated by a unique triggering mechanism that rapidly
releases and distributes the liquid electrolyte inside the battery. The electrolyte
immediately contacts the battery's solid electrodes to produce electric power.
Unlike conventional batteries that have relatively short shelf lives prior to
initial use of the flashlight, the mPhase reserve battery has a shelf life of
over 20 years.

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History
of Nanotechnology Operations

Smart
NanoBattery

mPhase Technologies along with Bell Labs, jointly
conducted research from February 2004 through April of 2007 that demonstrated
control and manipulation of fluids on superhydrophobic and superlyophobic
surfaces to create a new type of battery or energy storage device with power
management features obtained by controlling the wetting behavior of a liquid
electrolyte on a solid surface. The scientific research conducted set the
ground work for continued development of the Smart NanoBattery and formed a
path to commercialization of the technology for a broad range of market
opportunities. During 2005 and 2006, the battery team tested modifications and
enhancements to the internal design of the battery to optimize its power and
energy density characteristics, as well as making engineering improvements that
were essential in moving the battery from a zinc-based chemistry to a
commercial lithium-based chemistry that can be manufactured on a large scale.
The Company began its efforts by entering into a $1.2 million 12 month
Development Agreement with the Bell Labs division of Alcatel/Lucent for
exploratory research of control and manipulation of fluids on superhydrophobic
surfaces to create power cells ( batteries) by controlling wetting behavior of
an electrolyte on nanostructured electrode surfaces. The goal was to develop a
major breakthrough in battery technology creating batteries with longer shelf
lives as the result of no direct electrode contact (meaning no power drain
prior to activation). The Company extended its development effort twice for an
additional 2 year ending in March of 2007 and for two additional periods
thereafter through July 31, 2007. During this time, the technical focus shifted
from trying to separate the liquid electrolyte from nanostructured electrodes
to developing a nanostructured membrane that could physically separate the
liquid electrolyte from the solid electrodes.

mPhase also began working with the Rutgers University
Energy Storage Research Group (ESRG) in July of 2005 to conduct contract
research in advanced battery chemistries involving lithium. This work involved
characterizing and testing materials that could be used in the mPhase battery.
In July of 2007, the relationship shifted to a collaboration focused on
developing a memory backup battery needed by the U.S. Army. The work was funded
through a Phase I Small Business Technology Transfer Program (STTR) grant.

Also in July of 2007, mPhase formed a new wholly-owned
subsidiary, Always Ready, Inc., to focus on the development of its
nanotechnology products. The Company has used this subsidiary as a division of
the Company in order to develop increasing brand recognition of its battery
products. The Company decided in September of 2007 to transfer its development
work out of Bell Labs (Alcatel/Lucent) in order to ace;erate and broaden its
nanotechnology product commercialization efforts. Bell Labs had engaged in its
battery research and development for the Company for zinc-based batteries and
was limited since it did not have facilities capable of handling lithium
chemistry. mPhase has continued to work with Rutgers ESRG which has facilities
capable of handling lithium based batteries and has also engaged in work with foundries
and other companies to supply essential components, fabricate prototypes, and
plan manufacturing approaches. These companies currently include Silex, a
well-respected silicon foundry in Sweden and Eagle Picher, a well known battery
designer and manufacturer that focuses on high-end batteries for military
applications located in Joplin, Missouri.

In February of 2008, the Company announced that a
prototype of its Smart NanoBattery was successfully deployed in a gun-fired
test at the Aberdeen Proving Ground at Maryland. The test was conducted by the
U.S. Army Armament Research and Development and Engineering Center (ARDEC) of
Picatinny, New Jersey. The battery not only survived the harsh conditions of
deployment at a gravitational force in excess of 45,000 g, but was also
flawlessly activated in the process.

5

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In March of 2008, mPhase announced that it had been
invited to submit a proposal for a Phase II STTR grant based upon the
successful work it had performed on the Phase I grant to develop a version of
the Smart NnaoBattey referred to as the multi-cell, micro-array reserve battery
for a critical U.S. Army memory backup application The Phase II grant in the
gross amount of $750,000 (net $500,000) was granted to the Company in the
middle of September of 2008. In March of 2008, the
Company also announced the successful transfer to a commercial foundry of
certain processes critical to the manufacturing of its Smart NanoBattery. This
will enable fabrication of the porous membranes for the multi-cell, micro-array
reserve battery mentioned above.. The Company successfully manufactured
nanostructured membranes at the foundry that are essential to commercial
production of the battery. By achieving a series of delayed activations, the
shelf-life and continuous run-time of such battery is increased to a period of
time in excess of twenty years. In April of 2008, the Company announced that it
had successfully activated it first Smart NanoBattery prototype by
electrowetting using a hard-wired configuration and a remotely-activated
device. Remote activation plays a key role in providing power to wireless
sensors systems and RFID tags.

Also, in April of 2008, the Company announced that it
had successfully produced its first lithium-based reserve battery with a soft
or pouch package and
breakable separator (in place of the electrowettable membrane) that relies on
mechanical rather electrical activation to provide Power On Command. The
Company believes that it is a significant milestone in moving from a low energy
density zinc-based battery to a higher energy density lithium-based battery
towards proving that this mechanically-activated reserve battery will
eventually be economically and commercially viable.

During the fiscal year ended June 30, 2008 the Company
has continued to refine and improve prototypes of its manually-activated
reserve battery as well as made significant progress in its Smart NanoBattery
development in connection with meeting the specifications and requirements of
the Phase II grant received from the U.S. Army. Such grant was renewed for a
second year by the Army on August 27, 2009

Emergency
Flashlight

On December 5, 2008 mPhase Technologies, Inc. signed a
contract with Porsche Design Gesellschaft m.b.H., Flugplatzstrasse 29, A,S700
Zell am see. Austrla ["Porsche Design' Studio"], to design a premium version of
the AlwaysReady Emergency Flashlight. The flashlight will contain mPhase's
proprietary mechanically-activated lithium reserve battery. The battery
contains a breakable barrier that separates the solid electrodes from the
liquid electrolyte until the battery is manually activated. Unlike traditional
batteries, the mPhase battery remains in an inert state with no leakage or
self-discharge until activation. The mPhase battery is designed to have an
almost infinite shelf life making it ideal for emergency lighting applications.
The premium flashlight will be marketed as an accessory for automobile roadside
emergency kits.

On January 29, 2009, the Company announced that it has
contracted with EaglePicher Technologies to design and manufacture in small
quantiites its mechanically-acitvated battery that will be used in the its new
Emergency Flashlight. EaglePicher was selected for the project because of their
experience in custom and standardized power solutions for the extreme
environments of aerospace and military applications as well as medical and
commercial applications.

The reserve battery is a manually activated lithium
cell designed to provide Power On Command. The battery remains dormant until "turned on" by the user. It
will be built to the highest standards with a minimum storage life of 20 years.
Once activated, the reserve battery is expected to deliver the electrical
performance of a standard primary CR123 battery used in many portable
electronic applications today.

6

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EaglePicher Technologies, LLC (EPT), and EaglePicher
company, is a world leader in custom and standardized power solutions for the
extreme environments of aerospace and military applications as well as medical
and commercial applications. The company specializes in design and manufacture
of battery cells, battery packaging, battery management systems (BMS),
analysis, environmental testing, and energetic devices. Active in battery
development and testing since 1922, EPT has the most experience and broadest
capability in battery electrochemistry of any battery supplier.

Magnetometer

In March of 2005, the Company entered into a second
Development Agreement for 12 months at a cost of $1.2 million with the Bell
Labs to develop MEMS-based ultrasensitive magnetic sensor devices, also known
as magnetometers, that could be used in military and commercial electronics (e.g., cell phones) for determining
location, as well as in portable security and metal detection applications. The
agreement was renewed in April of 2006 for another 12 months. Although proven
to work in the lab, the magnetometer technology could not be scaled up as
quickly and as cost effectively as the battery. The project was suspended in September
2007 so that all technical resources could be allocated to the battery project.
The Company is entitled to certain royalties from the Magnetometer if
Alcatel/Lucent ultimately generates revenues from the product.

IPTV

Historically, the Company since its inception has
focused upon developing innovative solutions for the delivery of Broadcast
Television as part of a "triple play" of services that includes voice and
high-speed internet for telephone service providers globally. Beginning in
fiscal year 2004, the Company began developing Broadcast television delivery
solutions through software/middleware designed to enable telephone service
providers to deliver video data using internet protocol. The Company's
middleware/software is highly scalable, potentially saving telephone service
providers significant hardware deployment costs for routers and servers
required for the carrier class delivery of broadcast television using internet
protocol. Such solution potentially expands the content of available information
from the internet into broadcast quality television. The Company's middleware
is capable of delivering over copper, fiber, coax or any infrastructure
representing a combination of the foregoing that is used by a
telecommunications service provider. The Company has not to date been able to
derive any significant revenue from our TV+ solution.

Because the roll-out of broadcast television using
internet protocol has been a lengthy process for major service providers in the
United States, the Company has suspended development of new features for its
TV+ solution in order to conserve financial resources pending further
development in the U.S. market. All inventory has been written off and all
strategic alternatives relative to this business segment including the
valuation and sale of assets or licensing of the technology are being
evaluated.

Nanotechnology
Products

Platform
Technology

The surface is an important part of virtually every
physical object and often plays an overriding role in many processes, beyond
just connectivity and structural support, but more deeply into areas involving
chemical and biological interactions. In some instances, the surface provides
an easy entry into the chemical or biological systems, in others it protects
the internal elements of the object, surrounded by the surfaces.

mPhase's platform technology is the Smart Surface. By being able to control
the surface properties of materials down to the nanometer scale, new and
improved devices can be designed and built that may lead to compelling business
opportunities. One type of smart surface of particular interest allows the
properties to be changed in response to an external stimulus.

7

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Initially, mPhase's development focused on MEMS
devices by manipulating the surface of silicon materials  the same material
used to make microelectronic materials and devices. Using physical and chemical
processes, the surface of the silicon is modified to make solid porous
structures known as membranes. This is where microfluidics comes into play.
These membranes can be used to selectively control the flw of liquids through
the pores or openings at the micrometer length scale.

Surfaces may be characterized as hydrophilicor hydrophobicdepending on whether or not they attract or
repel water (or other liquids). A hydrophilic surface can be wet and adsorbs
water. A hydrophobic surface, on the other hand, cannot be wet. Hydrophilic and
hydrophobic surfaces are abundant in nature and in synthetic materials, both
organic and inorganic in chemical composition. A familiar example of a
hydrophilic surface is a sponge that readily soaks up water. By contrast, many
plant leaves and flower petals are hydrophobic, as are insect parts and bird
feathers. Synthetic hydrophobic surfaces include Scotchgard treated fabric,
Teflon® coated metal, or Rain-X® coated glass. On a hydrophobic surface, water
beads up and can move around without being absorbed by the solid material that
it is resting on.

So-called superhydrophobicsurfaces are also found in nature and can now be replicated in the
lab. The lotus leaf and rose petal, for example, exhibit superhydrophobicity.
Here water droplets form almost perfect spheres with hardly any contact with
the underlying solid surface. This makes the liquid even easier to move and
manipulate.

The synthesis of superhydrophobic surfaces has
recently been made possible by advances in nanotechnology and mPhase is leading
the way to better understand and create materials and devices incorporating
these unique surface properties.

As mPhase's research and development efforts evolve,
in addition to silicon materials, the ability to control the surface properties
of materials can be extended to other substances such as polymers, ceramics,
metals and fibers as examples, providing opportunities for our platform
technology to be used in a range of potential applications such as energy
storage and power management for portable electronics and microelectronics,
self-cleaning surfaces, filters for water purification or desalination systems,
materials for environmental remediation that separate liquids or solvents, and
other situations where the control of the interaction of a solid surface
exposed to a liquid is vitally important.

Smart
NanoBattery

Battery technology has changed little in its
fundamentals over the past 150 years. As a result, ordinary batteries begin
dissipating energy as soon as they are assembled and therefore have limited
shelf life. Chemistries are fixed inside the package so the user cannot
interact with the contents to program functionality. The size and form of
batteries have not kept pace with the miniaturization of electrical components,
microprocessors and integrated circuits. As a result, the optimal
implementation of an electronic device is not always achieved. Some batteries
contain chemicals that are not considered safe or environmentally friendly
("green"). This makes disposal a potential issue.

mPhase is challenging this convention by using their
proprietary superhydrophobic porous silicon membrane technology as the basis to
build the Smart NanoBattery providing Power On Command.

Superhydrophobicity initially keeps the liquid
electrolyte physically separated from the solid electrodes of the battery, thus
preventing the chemical reactions from occurring that cause the battery to
provide power. This gives the Smart NanoBattery the benefit of potentially
infinite shelf life.

8

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A conventional battery loses some capacity while
sitting on the shelf in its package or stored in an electronic or electrical
device, even before being used for the first time. On the other hand, the Smart
NanoBattery is built so that it is inactive and remains that way indefinitely
until it is turned on. No power is lost to self-discharge or leakage current
prior to activation. When needed, the Smart NanoBattery can be activated on
command via the phenomenon of electrowetting. The surface properties of the
porous silicon membrane are selectively controlled to shift instantly from a
superhydrophobic to hydrophilic state. In other words, electrowetting acts as
the triggering mechanism.

mPhase has successfully fabricated and demonstrated
its first 3-volt lithium-based Smart NanoBattery, based on a design allowing
either manual or remote activation by the user, the feature known as Power on
Command.

By incorporating the phenomenon of electrowetting on
nanostructured surfaces into a revolutionary way of storing energy, the Smart
NanoBattery provides power to portable electronic and microelectronic devices
exactly when and where it is needed. It is an alternative and an augmentation
to conventional batteries, still converting stored chemical energy into usable
electrical energy, but in a way that is potentially more reliable, more
versatile, more environmentally friendly, and less expensive than the industry
norm.

Applications

mPhase is exploring military and commercial
applications of smart surfaces in which the properties can be accurately and
precisely controlled down to the nanometer scale. Electrowetting allows the
switching from a hydrophobic to hydrophilic state as a result of an electronic
stimulus.

The Smart NanoBattery, mPhase's first smart surface
product, has a unique architecture that enables a shelf life of decades, remote
activation, programmable control, scalable manufacturing, and adaptability to
multiple configurations. The value proposition to the end user is to have a
source of energy or power that is literally always ready - reliable,
convenient, low cost - a battery guaranteed to work at full capacity when and
where you need it.

The Smart NanoBattery can conceivably supply power
"on command"to a wide variety of portable
electronic and microelectronic devices used in military, medical, industrial,
and consumer applications.

mPhase has already proven that the battery works in
lab tests as well as in a significant field test conducted for the U.S. Army as
part of a guided munitions project. The relationship with the Army also
includes a $850,000 funded project to develop a battery for a mission critical
computer memory backup application. The target is a small footprint, 3-volt
lithium battery with a minimum shelf life of 20 years and uninterruptible power
output during this time period. No other battery technology available today can
deliver the long-term performance requirements specified by the U.S. Army for
this application.

The Smart NanoBattery can potentially be designed to
accommodate a variety of sophisticated portable electronic and microelectronic
devices including next-generation cell phones and PDAs, handheld gaming
devices, wireless sensor systems, RFID tags, high-tech flashlights and beacons,
health alert alarms, and non-implantable and implantable medical devices such
as pacemakers.

Initial applications will address the need to supply
emergency and backup power to a range of products for defense and security,
with future applications in the commercial and consumer arenas.

Other
Products

As its first commercial product, mPhase is developing
an emergency flashlight using a mechanically-activated lithium reserve battery
with a patent-pending breakable separator in place of the electrowettable
membrane used in the Company's Smart NanoBattery. The emergency flashlight is
envisioned as a compact device that would be activated with a simple
push-button switch to provide Power On Command in the event of an emergency.
The device would be kept in the glove compartment of a car, on boats, trains or
planes, coupled with fire extinguishers, packed with safety, first aid and
survival kits.

9

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Business
Development, Organization, and Acquisition Activities

mPhase was incorporated in New Jersey in 1979 under
the name Tecma Laboratory, Inc. In 1987, the Company changed its name to Tecma
Laboratories, Inc. As Tecma Laboratories, Inc., the Company was primarily
engaged in the research, development and exploration of products in the skin
care field. On February 17, 1997, the Company acquired Lightpaths, Inc., a
Delaware corporation, which was engaged in the development of
telecommunications products incorporating DSL technology, and the Company
changed its name to Lightpaths TP Technologies, Inc.

On January 29, 1997, the Company formed another
wholly-owned subsidiary called TLI Industries, Inc. The shares of TLI were spun
off to its stockholders on March 31,1997 after the Company transferred the
assets and liabilities, including primarily fixed assets, patents and
shareholder loans related to the prior business of Tecma Laboratories. As a
consequence of these transactions, the Company became the holding company of
its wholly-owned subsidiary, Lightpaths, Inc. on February 17, 1997.

On May 5, 1997, the Company completed a reverse merger
with Lightpaths TP Technologies, Inc. and thereafter changed its name to mPhase
Technologies, Inc. on June 2, 1997.

On March 26, 1998, the Company entered into a
Licensing Agreement with Georgia Tech Research Corporation ("GTRC") in which mPhase became the exclusive licensee of all patents received by GTRC in
connection with development of the legacy Traverser DVDDS. GTRC is entitled to
receive a royalty equal to 5% of gross sales of the Traverser DVDDS and 30% of
any "lump sum payments" received in connection with revenues received by mPhase
from the Traverser DVDDS product under the terms of its license, as amended.
The Traverser DVDDS has been replaced by the Company's IPTV solution.

On June 25, 1998, mPhase acquired Microphase
Telecommunications, Inc., a Delaware corporation, from Microphase Corporation
by issuing 2,500,000 shares of its common stock. Microphase Telecommunications'
principal assets were patents and patent applications utilized in the
development of its proprietary Traverser technology.

In March 2000, mPhase entered into a joint venture
with AlphaStar International, Inc. to form an entity called
mPhaseTelevision.Net, Inc. in which the Company held a 50% interest. On May 1,
2000, the Company acquired an additional 6.5% interest in mPhaseTelevision.Net,
Inc. and made it one of its consolidated subsidiaries.

On March 14, 2000, mPhase entered into an agreement
with BMW Manufacturing Corp., located in South Carolina. Under the agreement,
the Company installed its legacy Traverser DVDDS product for BMW's telephone
transmission network at an automotive manufacturing plant to enable video
broadcast of information to its employees. Such system was replaced with a
competitor's network during fiscal year 2007.

In December of 2001, Hart Telephone company located in
Hartwell, Georgia completed the building and development of its digital headend
enabling Hart to test the Company's legacy Traverser DVDDS product with
approximately 20 customers receiving about 80 channels of television services
utilizing such platform.

In May of 2002, mPhase initiated discussion for
development of a cost-reduced set top box (INI) with the Bell Laboratories
division of Lucent Technologies, Inc.

10

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Effective December 1, 2002, mPhase entered into a
Development Agreement with the Bell Laboratories division of Lucent
Technologies, Inc. for the development of mPhase's broadcast television switch
as an integrated platform with the Lucent Stinger DSL Access Concentrator.

On December 9, 2002, pursuant to a Statement of Work,
Lucent commenced development of the Broadcast Television Switch for mPhase. On
December 15, 2002, mPhase engaged Lucent for the cost reduction of its Traverser
INI set top box.

On January 21, 2003 mPhase entered into a Co-Branding
Agreement with Lucent Technologies under which mPhase's INI set top box would
be co-branded with the Lucent Technologies name and logo.

On April 4, 2003, mPhase entered into a Systems
Integration Agreement with Lucent Technologies. Under the terms of such an
agreement mPhase has been given the exclusive rights to sell worldwide as a
bundled' solution the Stinger in connection with mPhases's BTS.

Effective September 15, 2003, mPhase entered into a
Development Agreement with the Bell Laboratories division of Lucent
Technologies, Inc. that has been extended through December of 2005 pursuant to
additional Statements of Work under such Development Agreement for development
of its IPTV solution.

Effective February 3, 2004, mPhase entered into a
Development Agreement with the Bell Laboratories division of Lucent
Technologies, Inc. for the development of micro power source arrays fabricated
using nanotextured superhydorphobic materials.

On November 28, 2004, mPhase entered into a Software
License Agreement with Espial Group, Inc to be used in the set top box of its
TV+ solution. Espial Group, Inc. is a leader in system operating software for
set top boxes used to receive IPTV.

On January 3, 2005, mPhase entered into a work order
with Magpie Telecom Insiders, Inc. pursuant to the terms of a Software
Development Agreement dated September 2, 2004 for purposes of adding video on
demand to its TV+ solution.

Effective March 5, 2005, mPhase extended its
Development Agreement with Bell Labs for an additional 12 months for the
development of micro power source power arrays.

Effective March 10, 2005, mPhase entered into a
Development Agreement with the Bell Laboratories division of Lucent Technologies
Inc. for the development of a new generation of magnetic field sensors using
the science of nanotechnology.

In April of 2006, mPhase renewed each of the
nanotechnology agreements with Bell Labs dated March 5, 2005 and March 10,
2005, respectively, for an additional 12 months at the cost of $100,000 per
month each.

In May of 2006, the Development Agreement with the
Bell Labs division of Lucent Technologies, Inc. covering the Company's TV+
solution was not renewed by the Company and Velankani, a software designer
headquartered in India, assumed responsibilities for development of the system
management software object code and system integration of the Company's TV+
solution. The Company has been working with Velankani for system integration
testing since January of 2006.

11

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On June 27, 2006, the Company entered into Amendment
No. 4 to a Software License Agreement with Espial Group, Inc. which extended
the term of its original development agreement through 2008 for Software
development and support of the TV+ software in connection with multiple set top
boxes of various vendors.

On September 13, 2006, the Company announced its first
test of it IPTV solution with Comstar/Odessa, a major telecommunications
service provider in the Ukraine for a trial deployment of our IPTV solution.
Upon successful completion of such trial, it is anticipated that a 6,000
subscriber deployment would follow generating the Company's first revenues with
respect to its IPTV solution.

As of November 14, 2006, the Company entered into a
Common Amendment to its Statement of Work with Velankani Systems Technologies,
Inc. rescheduling certain payments due for software integration services for
the Company's IPTV solution performed by Velankani for mPhase including a
conversion of a portion of the outstanding payable to mPhase common stock at
$.17 per share.

On December 13, 2006, the Company entered into a
Non-Exclusive Distribution Agreement with Netdialogue, a reseller and service
integrator of IPTV middleware for telecommunications service providers located
in Russia.

On January 4, 2007, the Company entered into a
Cooperative Research and Development Agreement for Novel Reserve Cell
Technologies and High Sensitivity Magnetometer Technology with the U.S. Army
Armament Research Center located in Picatinny, New Jersey.

On January 23, 2007, the Company entered into a
Memorandum of Understanding with Latens Systems Limited under which Latens
grants to mPhase a license to use its conditional access software (encoding and
encryption for IPTV delivery).

On February 3, 2007, the Company entered into
Amendment No. 4 to a Development Agreement effective February 3, 2004, with
Lucent Technologies, Inc. extending research and development through April 27,
2007, relating to micro-power source arrays fabricated using nano-textured
superhydrophobic materials.

On February 17, 2007, the Company extended a
Cooperative Research Agreement through December 31, 2007, originally entered
into on July 15, 2005 with Rutgers, The State University of New Jersey governing
cooperative research on a Lithium nanostructured reserve battery.

On February 22, 2007, the Company entered into a new
Statement of Work with Espial Group, Inc for Integration of its EVO software to
the Bitband Server for two set top boxes manufactured by Amino and Tilgin
respectively in connection with mPhase's IPTV solution. The Company
simultaneously entered into a Payment Agreement with Espial Group, Inc
rescheduling certain payments owed by the Company for services performed in
connection with software development of its IPTV solution.

On March 28, 2007, the Company entered into a Reseller
Agreement with Steeleye Technology, Inc. for software utilized for high use
rollover redundancy for IPTV.

On April 17, 2007, the Company announced that it had
formed AlwaysReady, Inc., a New Jersey Corporation, as a new wholly-owned
subsidiary. The Company plans to transfer all of its nanotechnology assets and
appropriate liabilities to such company as a first step in the separation of
its nanotechnology product line from its IPTV product. The Company plans to
staff AlwaysReady, Inc with a new management team experienced in the
nanotechnology area in order to unlock and maximize overall shareholder value.
On May 29, 2007, AlwaysReady, Inc announced the hiring of Source Capital Group,
an investment banking firm specializing in the raising of private equity, to
raise a minimum of $1.5 million in a Private Placement in which the Company
would sell up to a 10% interest in AlwaysReady, Inc. to institutional and accredited
investors. In addition the Company announced that it planned to eventually transform AlwaysReady, Inc. into a publicly traded
company. mPhase plans to retain a 90% interest in Always Ready, Inc. and the
shares of common stock of Always Ready, Inc. will be registered on appropriate
filings with the SEC under the Securities Act of 1933, as amended, as well as
the Securities Exchange Act of 1934, as amended, and listed for trading on the
over the counter bulletin board.

12

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On April 28, 2007, the Company extended its
Development Agreement with Lucent Technologies relating to micro-power source
arrays fabricated using nano-textured superhydrophobic materials originally
entered into in February of 2004 with Amendment #5 through July 31, 2007.

On May 10, 2007, the Company entered into a Consulting
Agreement with CT NanoBusiness Alliance to produce a report and assist the
Company with respect to its strategy for development and marketing of its nano
power cell product.

On May 11, 2007, the Company entered into an Escrow
Agreement with Bitband Technologies, Inc. governing certain payments to be made
by the Company to Bitband in connection with certain servers provided and
services rendered for the Company's IPTV product testing.

On June 20, 2007, the Company announced that it is
forming a new subsidiary, Granita Media, Inc. ("Granita"), a Delaware
corporation, that will provide targeted advertising to users of the TV+
middleware solution. Through the use of specific viewer demographics such as
age, gender and defined consumer preferences, the Company believes that a new
form of broadcast television advertising could develop that is more powerful
and focused than is currently being used by broadcasters. It is believed that
targeted advertising software to be developed by Granita will enhance mPhase's
middleware by offering a source of additional revenues for a telephone service
provider deploying IPTV. mPhase planed to fund the new company initially
through up to $500,000 of equity to be provided by employees and additional
outside institutional financing which will involve the sale of up to 10% of the
common stock of Granita with mPhase retaining 90% of the stock of Granita. The
financing of the new company was unsuccessful and its employees were terminated
or resigned between October and December of 2007.

On July 6, 2007, the Company announced that it has
executed with Double U. Master Fund, L.P., a limited partnership organized
under the laws of the British Virgin Islands, a Private Equity Credit Agreement
for an aggregate of up to $6 million in financing through the sale, from time
to time, of the common stock of the Company at a 14% discount to its market
value (determined as set forth in detail in the Private Equity Credit
Agreement). The terms of the Agreement provide that mPhase will have the option
to "PUT" up to $300,000 of its common stock to the Partnership per month upon
the effectiveness of a Form S-1 Registration Statement covering such shares of
common stock. Under the terms of the Agreement, the Company is not obligated to
draw any minimum amount of money under the Private Equity Credit Line

On July 18, 2007, the Company announced the award of a
Phase I US Army Small Business Technology Transfer (STTR) Program Grant. This
award is a Phase I six month research effort to develop a 30 plus year shelf
life, low power, green battery (coin cell or similar) that will continuously
power a static random access memory circuit for a computer device. SRAM is a
common type of digital memory chip used in a wide variety of electronic systems
for data storage. During the six month research period, the team will
characterize the design, conduct capacity and stability measurements of a
reserve style power cell based on Lithium chemistry. Long term stability and shelf
life is achieved by initially separating the active materials of the power cell
during storage, and controlling the activation of the cell until needed to
provide power. This research program extends the design of the company's smart
battery to support the use of non-water based electrolytes that are commonly
used in lithium based batteries. Lithium batteries are favored for powering
many different types of electronic devices due to their higher voltage and
power requirements that can be supplied by more common alkaline batteries. The
Phase I grant, valued at $100,000, will enable the Company to competitively
compete for a Phase II award as an avenue used by U.S. government defense
agencies to adopt advanced technology for commercialization and use. Rutgers
University will support the Company and its newly formed subsidiary
AlwaysReady, Inc. during the award period as a subcontractor under the award
guidelines.

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On August 21, 2007, the Company announced the
acquisition of a 10% stock ownership position in Sovereign Tracking Systems
LLC, a company located in New Jersey with a patent covering active, real-time,
tracking systems that use radio frequency identification tags to secure
high-end personnel tracking and monitoring systems. The Company believes that,
although such company faces severe financial challenges, such patent could
potentially compliment and enhance the Company's smart battery application
being developed through AlwaysReady, Inc. a wholly-owned subsidiary.

On September 5, 2007, the Company announced that it
had made significant progress, pursuant to the requirements of the STTR grant,
in developing a prototype of a lithium manganese dioxide prototype of its
SmartBattery product.

On October 19, 2007, the Company announced that in
connection with the settlement and dismissal of a civil law suit originally
filed on November 16, 2005 by the Securities and Exchange Commission in the
Federal District Court in the District of Connecticut, the SEC issued a Cease
and Desist Order and certain remedial sanctions against two officers of mPhase
Technologies, Inc. (the "Company"). The civil suit was filed against Packport.com, Inc. a Nevada corporation, Microphase Corporation, a Connecticut
corporation, a company that provides administrative services to the Company and
shares common management with the Company, and others. The two officers of the
Company were Mr. Ronald A. Durando, President and Chief Executive Officer and
Mr. Gustave T. Dotoli, the Chief Operating Officer. The Civil suit by the SEC named
as respondents Mr. Durando, Mr. Dotoli and others in connection with their
activities as officers and directors of Packetport.com. The cease and desist
order from the SEC found that (1) All parties had violated Section 5 of the
Securities Act of 1933, as making unregistered offers or sales of
Packetport.com common stock. (2) Mr. Durando and Mr. Dotoli had violated
Section 16(a) of the Securities Exchange Act of 1934, as amended, and Rule
16(a) thereunder by failing to timely disclose the acquisition of their
holdings on Form 3's and (3) Mr. Durando had violated Section 13(d) of the
Securities Exchange Act of 1934, as amended, for failing to disclose the
acquisition of more than five percent of the stock of Packetport.com. Under the
order Mr. Durando was required to disgorge $150,000 and Mr. Dotoli was required
to disgorge $100,000. The Company was not named as a party to the civil suit.
More information regarding the detailed terms of the settlement can be found in
SEC release No 8858 dated October 18, 2007 promulgated under the Securities Act
of 1933 and SEC Release No. 56672 dated October 18,2007 promulgated pursuant to
the Securities Exchange Act of 1934. Mr. Durando and Mr. Dotoli have continued
to serve as officers and directors of the Company. Mr Durando and Mr. Dotoli
together with Microphase corporation and others, without admitting or denying
the findings of the SEC, except as to jurisdiction and subject matter, have
consented to the entry of the Order Instituting Cease and Desist Proceedings, Making
findings and Imposing a Cease and Desist Order and Remedial Sanctions pursuant
to Section 8A of the Securities Exchange Act of 1933 and Section 21C of the
Securities Exchange Act of 1934.

On October 30, 2007, together with its subsidiary
Granita Media, Inc, jointly announced that Comstar/Odessa, a major provider to
telecommunications services in the Ukraine, had terminated the trial of the
Company's TV+ solution.

On November 2, 2007, the Company announced the
retirement of Mr. Necdet F. Egrul at the age of 84 from the Company's Board of
Directors.

On February 20, 2008, the Company announced that a
prototype of its smart reserve nanobattery was successfully deployed and
activated by the resulting g force in a gun-fired test at the Aberdeen Proving
Grounds in Maryland. The test was conducted by the U.S. Army Armament Research,
Development, and Engineering Center (ARDEC) of Picatinny New Jersey. In this
test, the AlwaysReady battery delivered power to the test load inside the
standard military anti-tank round (M830A1 or HEAT-High Explosive Anti Tank) and
demonstrated extreme resiliency, surviving the harsh environment as well as the
high acceleration at a g-Force in excess of 45,000 (One "g" is equal to the
pull of gravity at sea level). The gun-fired test was part of a prototype
evaluation process that the U.S. Army is conducting as part of its CRADA
(Cooperative Research and Development Agreement). The Company's Engineers
collaborated with those at Picatinny involved in the development of precision
guidance components to successfully package this reserve electrochemical storage system to operate
during the gun-firing and flight environment of a very high "g" round. The
developmental qualification work, prior to the live test firing, was performed
using Picatinny's air gun test facilities by subjecting battery prototypes to
various launch accelerations and various design iterations. The test validated
the performance of the AlwaysReady battery with a current armament used by the
Army. The Company has stated that its goal is to potentially incorporate this
battery technology into smart, gun-fired munitions programs being developed by
Picatinny.

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On May 2, 2008, the Company announced that it had
produced its first lithium-based battery that can be manually activated by
providing power on command with a significantly longer shelf life prior to
initial activation than those found in other batteries. The battery can be
activated by command wirelessly from a remote location by a radio frequency
signal giving it added mobility for sensor and similar applications.

On September 9, 2008, the Company announced that it
had been awarded a Phase II Small Business Technology Transfer Program (STTR)
grant, part of the Small Business Innovation Research (SBIR) program, from the
U.S. Army for continued development of a reserve Smart NanoBattery for a
critical computer memory application.

On September 17, 2008 the Company announced that its
breakthrough research in microfluidics on understanding how micro- and
nanostructured surfaces could be engineered to have properties for repelling
water and other types of liquids potentially used in consumer applications to
enable self-cleaning surfaces such as shower doors or windows and other
materials used in self-cleaning systems.

On September 23, 2008,the Company announced that it
had produced compact reserve lithium battery prototypes with a manually
activated breakable separator capable of powering a high-intensity emergency
flashlight for more than two hours continuously at full brightness. The work
was done in conjunction with Eagle Picher a respected battery design and
development firm located in Joplin, Missouri. mPhase stated that it is pursuing
the concept of using a reserve battery with a breakable separator in a high-intensity
emergency flashlight either as the primary power supply or as a reliable source
of backup power. Cylindrical and planar battery and flashlight designs are
possible. These flashlights may be equipped with either a krypton bulb or light
emitting diode (LED), the choice depending on the required brightness and
runtime characteristics. A manually activated breakable separator technology
has been created that is analogous to that of the AlwaysReady Smart NanoBattery
with the patented electrowettable membrane, both of which keep the liquid
electrolyte separate from the solid electrodes until the battery is actually
needed. This provides a battery with potentially infinite shelf-life that will
not lose power while sitting on the shelf or in storage. Whereas the
electrowettable membrane is activated by applying a voltage at the interface
between the liquid and membrane surface, the breakable separator is manually
activated through a well-defined physical force. The result in both cases is
that the liquid electrolyte mixes with the solid electrodes thus releasing the
stored energy and 3 volts of power when lithium chemistry is employed.

On December 5, 2008 the Company announced that it had
signed a contract with Porsche Design Gesellschaft m.b.H., Flugplatzstrasse 29,
A,S700 Zell am see. Austria ["Porsche Design' Studio"], to design a premium
version of the AlwaysReady Emergency Flashlight. The flashlight will use
mPhase's proprietary lithium reserve battery. The battery contains a breakable
barrier that separates the solid electrodes from the liquid electrolyte until
the battery is manually activated. Unlike traditional batteries, the mPhase
battery remains in an inert state with no leakage or self-discharge until
activation. The mPhase battery is designed to have an almost infinite shelf
life making it ideal for emergency lighting applications. The premium
flashlight will be marketed as an accessory for automobile roadside emergency
kits.

On January 15, 2009 the Company announced that its
SmartNanoBattery being developed pursuant to a Phase II Army Grant for a
critical mission computer backup reserve battery may also have wider
application for unattended electronic ground sensors that provide mission
critical information for military operatives.

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On January 29, 2009 the Company announced that it had
contracted EaglePicher Technologies to manufacture the reserve battery that
will be used in its emergency flashlight. EaglePicher was selected for the
project because of their experience in custom and standardized power solutions
for the extreme environments of aerospace and military applications as well as
medical and commercial applications.

On March 9, 2009,in reaction to the new Economic
Stimulus Plan, the Company announced that it will pursue funding opportunities
arising from the $2 billion allocated for advanced battery technology. The
mPhase/AlwaysReady Smart NanoBattery has the potential to impact new energy
efficient vehicle applications. Eligibility for the $2 billion in competitive
grants to support manufacturing advanced vehicle batteries and components is to
be determined by the Department of Energy, with a final decision made by the
Office of Energy Efficiency and Renewable Energy. Under the Economic Stimulus
Plan the Department of Energy must provide facility funding awards to
manufacturers of advanced battery systems and vehicle batteries produced in the
United States, including advanced lithium ion batteries, hybrid electrical
systems, component manufacturers, and software designers. The Company believes
that a rechargeable version of the Smart NanoBattery can be designed with
lithium ion chemistry for a wide range of energy-efficient applications.

On March 17, 2009 the Company announced that,
effective March 13, 2009, it entered into a Settlement Agreement with Magpie
Telecom Insiders, Inc. ("Magpie") of a lawsuit filed by Magpie against the
Company in November 2007 in the Federal District Court for the District of
Colorado. Neither party made any admission of liability in connection with the
settlement. As a result of the settlement the Company will remove from its
liabilities $175,000 in Accounts Payable and cancel 1,926,470 shares of its
common stock issued to Magpie and returned under the settlement to the Company.
The terms of the settlement otherwise resulted in no material change in
circumstances to the Company.

On March 18, 2009, the Company announced that it had
received the first working model for the Emergency Flashlight from the Porsche
Design Studio in Zell am See, Austria representing a major step forward as the
Company prepares for the initial product launch.

On June 23, 2009, the Company announced that it had
achieved a major milestone in the development of its Smart NanoBattery
Technology. mPhase reported that it has successfully manufactured a six-inch
silicon-based wafer containing its key membrane (separator) technology. This
separator is responsible for keeping the Smart NanoBattery's chemicals
separated until activated. The membrane's unique surface and structure allows
for control of a liquid on a nanostructured surface.

On August 5, 2009, the Company announced that it had
completed the first functional prototype of its lithium Reserve Battery that
will function in the Company's emergency flashlight. The prototype is the first
time the mPhase battery technology has come together in a "ready for
production" prototype. The mPhase lithium reserve battery stores energy until
it is literally "turned on." It is manually activated by a unique triggering
mechanism that rapidly releases and distributes the liquid electrolyte inside
the battery. The electrolyte immediately contacts the solid electrode materials
to produce 3 volts. The reserve battery is designed for backup power and
emergency applications. With a shelf life of over 20 years, the mPhase lithium
reserve battery will allow the its emergency flashlight to function as a
reliable emergency light source in countless situations.

On August 6, 2009, the Company announced that it had
completed the first fully functional prototype of its emergency flashlight. A
world renowned automobile design firm created a sleek design to accompany the
flashlight's unparalleled functionality. The new illuminator features mPhase's
first reserve battery that allows for backup power to be always ready through a
simple activation method.

On August 27, 2009 the Company announced that its
Phase II grant from the United States Army had been renewed for a second year.

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Products
& Services

Since our inception in 1996, mPhase has been a
development stage company focused on the development of intellectual property
involving high technology innovative solutions and products with high-growth
potential. The Company has served as an incubator for exploratory research and
initial development for products that are best characterized as having a high
risk/high reward profile
since they involve exploratory research to achieve significant scientific
breakthroughs from existing products that can have a substantial economic
impact and benefit upon successful commercialization.

NanoBattery

The Smart NanoBattery is an outgrowth of the science
of nanotechnology that the Company began in February of 2004 with the entering
into a Project Development Agreement with the Bell Labs Division of Lucent
Technologies, Inc. The Company has historically outsourced its Research and
Development of new products to larger companies or institutions with
significant scientific resources and experience in exploratory research. mPhase
Technologies along with Alcatel/Lucent/Bell Labs, jointly conducted research
from February 2004 through April of 2007 that demonstrated control and
manipulation of fluids on superhydrophobic surfaces to create power cells, by
controlling wetting behavior of electrolyte on nano structured electrode
surfaces. This scientific research conducted set the ground work for continued
exploration in the development of intelligent nanotechnology power cells
(nano-batteries), and formed a path to commercialization of the technology for
a broad range of market opportunities. During 2005 and 2006, the battery team
tested modifications and enhancements to the internal design of the battery to
optimize its power and energy density characteristics, as well as engineering
improvements that were essential in moving the battery from a zinc based
chemistry to design using lithium based chemistry The Company established a
strategic research working relationship with the Energy Storage Research Group
(ESRG), a center of excellence in Rutgers University that has lab research
facilities capable of handling lithium based battery development.

mPhase's current flagship product is its Smart
NanoBattery that has a significant longer shelf life prior to initial
activation than that of conventional batteries. The Smart NanoBattery has
potentially significant applications for critical mission power sources that must be reliable and
available upon command by the electronic device it is powering. Such
applications involve, emergency flashlights and beacons, back -up power sources
for computers and life support products, as well as significant military
applications where critical mission backup power is essential for weapons
control computers and electronic warfare equipment used in combat. Other
potential military applications include power sources activated by g forces for
guided munitions.

The Smart NanoBattery utilizes a proprietary
technology developed over a period of 5 years. The battery design, prior to
initial activation, has a membrane that separates the electrolyte and
electrodes used to generate power. Conventional batteries do not provide for
such separation and therefore their power begins to dissipate prior to the
first time they are activated causing them to loose capacity. Conventional
batteries have significant limits upon how long they can be stored prior to
their first activation and in providing a reliable source of power required for
critical applications requiring portable power supplies.

Emergency
Flashlight

In April of 2008 mPhase successfully produced its
first lithium-based breakable separator. This provided the basis of a new
reserve battery product that relies on mechanical rather than electrical
activation to provide Power on Command. In contrast to the Company's SmartNanoBattery product that is being developed using the science of
nanotechnology and relies on an electro wetting membrane, this reserve battery
is designed for mechanical rather than electrical activation. Such reserve
battery is based upon an innovative mechanical and battery engineering design
involving that is activated by puncturing a soft pouch containing electrolyte.
Such reserve battery has been especially designed to be used in the Company's
new emergency flashlight product. Such reserve battery is being designed for
the Company by Eagle Picher, a major U.S. battery designer and the flashlight
is being designed for the Company by Porsche Design Studio.

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Magnetometer:
Further Development Suspended in 2007 (See also description of operations)

In March of 2005, the Company engaged the Bell Labs
division of Lucent Technologies, Inc. to develop, using the science of
nanotechnology both a low and high sensitivity magnetometer for both military
and commercial use.

Magnetometers can be used in a wide range of
applications for the detection of magnetic fields in applications that include
military surveillance, securing the retail environment, automotive sensors and
actuators, industrial processing, medical imaging, scientific measurements,
detection of mineral deposits and even air and space exploration. In sensor networks
ultra-sensitive magnetometers can be used, for example, to detect and
accurately pinpoint battlefield objects or they might also be used to study the
workings of the human brain.

Magnetometers work by sensing changes in magnetic
fields due to the motion of magnetic objects or changes in electrical currents
generated by those objects. The magnetometer detects these objects by measuring
time-varying magnetic signals that are superimposed on the combination of earths background field used to orient compasses)
and static magnetic fields due to near- by magnetic objects. In March of 2007,
the Company ceased development with Alcatel/Bell Labs of its Magnetometer
product in order to conserve financial resources.

TV+
Solution: Further Development Suspended in 2007(See also description of
operations)

As mentioned previously, the roll-out of broadcast
television using internet protocol has been a lengthy process for major service
providers in the United States, the Company has suspended in November of 2007
development of new features for its TV+ solution in order to conserve financial
resources pending further development in the U.S. market. All inventories have
been written off and all strategic alternatives relative to this business
segment, including the sale or licensing of the intellectual property are being
evaluated.

Competitive
Business Conditions

Battery
Segment

The design and functionality of the mPhase/AlwaysReady
lithium Smart Nanobattery make it unique to the portable electronics battery
market segment.. To the best of our knowledge, there is no existing product
that directly competes with the Smart NanoBattery that combines small size with
a reserve design. As a reserve battery, the Smart NanoBattery remains dormant
until it is activated on command. It does not self-discharge or die prior to
its first activation, thereby offering extremely long shelf life prior to use
as either as a primary or backup battery in a device. Shelf life is projected
to be in excess of twenty years.

There are numerous thin film batteries based on
lithium metal, lithium ion and lithium polymer, as well as other chemistries,
used in military devices, portable electronics, RFID tags and wireless sensor
networks, that are similar in size to the Smart NanoBattery, often referred to
as microbatteries. None of these designs are based on reserve battery
architectures. Thin film batteries are manufactured by companies including:
Cymbet Corporation, Front Edge Technology, Infinite Power Solutions, ITN Energy
Systems, Johnson Research and Development Company, KSW Microtec, Lithium
Technology Corporation, MPower Solutions, Oak Ridge Micro-Energy, Power Paper,
Solicore, VoltaFlex Corporation. Large companies such as Energizer, Ultralife,
Varta and Proctor & Gamble are also involved with developing thin film
batteries. Thin film battery markets are anticipated to reach 10 billion units,
$11 billion dollars by 2012. The market driving forces are those of wide
expansion of portable devices in that time frame. With 3.5 billion cell phone users
and 67 billion RFID tags per year anticipated in that time frame alone, it is
anticipated that the volumes will be in place to create commercial demand for
thin film batteries.

18

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Traditional reserve batteries are quite distinct from
the mPhase/AlwaysReady Smart NanoBattery in terms of size and activation
mechanism. The market for reserve batteries has largely been limited to the
military for supplying power to munitions and other mission-critical electronic
devices. The traditional reserve battery tends to be larger and certain types
are built by hand and contain mechanical parts to activate the battery. The
Smart NanoBattery relies on the phenomenon of electrowetting to initiate
activation or a mechanical barrier that can be broken, in the case of the
breakable barrier design. Traditional reserve batteries for military
applications have been supplied by companies such as EaglePicher, Yardney and
Storage Battery Systems, Inc.

Flashlight
Market

The Company believes that there may be a significant
market for a high-end emergency flashlight containing its mechanically
activated reserve battery. The need for absolute reliability in many emergency
situations includes those of fire, police and other emergency service
providers. In addition to providing an emergency light source, when needed, the
Flashlight being developed with such lithium reserve battery will have a port
capable, in the alternative to providing light, of recharging a cellular
telephone produced by Porsche Design Studio as well as those of other major
cellular telephone providers. Since the market for new and innovative portable
electronic batteries continues to expand, especially in the field of wireless
hand-held devices, the Company believes that its emergency flashlight and
reserve battery may benefit significantly from such trend.

Outsourcing

Research
and Development

The Company practices an outsourcing model whereby it
contracts with third party vendors to perform research and development rather
than performing the bulk of these functions internally. For current development
of its Flashlight and Reserve Battery, the Company has outsourced the majority
of the work It also maintains a small core R/D staff of engineers and
scientists in the fields critical for the battery development. From February of
2004 through March of 2007 the Company engaged Lucent/Bell Labs to develop,
using the science of nanotechnology, micro power cell arrays creating a
structure for zinc batteries that separated the chemicals or electrolytes prior
to initial activation. This was done by suspending on nano grass or small spoke
like pieces of silicon a liquid electrolyte taking advantage of a super
hydrophobic effect
that occurs as a result of the ability to manipulate materials of a very small
size or less that 1/50,000 the size of a human hair. The Company has, as a
result of outsourcing, been able to have access to facilities, equipment and
research capabilities that the Company would not be able to develop on its own
given the financial resources and time that would be required to build or
acquire such research capabilities. The Company has also been able to achieve
key strategic alliances with the U.S. Army to successfully test, under military
combat conditions, its SmartBattery design, leading to further validation of
its path to product development under a Cooperative Research and Development
Agreement (CRADA). In addition the Company has formed a relationship with
Energy Storage Research Group, a center of excellence at Rutgers University, in
New Jersey, that has enabled the Company to expand its battery development from
a zinc to a lithium battery capable of delivering significantly more power.
During the period from March of 2005 to April of 2007, the Company engaged the
Bell Labs division of Lucent Technologies, Inc. to develop a magnetometer or
electronic sensor also using the science of nanotechnology. Although the
Company has, in order to conserve financial resources, currently suspended
further development of its magnetometer product line, we believe that the
intellectual property developed from the research to date could be resumed to
develop viable military and industrial products depending upon future financial
resources of the Company and future competitive market conditions.

19

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Prototype
Development

As the Company has moved from development to
commercialization of its Emergency Flashlight products utilizing its
mechanically activated reserve battery, the Company has outsourced the creation
of prototypes to Porsche Design Studio in December of 2008 and MKE, a
mechanical design company in Austria that works closely with them. The reserve
battery prototype development work has been outsourced to Eagle Picher in early
2009. The Company has engaged Microphase Corporation, a related party under
contract for project management and testing of its new Emergency Flashlight and
the Reserve Battery used in such Flashlight at a cost of $50,000 per month for
6 months beginning April 1, 2009 and ending on September 30, 2009. Such parties
are currently negotiating for a renewal of such contract.

Manufacturing

mPhase subcontracts all of the manufacturing of its
products to outside sources including related parties such as Microphase
Corporation. During the fiscal year ended June 30, 2009, the Company did not
have any contract for manufacturing its products with outside sources. From
April 1, 2009 through August 31, 2009 we paid $50,000 per month to Microphase
for project management services in connection with development of the Company's
flashlight with Porsche Design Studio and the concurrent development of its
mechanically-activated reserve battery by Eagle Picher. The Company believes
that such payments are the same as would be charged by other management
services provided by non-affiliated third party providers of such services. By
using contract manufacturers, mPhase avoids the substantial capital investments
required for internal production.

Patents
and Licenses

We have filed and intend to file United States
patents, in some cases EU patents and/or copyright applications relating to
some of our proposed products and technologies, either with our collaborators,
strategic partners or on our own. There can be no assurance; however, that any
of the patents obtained will be adequate to protect our technologies or that we
will have sufficient resources to enforce our patents.

Because we may license our technology and products in
foreign markets, we may also seek foreign patent protection for some specific
patents. With respect to foreign patents, the patent laws of other countries
may differ significantly from those of the United States, as to the
patentability of our products or technology. In addition, it is possible that
competitors in both the United States and foreign countries, many of which have
substantially greater resources and have made substantial investments in
competing technologies, may have applied for, or may in the future apply for
and obtain, patents, which will have an adverse impact on our ability to make
and sell our products. There can also be no assurance that competitors will not
infringe on our patents or will not claim that we are infringing on their
patents. Defense and prosecution of patent suits, even if successful, are both
costly and time consuming. An adverse outcome in the defense of a patent suit
could subject us to significant liabilities to third parties, require disputed
rights to be licensed from third parties or require us to cease our operations.

The Company has intellectual property as follows:

Nano
Technology, Micro Electrical Mechanical Systems (MEMS) and Battery Portfolio:

The Company has applied for seven (7) patent
applications in the area of battery designs, microfludics and MEMS fabrication.
In addition, the Company has two (2) joint patent applications with the Bell
Labs division of Lucent Technologies, obtained during the development period,
and the licensing rights for use of five (5) additional patents from Lucent
after the development period.

20

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Other
Patents

On July 12, 2005, mPhase announced that it had been
granted a U.S. patent that covers a series of techniques for splitting
different voice and data signals in DSL access networks that is used in its
Broadband Loop Watch product. The Company is not currently pursuing further
development and marketing of this product owing to the lack of demand for loop
diagnostics systems by telephone service providers.

In July of 2009, the Company filed for 3 new patents
covering the unique design features of its manually-activated lithium reserve
battery and emergency flashlight products.

We also rely on unpatented proprietary technology, and
we can make no assurance that others may not independently develop the same or
similar technology to ours or otherwise obtain access to our unpatented
technology.

Government
Regulation

The Federal Communication Commission, or FCC, and
various state public utility and service commissions, regulate most of mPhases potential domestic customers for our
TV+ product. Since our further development of our IPTV product and sales
efforts have been temporarily suspended, the regulation by the FCC of providers
of communications services is currently not of great significance to the
Company or its overall financial condition and strategy going forward. To the
best of our knowledge, there is no federal or state or local laws to which we
are subject that are relevant to our TV+ product as middleware from a
regulation and certification standpoint.

Changes in current or future laws or regulations, in
the U.S. or elsewhere, could materially adversely affect the Company's business.

Research
and Development

mPhase designed the legacy Traverser Digital Video
Data Delivery System (DVDDS) product to delivery broadcast television,
high-speed internet and voice to customers of telephone service providers. The
digital engineering and design was developed primarily on an outsourced basis
through Georgia Tech Research Corporation with analog portions of the product
developed by Microphase Corporation. As of June 30, 2009, we had been billed a
cumulative total of approximately $13,563,000 for research and development
conducted by Georgia Tech Research Corporation.

mPhase originally contracted with the Bell Labs
division of Lucent Technologies, Inc. in fiscal year 2002 to reduce the cost of
its INI set top box used with the Traverse r DVDDS platform. During fiscal year
2003, the Company engaged Lucent to develop an integrated system with the
Lucent Stinger DSLAM and mPhase middleware for the delivery of Television, high
speed internet and voice on an open standards system to replace the proprietary
Traverser product. Releases 1.0 and 2.0 of the TV+ solution were designed by
Bell Labs to be ATM systems that operated exclusively with the Lucent Stinger
DSLAM to enable a telecommunications service provider to deliver broadcast
television, voice and high speed internet over DSL.

Release 3.0 of our TV+ system that replaced the ATM
protocol that was used in prior releases of the TV+ uses internet protocol and
is referred to as out IPTV solution. It was completed during May of 2006 by the
Bell Labs division of Alcatel/Lucent Technologies, Inc. under a contract
extended in August of 2005. We have not renewed our contract for software
development of our TV+ product with Bell Labs. In the aggregate we have paid
Bell Labs approximately $4.9 million our TV+ solution.

21

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Since 2006 major vendors of further software
development for the TV+ included Velankani Communications (the successor to
Bell Labs as systems integrator of the TV+), Magpie Telecom Insiders, Inc,
Espial Telecommunications, Inc. As of June 30, 2008 we have been billed a
cumulative total of approximately $3.2 million for research and development for
our TV+ from these vendors. During the fiscal year ended June 30, 2008 such
activity was suspended. The Company is currently in disputes with several of
its vendors in connection with its TV+ solution regarding the failure of such
vendors of deliver certain aspects of its TV+ software that are not, in the
Company's opinion of carrie r class quality.

From March of 2005 through March of 2007, the Company
had also engaged Bell Labs in under separate Development Agreements for the
development of a new generation of ultra magnetic sensors (magnetometers) using
the science of nanotechnology with a total cost of $2.4 million. The Company
did not renew such its engagement with Bell Labs upon expiration and did not
incur any costs with respect to its magnetometer in fiscal year 2008 since the
Company has suspended further development of the product to conserve financial
resources.

Our SmartNanoBattery and power cell technology
research and development was performed by the Bell Labs division of
Alcatel/Lucent from February of 2004 through March o f 2007 at an aggregate
cost of $3.8 million. The Company paid Bell Labs $300,000 covering the period
from April 27, 2007 through July 30,2007 at which time it determined that in
order to develop a lithium battery for higher density energy than zinc, it
required facilities capable of handling lithium battery research that Bell Labs
does not have. The Company has engaged a number of small foundries during
fiscal year ended June 30, 2008 for commercialization of its SmartNanoBattery
at a cost of approximately $150,000. In fiscal year ended June 30, 2009 the
Company engaged Eagle Picher at a cost of $75,000 to design and engineer a
prototype of its manually-activated lithium reserve battery and Posche Design
studio at a cost of $79,123 for design of its emergency flashlight product. In
addition, the Company has secured a Co-Branding Agreement with Porsche Design
Studio for its emergency flashlight product. During the fiscal year ended June
30, 2009, the Company engaged Silex, a silicon foundry in Sweden, at a cost of
$21,200 for further development of its SmartNanoBattery.

Employees

mPhase and its subsidiary companies presently have a
total of 9 full-time employees and consultants, two of whom are also employed
by Microphase Corporation. See the description in the section entitled Certain
Relationships and Related Transactions.

22

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RISK
FACTORS

RISKS
RELATED TO FINANCIAL ASPECTS OF OUR BUSINESS

The
Company has been forced to curtail development of all products except its
SmartBattery and Emergency Flashlight in order to conserve financial resources

The Company has currently been forced to focus exclusively
on commercialization of only one of its products thereby eliminating product
diversification. The Company's lack of financial resources to simultaneously
develop multiple products increases its overall risk profile as a
development-stage company.

mPhase's
stock price has suffered significant declines during the past eight years and
remains volatile.

The market price of our common stock closed at $7.88
on July 26, 2000 and closed at $.028 on August 14, 2009. During such period the
number of shares outstanding of the Company increased from approximately 30
million shares to 900 million shares. Such increase was the result of periodic
private placements by the Company in order to finance company operations.
Stocks in micro cap companies having stock values below $1.00 per share been
very volatile during such period. Our common stock is a highly speculative
investment and is suitable only for such investors with financial resources
that enable them to sustain the loss of their entire investment in such stock.
Because the price of our common stock is less than $5.00 per share and is not
traded on the NASDAQ National or NASDAQ Small Cap exchanges, it is considered
to be a "penny stock" limiting the type of customers that broker/dealers can
sell to. Such customers consist only of "established customers" and "Accredited
Investors" (within the meaning of Rule 501 of Regulation D of the Securities
Act of 1933, as amended-generally individuals and entities of substantial net
worth) thereby limiting the liquidity of our common stock.

We may
not be able to raise sufficient capital to meet bring our SmartNanoBattery and
Emergency Flashlight and other applications of our technology to market.

We may not be able to obtain the amount of additional
capital needed until the Company has established a significant and predictable
sales and revenues from our technology. We have been successful in the past as
a micro-cap development stage company in raising capital; however recent trends
in the capital markets are likely to pose significant challenges for the
Company. Factors affecting the availability of capital include:

| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | 1. The price, volatility and trading volume of our
  common stock.                                          
| |                                                                                                             
| | 2. Future financial results including sales and
  revenues generated from operations.                       
| |                                                                                                             
| | 3. The market's view of the business sector of
  nanotechnology reserve batteries and emergency flashlights.
| |                                                                                                             
| | 4. The perception in the capital markets of our
  ability to execute our business plan.                     

We have
reported net operating losses for each of our fiscal years from our inception
in 1996 through the fiscal year ended June 30, 2009 and may not be able to
operate profitability in the future.

23

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We have had net losses of approximately $187 million
since our inception in 1996 including approximately $15.1 million and $3.4
million for the fiscal year ended June 30, 2009 and June 30, 2008, respectively
and cannot be certain when or if we will ever be profitable. We expect to
continue to have net losses for the foreseeable future and have a need to raise
not less than $5 million in additional cash in the next 12 months through
further equity private placements and existing convertible debt arrangements to
continue operations. As of June 30, 2009 we have negative working capital of
approximately $4.0 million and a stockholders deficit of $5.2 million.
Cumulative negative cash flow from operations since inception has amounted to
approximately $82.0 million

Economic
support from affiliated companies has been significant.

During the downturn in the telecommunications industry
beginning in 2001, both Microphase Corporation, and Janifast Ltd. provided
significant financial support to mPhase in the form of either cash infusions or
conversions of related party debt. Janifast Ltd shut down its operations in
March of 2009 owing to its financial condition and is currently being
liquidated. Such companies, which share common management with mPhase, are
under no legal obligation to and may not be able to sustain such economic
support of mPhase in the future should such support be necessary.

Our
independent auditor's report expresses doubt about our ability to continue as a
going concern.

The reports of the Company's outside auditors,
Rosenberg, Rich, Baker, Berman & Company and its prior auditors Arthur
Andersen & Co. with respect to its latest audited 10K for each of the
fiscal years commencing in the fiscal year ended June 30, 2001 through the
current fiscal year ended June 30, 2009,  stated that "there is substantial
doubt of the Company's ability to continue as a going concern." Such opinion
from our outside auditors makes it significantly more difficult and expensive
for the Company to raise additional needed capital necessary to continue our
operations.

Our
common stock is subject to significant dilution upon issuance of shares we have
reserved for future issuance.

As of June 30, 2009 outstanding convertible debt
plus accrued interest is equal
to $3,437,750 all of which has the right to convert into additional shares of our
common stock at discounts of up to 25% of mPhase's then current
stock price computed on a formula basis that may adversely affect the future
price of our common stock. As of June 30, 2009 we have warrants and options
convertible into  286,376,646 shares of our common stock at $.05 per
share or less that, upon exercise may result in significant future dilution to
many of our current shareholders and may adversely affect the future price of
our common stock. We may be forced to raise additional cash for operations by
selling additional shares of our common stock to shareholders at depressed
prices resulting in further dilution to our shareholders.

RISK
FACTORS RELATED TO OUR OPERATIONS

We have
been a development-stage company since our inception in 1996 and have not to
date had a significant or successful deployment of any of our flagship product
including our SmartBattery and our Reserve Flashlight products.

We have derived no material revenues from our
SmartBattery from inception of development in February 2004 through June 30,
2009 or the Emergency Flashlight and we have been forced to discontinue further
product development and marketing of both our TV+ and Magnetometer products
owing to limited financial resources.

The loss
of key personnel could adversely affect our business

Management and employment contracts with all of our
officers have expired and no assurances can be given that such executives will
remain with the Company or that the Company will be able to successfully enter
into agreements with such key executives. All of our officers have made
significant investments in the Company in the form of equity periodic purchases of
common stock and bridge loans and been granted stock and stock options that are
intended to represent a key component of their compensation. Such grants may
not provide the intended incentives to such officers if our stock price
declines or experiences significant volatility.

24

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We may
incur substantial expenditures in the future in order to protect our
intellectual property.

We believe that our intellectual property with respect
to our SmartNanoBattery and our proprietary rights with respect to the
Company's permeable membrane design consisting of both micro and nano scale
silicon features, that are coated with a monolayer chemistry used to repel
liquids is critical to our future success. We have four patents pending with
respect to our SmartNanoBattery product and 3 partents pending with respect to
our Emergency Flashlight and the reserve battery it utilizes in order to
protect our product, however no patents have yet been granted. Our pending
patent applications may never be granted for various reasons, including the
existence of conflicting patents or defects in our applications. Even if a U.S.
patent is ultimately granted there are significant risks regarding enforcement
of patents in international markets. There are many patents being filed as the
science of nanotechnology develops and the Company has limited financial
resources compared to large, well established companies, in order to bring patent
litigation based upon claims of patent infringement.

RISKS
RELATED TO OUR TARGETED MAKETS

The sale
of new high technology products often has a long lead-time and a multiplicity
of risks.

Commercialization of new technology products often
have very long lead time since it is not possible to predict when major
companies will license such technology for sale to their customers. The Science
of Nanotechnology and Microfluidics used to develop our SmartNanoBattery is in
its very early stages and acceptance and demand for such products can often be
a long evolutionary process. In the case of the Company's IPTV solution the
roll-out of delivery of broadcast television by telephone service providers
using internet protocol has taken 10 years to develop and is still moving
slowly which has resulted in the Company currently delaying any further
development of such product to conserve financial resources.

The
science of nanotechnology is at a very early stage as a discipline and is
subject to great uncertainty and swift changes in technology.

Micro fluid dynamics and the manipulation of materials
of nano size and dimensions is a very new science and the creation of new
products is dependent upon new and different properties of such materials
created that will result in many uncertain applications and rapid change. The
evolution of nanotechnology as a new science adds greater uncertainty to new
applications and new and improved product introductions is unpredictable.

We may
not be able to create new products from our intellectual property using
microfluidics that will be acceptable in water purification, oil separation
from water and other environment markets.

The market for "green" products and solutions is
characterized by: Changing regulatory standards; New and improved product
introductions and Changing customer demands;

Large
companies such as Exxon with great resources that are currently focusing
significant monies for new solutions.

Our future success will depend upon our ability to
achieve compelling technology innovations that are economic and practical to
produce in large quantities. Success in new technology, products and services
is a complex and uncertain process requiring high levels of innovation,
highly-skilled engineering and development personnel, and the accurate
anticipation of technological and market trends. We may not be able to
identify, develop, market or support new or enhanced technology, products, or
services on a timely basis, if at all owing to our size and limited financial
resources.

25

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The
commercialization of many applications of our technologies will depend on our
ability to establish strategic relationships with commercial partners.

We are seeking commercial partners with established
lines of business and greater financial resources than our own. Such partners
may not place the priority that we do on joint projects because the success or
failure of such projects is not as material to other existing well developed
lines of business.

Our
SmartBattery and our potential applications of our technology are components of
end products and therefore the products are tied to the success of such
products

The compelling need for critical mission batteries and
other applications of our nanotechnology will depend upon both military and commercial
needs going forward and the demand for our products as components. Thus are
SmartBattery and other applications of our technology success will depend upon
the continuing need for the end user products over which will depend upon
market demand.

ITEM 2.
PROPERTIES

Our corporate headquarters is located at 587
Connecticut Avenue, Norwalk, CT 06854-1711. The Company leases this office
space from Microphase Corporation under a facilities agreement with Microphase
that provides that mPhase lease office space, lab facilities and administrative
staff on a month-to-month basis for $3,000 month. The Company also maintains an
office in Little Falls and Newark, New Jersey with monthly rent of $2,244 per
month.

ITEM 3.
LEGAL PROCEEDINGS

On November 9, 2007, Magpie Telecom Insiders, Inc
("Magpie") filed a lawsuit in the Federal District Court in the State of
Colorado alleging a breach of contract by mPhase in connection with a Statement
of Work dated July 10, 2006 in connection with software supplied by Magpie for
mPhase's TV+ solution. The claim alleged the failure of mPhase to make payments
amounting to $679,969 under the contract. mPhase asserted a number of
affirmative defenses to the claim including deficiencies in the software
delivered by Magpie and failure to deliver support services by Magpie. mPhase
counterclaimed against Magpie asserting that the software delivered was not of
"carrier class" standards required in the telecommunications industry and that
Magpie sold or attempted to sell mPhase common stock received in connection
with a modification of the payments due under the Statement of Work in
violation of Rule 10b-5 and the Federal Securities Laws. Effective March 13,
2009, the Company, entered into a Settlement Agreement with Magpie. Neither party
made any admission of liability in connection with the settlement. As a result
of the settlement, the Company removed $175,000 in Accounts Payable and
cancelled 1,926,470 shares of its common stock issued to Magpie and returned
under the settlement to the Company. The terms of the settlement otherwise
resulted in no material change in circumstances to the Company.

From time to time mPhase may be involved in various
legal proceedings and other matters arising in the normal course of business.

ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

26

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PART
II

ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(A)
MARKET PRICES OF COMMON STOCK The primary market for mPhase's common stock
is the NASDAQ OTC Bulletin Board, where it trades under the symbol "XDSL." The Company became publicly traded through a merger with Lightpaths TP
Technologies, formerly known as Tecma Laboratories, Inc. pursuant to an
agreement dated February 17, 1997. The following table sets forth the high and
low closing prices for the shares for the periods indicated as provided by the
NASDAQ's OTCBB System. The quotations shown reflect inter-dealer prices,
without retail mark-up, markdown, or commission and may not represent actual
transactions. These figures have been adjusted to reflect a 1 for 10 reverse
stock split on March 1, 1997.

|                                |  |   |      |  |   |     | 
|------------------------------- |  | - | ---- |  | - | --- | 
|YEAR/QUARTER                    |  |   | HIGH |  |   | LOW | 
|                                |  |   |      |  |   |     | 
|Fiscal year ended June 30, 2004 |  |   |      |  |   |     | 
|First Quarter                   |  | $ | .42  |  | $ | .29 | 
|Second Quarter                  |  |   | .61  |  |   | .29 | 
|Third Quarter                   |  |   | .69  |  |   | .38 | 
|Fourth Quarter                  |  |   | .46  |  |   | .29 | 
|                                |  |   |      |  |   |     | 
|Fiscal year ended June 30, 2005 |  |   |      |  |   |     | 
|First Quarter                   |  | $ | .31  |  | $ | .21 | 
|Second Quarter                  |  |   | .35  |  |   | .23 | 
|Third Quarter                   |  |   | .60  |  |   | .30 | 
|Fourth Quarter                  |  |   | .41  |  |   | .25 | 
|                                |  |   |      |  |   |     | 
|Fiscal year ended June 30, 2006 |  |   |      |  |   |     | 
|First Quarter                   |  | $ | .29  |  | $ | .21 | 
|Second Quarter                  |  |   | .32  |  |   | .15 | 
|Third Quarter                   |  |   | .45  |  |   | .19 | 
|Fourth Quarter                  |  |   | .34  |  |   | .18 | 
|                                |  |   |      |  |   |     | 
|Fiscal year ended June 30, 2007 |  |   |      |  |   |     | 
|First Quarter                   |  | $ | .21  |  | $ | .16 | 
|Second Quarter                  |  |   | .20  |  |   | .15 | 
|Third Quarter                   |  |   | .24  |  |   | .15 | 
|Fourth Quarter                  |  |   | .19  |  |   | .09 | 
|                                |  |   |      |  |   |     | 
|Fiscal year ended June 30, 2008 |  |   |      |  |   |     | 
|First Quarter                   |  | $ | .13  |  | $ | .07 | 
|Second Quarter                  |  |   | .09  |  |   | .05 | 
|Third Quarter                   |  |   | .14  |  |   | .05 | 
|Fourth Quarter                  |  |   | .13  |  |   | .07 | 
|                                |  |   |      |  |   |     | 
|Fiscal year ended June 30, 2009 |  |   |      |  |   |     | 
|First Quarter                   |  | $ | .08  |  | $ | .03 | 
|Second Quarter                  |  |   | .05  |  |   | .01 | 
|Third Quarter                   |  |   | .04  |  |   | .01 | 
|Fourth Quarter                  |  |   | .05  |  |   | .01 | 

27

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(B)
HOLDERS

As of June 30, 2009, mPhase had approximately 870
million shares of common stock outstanding and approximately 19,000
stockholders of record and 1,378,723,287 million shares of common stock reserved for
issuance upon the conversion of warrants, options and convertible debentures
respectively. In addition the Company has reserved 195,654,000 shares for conversion
of officer notes. Such notes may only be converted if the Board of Directors
then determines that such shares are not needed for general corporate financing
or other purposes. As of June 30, 2008, we had approximately 440 million shares of
common stock outstanding and approximately 19,000 shareholders

(C)
DIVIDENDS

mPhase has never declared or paid any cash dividends
on its common stock and does not anticipate paying any cash dividends in the
foreseeable future. The Company currently intends to retain future earnings, if
any, to finance operations and the expansion of its business. Any future
determination to pay cash dividends will be at the discretion of the Board of
Directors and will be based upon mPhase's financial condition, operating
results, capital requirements, plans for expansion, restrictions imposed by any
financing arrangements and any other factors that the Board of Directors deems
relevant.

Issuances of Unregistered Securities

The following securities were issued by us within the
past three years and were not registered under the Securities Act of 1933, as
amended (the "Act"). Each of the transactions is claimed to be exempt from
registration under the Act.

In September 2001, certain of our officers and
directors purchased an aggregate of 2,000,000 shares of common stock for an
aggregate investment of $1,000,000. These issuances included 1,000,000 shares
to Mr. L. Barton, a director at that time, for an investment of $500,000;
400,000 shares to Mr. Ronald A. Durando, the Company's president and a
director, for an investment of $200,000; 400,000 shares to Mr. Gustave Dotoli,
the Company's vice-president and a director, for an investment of $200,000;
and; 200,000 shares to Mr. Martin S. Smiley, the Company's vice-president, for
an investment of $100,000; and were exempt pursuant to Section 4(2) and/or Rule
506 of Regulation D of the Act.

In December 2001 and January 2002, we issued 6,797,643
shares of common stock and a like amount of warrants at an exercise price of
$.30 per share for a term of five (5) years pursuant to Rule 506 of Regulation
D of the Act for approximately $2,000,000 in cash. This issuance was exempt
pursuant to Section 4(2) and/or Rule 506 of Regulation D of the Act.

During the year ended June 30, 2002 the Company issued
7,492,996 shares of its common stock, and 5,953,490 warrants to related parties
and strategic vendors, in connection with the conversion of $2,738,658 of
accounts payable and accrued expenses, of which 6,150,000 shares of common
stock and 3,400,000 warrants were issued in settlement of $1,460,000 of
accounts payable to related parties as follows:

a.) During December 2001, the Company converted
$660,000 of liabilities due to Microphase and $360,000 of liabilities due to
Janifast into 2,200,000 and 1,200,000, respectively, shares of the Company's
common stock and a like amount of warrants to purchase one share each of the
Company's common stock at an exercise price of $.30 pursuant to debt conversion
agreements pursuant to Section 3(a)(9) of the Act and 320,000 shares of common
stock plus warrants to purchase another 320,000 shares of common stock at $.30
for a term of 5 years, respectively, were issued to strategic vendors pursuant
to Section 3(a)(9) of the Act.

28

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b.) During the quarter ended March 31,2002 the Company
converted $96,000 of liabilities due to Strategic Vendors into 320,000 shares
of the Company's common stock and a like amount of warrants to purchase one
share each of the Company's common stock at an exercise price of $.30 pursuant
to debt conversion agreements pursuant to Section 3(a)(9) of the Act.

c.) Effective March 31, 2002, the Company converted
$420,872 of liabilities due to Piper Rudnick LLP, outside legal counsel to
mPhase pursuant to Section 3(a)(9) of the Act into a warrant to purchase up to
a total of $1,683,490 shares of the Company's common stock which pursuant to EITF 96 18, has an approximate value of $.30 per share and a warrant to
purchase 550,000 shares of the Company's common stock at an exercise price of
$.30 per share pursuant to the terms of payment agreement. In addition, Piper
agreed to accept a Promissory note for $420,872 of current payables at an
interest rate of 8% with payments of $5,000 per month commencing June 1, 2002
and continuing through December 1, 2003, with a final payment of principal plus
accrued interest due at maturity on December 31, 2003. Additionally, 1,022,996
shares of common stock were issued to strategic vendors, the value of which was
based upon the price of the Company's common stock on the effective date of
settlement with each strategic vendor, to settle $761,786 of liabilities
pursuant to Section 3(a)(9) of the Act. The conversion of $1,182,658 of such
liabilities which, together with gains from cash settlements of $27,960
resulted in an aggregate gain on extinguishments of $142,236.

d.) Effective for June 30 2002, the Company converted
$360,000 of liabilities due to Microphase and $80,000 of liabilities due to
Janifast into 2,250,000 and 500,000 shares of the Company's common stock,
respectively, pursuant to debt conversion agreements pursuant to Section
3(a)(9) of the Act.

From August 2001 to June 2002, we issued an aggregate
of 2,976,068 shares of common stock to consultants for an aggregate of
$1,202,997. We also issued an aggregate of 2,675,000 warrants to consultants for
an aggregate of $1,040,000. Each transaction was pursuant to Section 4(2) of
the Act.

During the year ended June 30, 2003, we issued
4,296,680 shares of Common Stock at $.30 per share plus 5 year warrants to
purchase 4,296,680 shares of Common Stock at $.30 per share in a Private
Placement pursuant to Rule 506 of Regulation D of the Act, generating net
proceeds to the company of approximately $1,164,000.

During the year ended June 30, 2003, the Company
issued 426,000 shares of its common stock valued at $112,245 and 1,690,000
warrants, valued at $203,150 based upon the fair market value of the Company's
common stock on the date of the grant using the Black-Scholes option pricing
model. The Company recorded these charges, totaling $318,395 to operations for
the year ended June 30, 2003. Each transaction was pursuant to Section 4(2) of
the Act.

During the fiscal year ended June 30, 2003, the
Company converted certain payables and accrued expenses with officers, related
parties and strategic vendors pursuant to Section 4(2) and to Section 3(a)(9)
of the Act aggregating approximately $1.9 million into 5,923,333 restricted
shares of the Company's common stock and 5 year warrants to purchase an
additional 3,706,800 restricted shares of the Company's common stock. Of these,
5,533,333 shares of common stock and 3,491,800 warrants were issued in
settlement of $1,748,756 of debt to related parties as follows:

a.) The conversion of $620,000 and $360,000 of
liabilities due to Microphase corporation, and Janifast Ltd into 3,033,000
shares and 1,500,000 shares of stock, respectively. The value attributable to
the shares was based upon the market price of the Company's common stock on the
measurement date, such date was determined pursuant to EITF 00-19, as to when all
the contingent terms of the conversion agreements were met, in which no gain or
loss was recognized on the conversion of $980,000 of debt, and;

b.) Also included in such conversions during the year
ended June, 30 2003, were transactions whereby the Company converted $525,967
of liabilities; $269,362 due to the Company's president, $211,605 due to the
vice president and $45,000 due to the a sales manager who is also concurrently
employed by Microphase,  for unpaid management compensation and sales commissions
due from mPhase into warrants to purchase up to a total of 2,656,500 shares of
the Company's common stock. The aggregate value of such warrants was estimated
using the Black-Scholes options pricing model, pursuant to EITF 96-18, having
an approximate value of $.21 per share, or $538,173. The Company recorded a
settlement expense of approximately $12,206 with respect to the Company's
president and vice president.

29

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c.) Strategic vendors converted $117,486 of payables
into 340,000 shares of the Company's common stock on the measurement date the
value of which was based upon the price of the Company's common stock on the
effective date of settlement with each party. This resulted in a gain of
$37,383, which, when combined with all conversions and the gains from cash
settlements of $36,049 for the fiscal year 2003, resulted in a net gain on
extinguishments in the statements of operations of $61,226 for the year ended
June 30, 2003.

In August of 2003, the Company issued 333,334 shares
of its common stock together with a like amount of warrants in a private
placement pursuant to Rule 506 of Regulation D of the Act, generating net
proceeds of $100,000 which was collected during the three month period ended on
September 30, 2003.

During the six months ending December 31, 2003, the
Company granted 924,667 shares of its common stock and warrants to purchase
249,667 shares of its common stock to consultants for services performed,
valued at $307,243, and charged to operations during the period. Each
transaction was pursuant to Section 4(2) of the Act.

During the three months ended December 31, 2003, the
Company issued 500,000 shares of its common stock pursuant to warrants
previously issued to purchase said shares pursuant to Rule 506 of Regulation D
of the Act for an aggregate of $150,000 in cash.

In December of 2003, the Company issued to five
accredited investors 2,300,000shares of its common stock together with a like
amount of 5 year warrants to purchase one share each of the Company's common
stock, with an exercise price of $.35 per share, in a private placement
pursuant to Rule 506 of Regulation D of the Act generating net proceeds of
$805,000, $175,000 of which was collected in January, 2004. An advisor of the
Company was issued 100,000 shares for assisting in this transaction.

In January of 2004, the Company issued to twenty-three
accredited investors 7,160,720 shares of its common stock together with a like
amount of 5 year warrants to purchase one share each of the Company's common
stock, with an exercise price of $.35 per share, in a private placement
pursuant to Rule 506 of Regulation D of the Act generating net proceeds of
$2,506,250, all of which was collected in January, 2004.

In March and April of 2004, the Company issued to six
accredited investors 1,811,429 shares of its common stock together with a like
amount of 5 year warrants to purchase one share each of the Company's common
stock, with an exercise price of $.35 per share, in a private placement
pursuant to Rule 506 of Regulation D of the Act generating net proceeds of
$634,000, all of which was collected in March and April, 2004. Two advisors of
the company were issued 128,826 shares of its common stock together with a like
amount of 5 year warrants to purchase one share each of the Company's common
stock, with an exercise price of $.35 per share for assisting in this
transaction.

In June of 2004, the Company issued to three
accredited investors 3,844,000 shares of its common stock together with two
warrants each to purchase a like amount of stock at $.35 and $.50 respectively
at a price of $.25 per unit. Such warrants are exercisable for a period of 5
years and are callable at $.10 per $100,000 of the value of the shares in which
such warrants may be converted if the common stock of the company trades for 20
consecutive days above (i) $.50 per share in the case of the $.35 warrant and
(ii) $.75 per share in the case of the $.50 warrant.

30

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During the year ended June 30, 2004, the Company
issued 17,446,441 shares of its common stock valued at $6,419,545 and 900,000
warrants, valued at $300,901 based upon the fair market value of the Company's
common stock on the date of the grant using the Black-Scholes option pricing
model. The Company recorded these charges, totaling $130,450 to operations for
the year ended June 30, 2004. Each transaction was pursuant to Section 4(2) of
the Act.

During the fiscal year ended June 30, 2004, the
Company converted certain payables and accrued expenses with GTRC, a strategic
vendor, pursuant to Section 4(2) and to Section 3(a)(9) of the Act aggregating
approximately $1.8 million into 5 year cashless warrants to purchase an
additional 5,039,200 restricted shares of the Company's common stock valued at
$.35 per share plus a $100,000 term promissory note. The Company is in arrears
with respect to the first payment on the note and is currently renegotiating
the amount of the note and payment schedule since the note includes past and
future royalty payments with respect to the Company's patents covering its Traverser DVDDS, some of which the Company may relinquish going forward.

A July private placement of 622,000 shares, each with
two separate 5 year warrants were sold for $ 155,000, each warrant specifying
the right to purchase one additional share at $.25 and $.50, respectively. A
September private placement of 1,050,000 shares, each with two separate 5 year
warrants was sold for $ 247,400, each warrant specifying the right to purchase
one additional share at $.25 and $.35, respectively. A total of 3,344,000 shares
have been reserved to provide for conversion in connection with these warrants.

During the three months ending December 31, 2004, the
Company granted 134,500 shares of its common stock to consultants for services
performed valued at $26,900. Additionally, the Company issued 2,817,954 shares
of its common stock pursuant to the exercise of previously outstanding
warrants, generating net proceeds intended to be used for general corporate
purpose of $563,590. During the quarter ended December 31 of 2004, the Company
issued equity units consisting of 10,717,500 shares of its common stock
together with a like amount of warrants, with an exercise price of $.25, in a
private placement generating net proceeds intended to be used for working
capital and general corporate purposes, of 2,116,600 of which $2,066,600 was
collected through December 31, 2004 and $50,000 was collected in January of
2005. A consultant who assisted the Company with this transaction also received
100,000 shares of the Company's common stock.

During January of 2005, the Company issued an
additional 3,750,000 shares of equity units as part of the private placement
begun in the second quarter of fiscal year 2005, generating additional proceeds
of $750,000. Additionally, 1,000,000 shares of common stock plus a 5 year
warrant for a like amount of shares at $.25 per share were issued to Janifast
Ltd. upon conversion of $200,000 of accounts payable. In addition 424,875
shares of common stock plus a 5 year warrant for a like amount of shares at
$.25 per share were issued to Martin Smiley, CFO and General Counsel of the
Company in connection with his conversion of a $75,000 promissory note plus
accrued interest of $9,975. In addition 65,000 shares of common stock and a 5
year warrant for a like amount of stock at $.25 per share were issued to Mr.
Durando, President and CEO of the Company for conversion of $13,000 of accrued
interest on various promissory notes issued by the Company and also received
1,395,400 shares of common stock of the Company in connection with the exercise
of a warrant at $.01 per share previously awarded for unpaid compensation. A
reduction in principal of $13,954 of a $75,000 promissory note to Mr. Durando
was made for payment of the exercise price of $.01 per share under the warrant.
Mr. Gustave T. Dotoli, Chief Operating Officer of the Company also was issued
375,000 shares of common stock of the Company in connection with the exercise
of a portion of a warrant at $.01 per share. Payment for such exercise was made
in exchange for cancellation of $3,750 of accrued interest on a $75,000
promissory note. Finally Mr. Souzzo, a consultant, received 100,000 shares of
common stock plus a 5 year warrant for a like amount of stock at $.25 per share
in exchange for cancellation of $20,000 of accounts payable.

The December 31, 2004 an outstanding subscriptions
receivable balance of $50,000 was fully collected in January of 2005.
Additionally, the December 2004 private placement was closed out in January of
2005 with the placement of 3,600,000 equity units at $.20 per unit consisting
of one share of common stock plus 5 year warrants for a like amount of shares
with a strike price of $.25 per share generating net proceeds of $720,000 to
the Company.

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A January Private Placement realized net proceeds of
$357,250 upon issuance of 1,793,750 shares of Common Stock at $.20 per share
plus 5 year warrants to purchase 1,793,750 shares of Common Stock at $.25 per
share. A later Private Placement realized net proceeds of $1,351,000 upon
issuance of 4,920,000 shares of Common Stock plus 5 year warrants to purchase
4,920,000 shares of Common Stock at $.25 per share.

In January of 2005 there were stock option awards
issued to two consultants for services performed. The company granted 250,000
options to a consultant for professional services, these options provide for
the right of stock purchase at an exercise price of $.25; these options have a
five year life and expire in January of 2010. A second award issued a like
number of options to another service provider under similar terms, except that
the options associated with this second award offer a call feature, available
to the company, for redemption of such options at a call price of $.45 at any
time during their five year life. In aggregate, 400,000 options were issued in
connection with these awards and will result in a charge to General and
Administrative non-cash expense in the amount of 133,990 in the third quarter
of fiscal 2005. The valuation of this charge was made on the basis of the fair
market value of the Company's common stock on the date of grant using the
Black-Scholes option premium model.

In February of 2005, GTARC tendered 5,069,242 of
cashless warrants which they held in connection with a previous debt settlement
in exchange for 4,949,684 of the company's shares of common stock, the balance
of the 119,558 warrants were effectively cancelled as a result of certain
warrant exercise exchange provisions adjusting the exchange rate based on
specified stock pricing experience as per the original debt settlement
agreement.

A March Private Placement resulted in the realization
of net proceeds of $1,217,000 upon issuance of 4,396,667 shares of Common Stock
at $.30 per share plus 5 year warrants to purchase 4,396,667 shares of Common
Stock at $.30 per share.

On February 17 of 2005, the Company granted 2,600,000
warrants and 400,000 options to consultants for services performed valued at
$1,328,600 and $204,400, respectively. The warrants and options provide the
right to purchase a share of mPhase common stock at an exercise price $.45 and
$.30 per share, respectively, over their 5 year life expiring in February of
2010. These warrant and option awards were valued on the basis of the fair
market value of the Company's common stock on the date of grant using the
Black-Scholes option premium model and the value of the award will be expensed
to General and Administrative non-cash expenses in the third quarter of fiscal
2005.

On January 15, 2005, Martin Smiley converted a
$100,000 convertible note payable by the Company in exchange for 400,000 shares
of common stock and a like number of warrants that were price at $.25 per unit.
General and Administrative non-cash expense in the amount of $131,750 was
recognized in the third quarter of fiscal year 2005 consistent with the market
price of the stock of $.31 on the date of the award.

Also in January of 2005, Martin Smiley was awarded
additional compensation of 425,000 shares of common stock. This award resulted
in a charge to General and Administrative non-cash expense in the amount of $
131,750 in the third quarter of fiscal 2005, representing expense recognition
consistent with the market price of that stock of $.31 on the date of that
award.

In January of 2005 there were stock option awards
issued to two consultants for services performed. The company granted 250,000
options to a consultant for professional services, these options provide for
the right of stock purchase at an exercise price of $.25; these options have a
five year life and expire in January of 2010. A second award issued a like
number of options to another service provider under similar terms, except that
the options associated with this second award offer a call feature, available
to the company, for redemption of such options at a call price of $.45 at any
time during their five year life. In aggregate, 400,000 options were issued in connection with these
awards and will result in a charge to General and Administrative non-cash
expense in the amount of $ 133,990 in the third quarter of fiscal 2005. The
valuation of this charge was made on the basis of the fair market value of the
Company's common stock on the date of grant using the Black-Scholes option
premium model assumptions of a 145% volatility or beta factor and a 2.6%
interest rate factor.

32

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In February of 2005, GTARC tendered 5,069,242 of
cashless warrants which they held in connection with a previous debt settlement
in exchange for 4,949,684 of the company's shares of common stock, the balance
of the 119,558 warrants were effectively cancelled as a result of certain
warrant exercise exchange provisions adjusting the exchange rate based on
specified stock pricing experience as per the original debt settlement
agreement.

A March Private Placement resulted in the realization
of net proceeds of $1,217,000 upon issuance of 4,396,667 shares of Common Stock
at $.30 per share plus 5 year warrants to purchase 4,396,667 shares of Common
Stock at $.30 per share.

On February 17 of 2005, the Company granted 2,600,000
warrants and 400,000 options to consultants for services performed valued at
$1,328,600 and $204,400, respectively. The warrants and options provide the
right to purchase a share of mPhase common stock at an exercise price $.45 and
$.30 per share, respectively, over their 5 year life expiring in February of
2010. These warrant and option awards were valued on the basis of the fair
market value of the Company's common stock on the date of grant using the
Black-Scholes option premium model and the value of the award will be expensed
to General and Administrative non-cash expenses in the third quarter of fiscal
2005.

On January 15, 2005, the company converted a $ 100,000
convertible note payable to Martin Smiley in exchange for 400,000 shares and a
like number of warrants that were price at $.25 per unit or $100,000 in
aggregate. Also in January of 2005, Martin Smiley was awarded additional
compensation of 425,000 shares of common stock. This award will result in a
charge to General and Administrative non-cash expense in the amount of $
131,750 in the third quarter of fiscal 2005, representing expense recognition
consistent with the market price of that stock of $.31 on the date of that
award.

In late February and early March of 2005, the Company
converted approximately $173,898 in accounts payable due various vendors into
535,296 shares of common stock aggregating $183,310 in full settlement of those
obligations and pursuant to Section 3(a)(9) of the Act.

During May 2005, the Company adjusted the exercise
price of $.45 per share of an investor's 5 year warrant to purchase 714,296
shares of common stock. The warrant was originally issued in January 2005, to
$.225 in July of 2005. In July of 2005 such investor exercised a portion of
such warrant, as adjusted, to purchase 200,000 shares of the Company's common
stock generating $45,000 of net proceeds to the Company.

During
the Fiscal Year Ending June 30, 2006 the following transactions impacted
stockholders equity.

On July 20, 2005, at the Company's annual meeting of
Shareholders, the Shareholders ratified an amendment to its Certificate of
Incorporation to increase the number of authorized shares of common stock from
250,000,000 to 500,000,000 shares.

Private
Placements:

During the first fiscal quarter, the Company issued
4,648,625 unregistered shares together with 5 year warrants to purchase
4,648,625 shares at $.25 per share in a private placement pursuant to Rule 506
of Regulation D of the Securities Act of 1933 generating $920,000 of gross
proceeds. Also during the quarter, the Company issued 9,877,000 shares of its
common stock together with 5 year warrants to purchase a like amount of shares
at $.20 per share in two private placement pursuant to Rule 506 of Regulation D
of the Securities Act of 1933 generating $2,167,400 of gross proceeds.

33

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During the second fiscal quarter the Company issued
1,702,900 shares together with of 5 year warrants to purchase 1,702,900 shares
of the Company's common stock to accredited investors at $.20 per share in a
private placement generating pursuant to Rule 506 of Regulation D of the
Securities Act of 1933 generating $340,580 of gross proceeds Also during the
quarter, the Company issued 11,477,785 shares together with of 5 year warrants
to purchase 11,477,785 shares of the Company's common stock to accredited
investors at $.18 per share in a private placement pursuant to Rule 506 of
Regulation D of the Securities Act of 1933 generating $2,238,973 of gross
proceeds.

During the third fiscal quarter, the Company issued
29,861,772 shares together with of 5 year warrants to purchase 29,861,772
shares of the Company's common stock to accredited investors at $.18 per share
in a private placement generating pursuant to Rule 506 of Regulation D of the
Securities Act of 1933 generating $5,065,265 of gross proceeds.

In addition, the Company issues approximately
2,426,698 shares as finders fees as part of the private placements during the
year. (See also comments regarding 12,792,117 shares explained under
Reparations below)

Warrants
Exercised:

During the first fiscal quarter the Company issued
225,000 shares of common stock pursuant to the exercise of warrants issued
prior to the 3 month period generating net cash proceeds of $45,000.

During the second fiscal quarter, the Company issued
1,714,286 shares of its common stock pursuant to the exercise of warrants,
generating net proceeds of $294,857.

During the third fiscal quarter, the Company issued
12,530,834 shares of its common stock pursuant to the exercise of warrants,
generating net proceeds of $2,525,867.

During the fourth fiscal quarter the Company issued
1,250,000 shares of its common stock pursuant to the exercise of warrants,
generating net proceeds of $250,000 to the Company.

Options
and Stock Based Compensation

At various points during the fiscal year ended June
30, 2007, the Company issued stock options to employees and officers for the
right to purchase 23,595,000 shares. Pursuant to the adoption of FAS 123(R),
the Company recognized an expense in the amount of $3,837,423, all of which has
been included in general and administrative expense. The fair value of options
granted in 2007 were estimated as of the date of grant using the Black-Scholes
stock option pricing model, based on the following weighted average
assumptions: annual expected return of 0%, annual volatility of 108.5%, based
on a risk-free interest rate of 4.4% and expected option life of 3 years.

During the fiscal year the Company issued to key
employees and consultants common stock shares in the aggregate amount of
11,500,000 for services rendered. The value of such shares was determined based
on the fair market value of the Company's stock on the date that such
transaction was authorized. Accordingly, the Company recorded a charge to
earnings in the aggregate amount of $2,439,000.

34

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Debt
Conversions

During the second fiscal quarter the Company converted
$369,000 and $171,000 of liabilities due to Microphase Corporation, and
Janifast Ltd into 2,050,000 shares and 950,000 shares of stock and warrants,
respectively. In addition the Company converted $50,000 of liabilities due to a
strategic vendor into 331,864 shares of stock plus warrants of 277,778. The
value attributable to the shares was based upon the market price of the
Company's common stock on the measurement date.

Reparations

At various times during the second and third fiscal
quarters, the Company issued shares of its common stock together with a like
amount of warrants as reparation to affect revised pricing on previous private
offerings. This additional consideration was afforded to stockholders who
participated in the private placement of equity units and invested a minimum of
30% of their original investment. Each unit consisted of one share of stock and
a warrant to purchase an equal amount of shares at $.18 per share. As
additional consideration, each investor received the amount of shares that were
required to bring the average cost of the total investment down to $.18 per
share (range of original investment $.25 - $.35). A total of 29,848,271 of such
shares were issued as reparation under such a program and the Company recorded
a charge to earnings (Other Expense) in the amount of $5,530,504. In addition,
shares in the amount of 12,792,117 were issued and charged to "Additional Paid
In Capital" as an appropriate incentive for the additional cash investment.

During
the Fiscal Year Ending June 30, 2007 the following transactions impacted
stockholders equity.

Private
Placements:

During the quarter ended September 30, 2006, the
Company issued 6,780,716 shares of its common stock together with 5,555,556 of
5 year warrants to purchase one share each of the Company's common stock, with
an exercise price of $.18 per share in private placements generating net
proceeds of $1,104,000.

During the quarter ended December 31, 2006, the
Company issued 6,622,223 shares of its common stock together with 5 year
warrants to purchase 1,388,889 of the Company's common stock, with an exercise
price of $.18 per share in private placements generating net proceeds of
$833,866. Included in these amounts are finders fees paid in cash and 566,667
additional shares of common stock.

During the quarter ended March 31, 2007, the Company
issued 14,973,083 shares of its common stock. Private placements generating net
proceeds of $1,777,503; included in this amount is an estimate of finder's fees
to be paid of $209,000.

During the quarter ended June 30, 2007, the Company
issued 19,582,038 shares of its common stock. Private placements generating net
proceeds of $2,476,000; included in this amount is an estimate of finder's fees
to be paid of $41,000

Warrants
Exercised:

During the quarter ended September 30, 2006, the
Company issued 138,889 shares of its common stock pursuant to the exercise of
warrants, generating net proceeds of $25,000 to the Company.

During the quarter ended December 31, 2006, the
Company issued 12,101,780 shares of its common stock pursuant to the exercise
of warrants, generating net proceeds of $1,669,667 to the Company. In addition,
the Company issued to certain investors new 5 year warrants to purchase
11,111,112 of the Company's common stock, with exercise prices ranging from
$.15 - $.18 per share.

35

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During the quarter ended March 31, 2007, the Company
issued 2,500,000 shares of its common stock pursuant to the exercise of
warrants, generating net proceeds of $375,000 to the Company.

Options
and Stock Based Compensation

During the twelve months ended June 30, 2007, the
Company authorized the issuance of 10,455,000 in options and warrants of
2,821,113 to employees, officers, and consultants granting the right to
purchase a like amount of common shares. Pursuant to the adoption of FAS
123(R), the Company recognized an expense in the amount of $1,321,853, all of
which has been included in general and administrative expense. The fair value
of options granted was estimated as of the date of grant using the
Black-Scholes stock option pricing model, based on the following weighted
average assumptions: annual expected return of 0%, annual volatility of ranging
between 80% -95%, based on a risk-free interest rate of 4.8% and expected
option life of 5 years.

During the twelve months ended June 30, 2007, the
Board of Directors authorized the issuance of 18,172,983 shares of common
stock, with an aggregate value of $2,668,615 as compensation to consultants and
employees. The stock value ranged in price from $.12 to $.20 per share, the
fair value on the date of the awards.

Debt
Conversions

During the twelve months ended June 30, 2007, the
Company converted accounts payable of $991,709 into 6,073,728 shares of common
stock.

Reparations

During the twelve month period ended June 30, 2007,
the Company became obligated to issue 22,664,580 of its common stock as
reparation to affect revised pricing on previous private placements. This
additional consideration was afforded to past investors who agreed to make an
additional cash investment as part of a new private placement. The cost of such
consideration was estimated to be the fair value of such shares at the time of
the investment of $1,874,020.

During
the Fiscal Year Ending June 30, 2008 the following transactions impacted
stockholders equity

Private
Placements

During the quarter ended September 30, 2007, the
Company issued 500,000 shares of its common stock in private placements generating
net proceeds of $50,000

During the quarter ended December 31, 2007, the
Company issued 850,000 shares of its common stock in private placements
generating net proceeds of $48,000

During the quarter ended June 30, 2008, the Company
issued 23,250,000 shares of its common stock in private placements generating
net proceeds of $1,162,500.

Exercise
of Warrants

During the quarter ended June 30, 2008, 11,111,112
warrants to purchase common stock were exercised and additional warrants of
11,111,112 issued. Such transaction generated net proceeds of $650,000.

36

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Other
Equity Transactions

During the year  ended, June 30, 2008, the
Company issued 500,000 shares of stock, 110,000 of options and approximately
13.1 million warrants to purchase common stock valued at $346,985 to
individuals and investors. In addition, it issued approximately 5.2 million
shares of common stock valued at $230,927 to reflect re-pricing agreements,
1,109,200 shares were issued to pay for finders fees valued at $100,000 and
issued 5,250,000 shares of common stock valued at $165,000 in connection with
debt financing arrangement (see convertible debt below) The fair value of
shares issued was estimated as of the date of grant using the Black-Scholes
pricing model, based on the following weighted average assumptions: annual
expected return of 0%, annual volatility of ranging between 70 -81 %, based on
a risk-free interest rate of 2.25% and expected option life of 5 years.

Investment
in Granita Media inc

An investment of $514,000 was received by Granita
Media, Inc, a subsidiary formed July 1, 2007, to operate its IPTV business.
Since the company remains the controlling shareholder in Granita Media and such
results are consolidated, this investment is included in Additional Paid In
Capital.

Convertible
Debt Short Term

In September, 2007, the Company received proceeds of
$154,000 of convertible debt bearing interest at an annual rate of 15% and due
September 1, 2008. Such debt may be converted into the Company's common shares
at a price equal to a 20% discount from the 20 day average bid and ask price.
Such election is at the option of the Company on September 1, 2008. In March
2008, $100,000 of such debt was converted into 2,727,264 shares of common
stock.

Long
Term Convertible Debentures / Note Receivable / Debt Discount

During Fiscal Year ended June 30, 2008 the Company
entered into three separate convertible debt arrangements with independent
investors. These transactions are intended to provide liquidity and capital to
the Company and are summarized below.

Arrangement #1

In December, 2007, the Company received proceeds of
$500,000 under a Securities Purchase Agreement. This transaction involves three
related agreements: 1) A Securities Purchase Agreement which may under certain
circumstances permit the Company to draw up to $6,000,000 of funds; 2) A
Convertible Debenture in the amount of $1.5 million, with an interest rate of 7
1⁄4% and a maturity date of December 11, 2010 and 3) A Secured Note Receivable in
the amount of $1.0 million, with an interest rate of 8 1⁄4 % and a maturity date
of February 1, 2011 due from the same parties who are the holders of the
Convertible Debentures

Conversion of outstanding debentures into common
shares is at the option of the holder. The number of shares into which this
debenture can be converted is equal to the dollar amount of the debenture
divided by the lesser of $.35 per share or 80% of the 3 lowest Volume Weighted
Average Prices during a 20 day trading period. At the time of the transaction
(December 11, 2007) the derivative value of this security was calculated to be
$1,678,471. On June 30, 2008, given the decrease in the stock price, this value
had decreased to $322,636 creating a non-cash credit to earnings over the year
of $1,355,835 In addition, the transaction resulted in a note discount of $1.5
million which is being amortized as expense over the life of the loan.

During the fourth quarter of FYE 2008, $135,000 of
such debt was converted into 2,177,723 shares of common stock and the Company
received a $50,000 payment under the provisions of the related Note Receivable.
Subsequently, through September 18, 2008, an additional $560,000 was converted
into 14,792,000 shares and the Company received additional payments of $700,000
of its Note Receivable. The Note Receivable is secured by all the assets of
Golden Gate.

37

---

Arrangement #2

In February 2008, the Company entered into a
Convertible Debenture transaction which involved the receipt of $500,000 cash,
a note payable of $550,000 and the issuance of 3,250,000 shares of stock valued
at $260,000. The relative fair value of the shares was $105,000 as of June 30,
2008. The terms of the debenture provide for a 7.5% interest rate, a due date
of February 2012 and allow similar conversion privileges equal to 75% of the
average of the three lowest prices over a 20 day period. The derivative value
of such security was estimated to be $581,428 on the date of issuance. On June
30, 2008, this value had decreased to $142,593 creating a non cash credit to
earnings of $438,835. The cost of the shares issued and related debt discount
is being amortized to expense over the life of the debenture. In the event of
default under the note payable the holder is entitled to certain compensatory
fees.

Arrangement #3

In April, 2008, the Company received proceeds of
$300,000 under a Securities Purchase Agreement. This transaction involves three
related agreements: 1) A Securities Purchase Agreement which may under certain
circumstances permit the Company to draw up to $1,300,000 of funds; 2) Two
Convertible Debentures totaling $1,450,000, with a one time interest factor of
12% and a maturity date of March 25, 2011 and 3) A Secured Note Receivable in
the amount of $1.0 million, with a one time interest factor of 13.2 % and
maturity dates of March 25, 2012 due from the same parties who are the holders
of the Convertible Debentures.

Conversion of outstanding debentures into common
shares is at the option of the holder. The number of shares into which this
debenture can be converted is equal to the dollar amount of the debenture divided
by 75%- 80% of the 3 lowest Volume Weighted Average Prices during a 20 day
trading period. At the time of the transaction the derivative value of this
security was calculated to be $2,493,212. On June 30, 2008, given the decrease
in the stock price, this value had decreased to, $284,922 creating a non-cash
credit to earnings over the year of $2,208,290. In addition, the transaction
resulted in a note discount which is being amortized as expense over the life
of the loan. Draws under the Note Receivable are not anticipated until October
2008 and is collateralized by $1 million of Blue Chip Stocks. In total 2
million shares were issued in connection with the convertible debenture with a
relative fair value of $160,000 included in debt discount.

During
the Fiscal Year Ending June 30, 2009 the following transactions impacted
stockholders equity

Private Placements

During the quarter ended September 30, 2008, the Company issued
4,000,000 shares of its common stock at $.05 per share in private placements
generating net proceeds of $180,000. Related to this transaction was the
issuance of 3,862,000 shares as reparations shares to effect re-pricing at a
cost estimated to be $216,689.

No Private Placements occurred in the quarter ending December 31, 2008.

During the quarter ended March 31, 2009, the Company issued 35,000,000
shares of its common stock at $.01 per share in private placements generating
net proceeds of $315,000. Related to these transactions was the issuance of
7,660,000 shares as reparations shares to effect re-pricing, costing an
estimated $99,483.

During the quarter ended June 30, 2009, the Company issued
33,333,333 shares
of its common stock at $.0075 per share in private placements generating gross
proceeds of $225,000. Related to these transactions was the issuance of
2,000,000 shares as reparations shares to effect re-pricing, costing an
estimated $64,000 and finder's fees of $25,000.

Also during the quarter ended June 30, 2009, the Company
issued 20,775,000 shares in settlement of $169,875 or prior promissory notes
payable plus accrued interest and incurred a beneficial conversion of $114,500.

38

---

Stock Based Compensation

During the three months ended September 30, 2008, the Company issued 5
year options to purchase 104,675,000 shares of common stock at $.05 per share.
The value of such options was estimated to be $4,071,348 using the Black Scholes method, a volatility of 78% and an interest free rate of 1.5%. In
addition, 61,750,000 shares of common stock valued at $3,525,615 were issued to
employees and consultants. (See note 3).

No such transactions occurred in the quarters ending December 31, 2008
nor March 31, 2009

During the quarter ended June 30, 2009, the Company granted 3 officers
of the Company the right to convert an aggregate of $1,465,992 of loans and
accrued and unpaid compensation and accrued interest into common stock of the Company at a price of
$.0075 per share.

Conversion of debt securities

During the fiscal year ended June 30, 2009, $3,303,333 of debt was
converted into 278,346,019 shares of common stock. Included in this amount is $112,500
of notes payable to a related party which were sold to an investor for $112,500
cash and subsequently converted into 15,000,000 shares of the Company's common
stock valued at .0075 cents per share. Additionally $57,375 of prior notes plus
accrued interest outstanding were settled by the issuance of 5,775,000 shares of
common stock. All other debt converted involved long term convertible debentures
which are discussed below.

Long Term Convertible Debentures /
Note Receivable / Debt Discount and related Interest

From December of 2007 through August of 2009, the Company has entered
into six separate convertible debt arrangements with independent investors.

General

The economic substance of convertible debt arrangements entered into
beginning December 2007 was to provide the Company with needed liquidity to
supplement the private equity markets.

The form of the transaction may involve the following:

|  |                                                                                                                                                                                                                                                                                                                                        
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The receipt of cash                                                                                                                                                                                                                                                                                                                    
|  |                                                                                                                                                                                                                                                                                                                                        
| | The issuance of a note payable from mPhase.                                                                                                                                                                                                                                                                                            
|  |                                                                                                                                                                                                                                                                                                                                        
| | The issuance of a note receivable due to mPhase                                                                                                                                                                                                                                                                                        
|  |                                                                                                                                                                                                                                                                                                                                        
| | A Securities Purchase Agreement                                                                                                                                                                                                                                                                                                        
|  |                                                                                                                                                                                                                                                                                                                                        
| | The note payable contains conversion features which
  permit the holder to convert debt into equity. Such debt is eligible to be
  converted into the Company's common stock immediately, thus requiring the
  recording of the entire liability upfront. Finally, to encourage conversion,
  a discount from market value was offered.
|  |                                                                                                                                                                                                                                                                                                                                        
| | The aggregate amount of notes payable exceeded the
  amount of cash received. As "Consideration" for this difference the Company
  took back a secured Note Receivable. Security is generally liquid investments
  of the investor.                                                                                                    
|  |                                                                                                                                                                                                                                                                                                                                        
| | The note receivable provides a commitment to fund
  mPhase. The notes are secured and collateralized and carry terms which are
  different from the related note payable and no right of offset exist.                                                                                                                                 

39

---

Derivative
Value and Debt Discount

It was determined that the value of the note payable
to the holder (investor) was primarily due to the favorable conversion features
of the note. In accordance with SFAS 133, the conversion feature requires the
bifurcation of the embedded derivative from the host document and separate
reporting of the embedded conversion feature at fair value determined by a
Black-Scholes calculation. The value of the agreement includes the conversion
feature and the variable amount of shares that may be converted at any
particular point in time. As such and under GAAP, our Balance Sheet reflects
the value of the embedded conversion feature as Derivative Value and the
corresponding contra account to Notes Payable called Debt Discount.

At the end of every quarter the fair value of
Derivative Securities is reviewed and adjustments made accordingly. The
volatility of the stock price, the amount and variable number of shares
involved and the low price of our stock has caused this value to fluctuate significantly.
In addition, the debt discount is adjusted for any conversions and amortized
over the remaining life of the loan.

A
summary of our arrangements are as follows:

Arrangement
#1 (Golden Gate Investors)

In December, 2007, the Company received proceeds of
$500,000 under a Securities Purchase Agreement. This transaction involves three
related agreements: 1) A Securities Purchase Agreement, dated as of December
11, 2007, which may under certain circumstances permitted the Company to draw
up to $6.0 of funds; 2) A Convertible Debenture in the amount of $1.5 million,
with an interest rate of 7 1⁄4% and a maturity date of December 11, 2010 and 3) A
Secured Note Receivable in the amount of $1.0 million, with an interest rate of
8 1⁄4% and a maturity date of February 1, 2011 due from the same parties who are
the holders of the Convertible Debentures.

Conversion of the outstanding debenture into common
shares is at the option of the holder. The number of shares into which this
debenture was converted is equal to the dollar amount of the debenture divided
by the lesser of $.35 per share or 80% of the 3 lowest Volume Weighted Average
Prices during the 20 day trading period prior to conversion. At the time of the
transaction (December 11, 2007) the derivative value of the conversion feature
was calculated to be $1,678,471. On June 30, 2008, given the decrease in the Company's
stock price, this value had decreased to $322,636. As of June 30, 2009 all of
the related debt had been converted and no derivative value
balance remained. This has resulted in an increase in earnings for the year of $322,636. In addition, the
transaction resulted in a note discount of $1.5 million which has been
amortized as expense. During the year ended June 30, 2009, amortization of debt discount amounted to $1,122,649.
In March of 2009, by mutual consent of the parties, the
Securities Purchase Agreement was terminated. Total draws under this facility
were $1.5 million.

During the fiscal year ended June 30, 2009, $1,365,000
of such debt was converted into 74,368,943 shares of common stock and the Company received
a total of $950,000 under the provisions of the related Note Receivable.

40

---

Arrangement
#2 ( St.George Investments, LLC)

In February 2008, the Company entered into a Convertible
Debenture transaction which involved the receipt of $500,000 cash, a note
payable of $550,000 and the issuance of 3,250,000 shares of stock. The relative
fair value of the shares was $105,000. The terms of the debenture provide for a
7.5% interest rate, a due date of February 2012 and conversion privileges equal
to 75% of the lowest trading price over the 20 day period prior to
conversion. The derivative value of the embedded conversion feature was
estimated to be $581,428 on the date of issuance. On June 30, 2008, the
derivative value was $142,593 and on June 30, 2009 such value was $0 since the
entire debt has been converted. The cost of the shares issued and related debt
discount is being amortized to expense over the life of the debenture. In the
event of default under the note payable the holder is entitled to certain
compensatory fees. During the period ended June 30, 2009, amortization of debt
discount amounted to $502,083.

During the fiscal year ended June 30, 2009, $614,209 of such debt plus
accrued interest was converted into 60,536,582 shares of common stock.

Arrangement
#3 (JMJ Financial, Inc.)

In April, 2008, the Company received proceeds of $300,000
under a Securities Purchase Agreement. This transaction involves three related
agreements: 1) A Securities Purchase Agreement which may under certain
circumstances permit the Company to draw up to $1,000,000 of funds; 2) Two
Convertible Debentures totaling $1,450,000, with a one time interest factor of
12% ($132,000) and a maturity date of March 25, 2011 and 3) A Secured Note
Receivable in the amount of $1.0 million, with a one time interest factor of
13.2 % and maturity dates of March 25, 2012 due from the same parties who are
the holders of the Convertible Debentures.

Conversion of outstanding debentures into common shares is at
the option of the holder. The number of shares into which the debentures can be
converted is equal to the dollar amount of the debenture divided by 75% of the 3
lowest Volume Weighted Average Prices during the 20 day trading period prior to
conversion. An amendment of December 31, 2008 allowed one conversion of $200,000
of principal to be converted into common stock at the rate of 70% of lowest
trading priceduring the 20 day period prior to
conversion and reduced the conversion price from 80% to 75% for future
conversions.

During the fiscal year ended June 30, 2009, $964,250 of such debt and accrued
interest was converted into 100,951,309 shares of common stock.

At the time of the transaction the embedded conversion
feature of this security was calculated to be $2,493,212. On June 30, 2008, this
value had decreased to $284,922. On June 30, 2009, such value had increased to
$444,552, creating a non-cash expense for the twelve month period of $159,630.
In addition, the transaction resulted in a note discount which is being
amortized as expense over the life of the loan. During the twelve month period
ended June 30, 2009, amortization of debt discount amounted to $1,007,097.

Payments received under the Note Receivable for the fiscal year ended June
30, 2009, have totaled $650,000. The Note Receivable is collateralized by $1
million of Blue Chip Stocks.

Arrangement
#4 (JMJ Financial, Inc.)

On December 31, 2008, the Company entered into a second
agreement with JMJ Financial. This transaction involves; 1) A Convertible
Debenture in the amount of $1.1 million, plus a one time interest factor of 12%
($132,000) and a maturity date of December 31, 2011 and 2) A Secured Note
Receivable in the amount of $1.0 million, plus a one time interest factor of
13.2 % ($132,000) and maturity date of December 31, 2012 due from the same
parties who are the holders of the Convertible Debentures. No cash was exchanged
relative to this agreement.

41

---

Conversion of outstanding debentures into common shares is at
the option of the holder. The number of shares into which this debenture can be
converted is equal to the dollar amount of the debenture divided by 75% of the
lowest trading priceduring the 20 day trading period prior to conversion. At the
commitment date the embedded conversion feature of such security was $586,667
and the debt discount valued at $586,667. As of June 30, 2009, the value of
embedded conversion feature has increased to $855,920 creating a charge to
earnings of $269,254 while the debt discount has been amortized by $97,778.

During the fiscal year ended 2009 no
cash was exchanged nor was any debt converted relative to this agreement (see
Subsequent Events). The FMV addition to this debt as of fiscal year end 2009 was
$307,899.

Arrangement
#5 (LaJolla Cove Investors, Inc.)

On Sept 11, 2008, the Company received proceeds of $200,000
under a Securities Purchase Agreement. This transaction involves three related
agreements: 1) A Securities Purchase Agreement which may under certain
circumstances permit the Company to draw up to $2,000,000 of funds; 2) A
Convertible Debenture totaling $2,000,000, with an interest rate of 7 1/4% and a
maturity date of September 30, 2011 and 3) A Secured Note Receivable in the
amount of $1,800,000, with an interest rate of 8 1/4% and maturity dates of
September 30, 2011 due from the same parties who are the holders of the
Convertible Debentures. In addition, the holder of the debenture is related to
the holder in Arrangement #1.

Conversion of outstanding debentures into common shares is
similar to the terms of Arrangement #1. At the time of the transaction
(September 11, 2008) the embedded conversion feature of this security was
calculated to be $859,756. On June 30, 2009, this value had increased to
$1,080,343, creating a non-cash expense to earnings for the twelve month month
period of $220,587. In addition, the transaction resulted in a note
discount which is being amortized as expense over the life of the loan. During
the twelve month period ended June 30, 2009, amortization of debt discount
amounted to $285,320.

During the twelve months ended June 30, 2009 the holder
converted $19,000 of principal into 27,214,285 shares of common stock
(See also Subsequent Events).

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | GRANITA MEDIA                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Effective July 1, 2007, the Company formed Granita
  Media, Inc. to separate its IPTV business and facilitate the raising of
  capital. Pursuant to an arrangement with 4 employees of mPhase, such
  employees were terminated from mPhase as of July 1, 2007 and became employees
  of Granita Media, Inc and invested solely in the common stock of Granita
  Media, Inc. Under the arrangement, each of the 4 employees was required to
  invest $125,000 in exchange for an aggregate 2% equity interest in Granitia
  Media, Inc with mPhase continuing to own 98% of the Company. The 4 employees
  contributed a total of $339,000 of the total $500,000 equity investment
  required from them and raised from third party investors another $175,000 for
  a total of $514,000. Granita Media has 19,000,000 shares of common stock
  outstanding of which 18,000,000 was owned by mPhase Technology and 1,000,000
  is being held for issuance to the 4 employees and the third party investors
  pending an agreement among such persons of the allocation of such shares.

42

---

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Under the terms of the arrangement between mPhase
  and the 4 employees, such employees were authorized to sell up to 7.99% of
  additional equity in the Company for a total of not less than $2,000,000 of
  additional capital by December 31, 2007. As noted above, the employees raised
  a total of $175,000 of outside capital only and pursuant to the arrangement,
  such employees either resigned or were terminated by mPhase together with
  several lower level employees of Granita. A dispute has arisen between Granita Media and one of the former
  employees with respect to a sum of approximately $176,000 included in short
  term loans. It is the Company's position that such sums were voluntarily
  advanced to fund operating expenses after July 1, 2007. Since the 4 employee
  / officers of Granita Media were required to cover operating expenses of
  Granita Media after July 1, 2007 through equity investments either directly
  or from third parties, the Company has taken the position that such amount
  nor any related interest and fees are not owed to the employee. In addition,
  the Company has substantial rights of offset for unpaid rent with respect to
  the portion of its Little Falls office occupied by Granita Media after July
  1, 2007.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | During the FYE June 30, 2009, Granita Media Inc did
  not conduct any operations and management is considering all alternatives
  including the possible sale of the IPTV business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

ITEM 6.
SELECTED CONSOLIDATED FINANCIAL DATA

The selected financial data set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the historical financial statements
and notes included in this annual report. The statement of operations data from
October 2, 1996 (date of inception) to June 30, 1997 and for the year ended
June 30, 1998, and the balance sheet data as of June 30, 1997 and 1998, are
derived from financial statements that have been audited by Schuhalter,
Coughlin & Suozzo, LLC, independent auditors, and are included in this
document. The statement of operations data for the years ended June 30, 1999,
2000, and 2001 and the balance sheet data as of June 30, 1999, 2000, and 2001
are derived from financial statements that have been audited by Arthur Andersen
LLP., independent auditors. The statement of operations data for each year
ended June 30, 2002 through June 30, 2009 and the balance sheet data as of June
30, 2002 through June 30, 2009 are derived from financial statements that have
been audited by Rosenberg Rich Baker Berman & Company, independent
auditors, and are included in this document.

43

---

SUMMARY OPERATING
DATA
Year Ended June 30,
(in thousands except per share data)

Cumulative
  from inception
  October 2,
  1996 to2005

2006

2007

2008
(As Restated)

2009
(As Restated)

June
  30, 2009
(As Restated)Total revenues

$
1,711

$
975

$
154

$
113

$
187

$
22,749Cost of sales


1,446


974


90


1


0

$
16,425Research and
  development


5,127


8,035


6,393


988


1,256

$
60,216General and
  administrative


6,580


11,121


8,684


4,032


9,554

$
119,026Depreciation and
  amortization


63


79


94


145


34

$
3,304Operating loss


(11,505
)

(19,234
)

(15,107
)

(5,053
)

(10,657
)
$
(176,222
)Other income
  (expense), net


382


(5,182
)

(1,726
)

1,884


(3,118
)
$
(8866
)Interest income
  (expense)


(111
)

(35
)

(18
)

(215
)

(1,321
)
$
(1,703
)Net loss

$
(11,234
)
$
(24,451
)
$
(16,851
)
$
(3,384
)
$
(15,096
)

(186,791
)Basic and
  diluted net loss per share

$
(0.10
)
$
(0.12
)
$
(0.05
)
$
(0.01
)
$
(0.03
)Shares used in
  basic and diluted net loss per share


108,657,578


199,610,372


310,395,562


405,032,339


592,455,950


BALANCE SHEET DATA in $000's

|                                                |  |      |        |      |   |        |   |                    |        |                    |   |        |   |   |        |  
|----------------------------------------------- |  | ---- | ------ | ---- | - | ------ | - | ------------------ | ------ | ------------------ | - | ------ | - | - | ------ | -
|                                                |  | 2005 |        | 2006 |   | 2007   |   | 2008
(As Restated) |        | 2009
(As Restated) |  
|                                                |  |      |        |      |   |        |   |                    |        |                    |  
|Cash and cash
  equivalents                     |  | $    | 351    |      | $ | 1,360  |   | $                  | 23     |                    | $ | 16     |   | $ | 100    |  
|Working capital
  (deficit)                     |  | $    | (1,674 | )    | $ | (1,093 | ) | $                  | (3,088 | )                  | $ | (3,853 | ) | $ | (3,991 | )
|Total assets                                    |  | $    | 2,232  |      | $ | 2,182  |   | $                  | 1,808  |                    | $ | 2,351  |   | $ | 3,489  |  
|Long-term
  obligations, net of current portion |  | $    | 315    |      | $ | 0      |   | $                  | 0      |                    | $ | 1,595  |   | $ | 4,433  |  
|                                                |  |      |        |      |   |        |   |                    |        |                    |   |        |   |   |        |  
|Total
  stockholders' (deficit)                 |  | $    | (1,618 | )    | $ | (606   | ) | $                  | (2,754 | )                  | $ | (3,238 | ) | $ | (5,234 | )

Selected
Quarterly Financial Information

The statement of operations data as of the quarterly
periods indicated below are derived from unaudited financial statements
reviewed by Rosenberg, Rich, Baker, Berman & Company, and include all
adjustments (consisting of normal recurring items) that management considers
necessary for a fair presentation of the financial statements.

44

---

FISCAL
  2009 QUARTERLY


Three
  Months EndedSTATEMENT
  OF OPERATIONS DATA:

September
  30,
(As Restated)

December
  31
(As Restated)

March
  31,

June
  30,(in
  thousands, except share amounts)Total revenues


6


45


44


92Costs and
  Expenses:Cost of sales


-


-


-


-Research and
  development


388


216


265


386General and
  administrative


6,239


499


430


2,387Depreciation and
  amortization


13


13


4


4Operating loss


(6,634)


(683)


(655)


(2,685)Interest
  expense, Net


(39)


(61)


(74)


(1,147)Other Income
  (expense)


355


(1,845)


73


(1,702)Net Loss


(6,318)


(2,589)


(656)


(5,534)Basic and
  diluted net (loss) gain per share


(0.01)


(0.01)


-


(0.01)Shares used in
  basic and diluted net loss per share


452,895,360


452,895,360


671,278,600


786,484,581


|                                                                   |  |                 |                                        |               |   |             |   |            |             |   |   |               |  
|------------------------------------------------------------------ |  | --------------- | -------------------------------------- | ------------- | - | ----------- | - | ---------- | ----------- | - | - | ------------- | -
|FISCAL
  2008 QUARTERLY                                            |  |                 | Three
  Months Ended                   |              
|STATEMENT
  OF OPERATIONS DATA:                                    |  | September
  30, |                                        | December
  31 |   | March
  31, |   | June
  30, |            
|                                                                   |  |                 |                                        |               |   |             |   |            |             |   |   | (As Restated) |  
|                                                                   |  |                 | (in
  thousands, except share amounts) |              
|Total revenues                                                     |  | $               | 35                                     |               | $ | 61          |   | $          | 1           |   | $ | 16            |  
|Costs and
  Expenses:                                              |  |                 |                                        |               |   |             |   |            |             |   |   |               |  
|Cost of sales                                                      |  |                 | 0                                      |               |   | 1           |   |            | 0           |   |   | 0             |  
|Research and
  development                                         |  |                 | 560                                    |               |   | 285         |   |            | 277         |   |   | (134          | )
|General and
  administrative                                       |  |                 | 1,497                                  |               |   | 985         |   |            | 576         |   |   | 974           |  
|Depreciation and
  amortization                                    |  |                 | 34                                     |               |   | 81          |   |            | 21          |   |   | 9             |  
|Operating loss                                                     |  |                 | (2056                                  | )             |   | (1291       | ) |            | (873        | ) |   | (833          | )
|Interest
  expense, Net                                            |  |                 | (12                                    | )             |   | (38         | ) |            | (145        | ) | $ | (20           | )
|                                                                   |  |                 |                                        |               |   |             |   |            |             |   |   |               |  
|Other Income
  (expense)                                           |  |                 | (718                                   | )             |   | 1436        |   |            | (2487       | ) |   | 3,653         |  
|                                                                   |  |                 |                                        |               |   |             |   |            |             |   |   |               |  
|Net Loss                                                           |  | $               | (2,786                                 | )             | $ | 107         |   | $          | (3,505      | ) | $ | 2,801         |  
|Basic and
  diluted net (loss) gain per share                      |  | $               | (0.01                                  | )             | $ | 0.00        |   | $          | (0.01       | ) | $ | 0.00          |  
|Shares used in
  basic and diluted net loss per share              |  |                 | 389,791,154                            |               |   | 392,557,583 |   |            | 397,367,531 |   |   | 418,881,266   |  
|Includes certain
  reclassification from previous reported amounts |  |                 |                                        |               |   |             |   |            |             |   |   |               |  

45

---

|                                                    |  |                                        |             |               |   |             |   |           |             |   |   |             |  
|--------------------------------------------------- |  | -------------------------------------- | ----------- | ------------- | - | ----------- | - | --------- | ----------- | - | - | ----------- | -
|                                                    |  |                                        |            
|FISCAL 2007 QUARTERLY                               |  | Three
  months ended                   |            
|STATEMENT OF OPERATIONS DATA:                       |  | September
  30                         |             | December
  31 |   | March
  31  |   | June
  30 |            
|                                                    |  |                                        |             |               |   |             |   |           |             |   |   |             |  
|                                                    |  | (in
  thousands, except share amounts) |            
|Total revenues                                      |  | $                                      | 106         |               | $ | 15          |   | $         | 15          |   | $ | 18          |  
|Costs and Expenses:                                 |  |                                        |             |               |   |             |   |           |             |   |   |             |  
|Cost of sales                                       |  |                                        | 85          |               |   |             |   |           | 3           |   |   | 2           |  
|Research and development                            |  |                                        | 1,990       |               |   | 1,723       |   |           | 1,251       |   |   | 1,429       |  
|General and administrative                          |  |                                        | 1,962       |               |   | 1,405       |   |           | 1,645       |   |   | 3,672       |  
|Depreciation and amortization                       |  |                                        | 22          |               |   | 22          |   |           | 23          |   |   | 28          |  
|Operating loss                                      |  |                                        | (3,954      | )             |   | (3,136      | ) |           | (2,906      | ) |   | (5,111      | )
|Interest expense, Net                               |  |                                        | (4          | )             |   | (8          | ) |           | 1           |   |   | (7          | )
|Other Income (expense)                              |  |                                        | (695        | )             |   | (359        | ) |           | (672        | ) |   |             |  
|Net Loss                                            |  | $                                      | (3,958      | )             | $ | (3,839      | ) | $         | (3,264      | ) | $ | (5,791      | )
|Basic and diluted net loss per share                |  | $                                      | (0.01       | )             | $ | (0.01       | ) | $         | (0.01       | ) | $ | (0.02       | )
|Shares used in basic and diluted net loss per share |  |                                        | 282,306,237 |               |   | 300,483,022 |   |           | 327,195,047 |   |   | 363,823,271 |  

|                                                         |  |                                        |             |               |   |             |   |            |             |   |   |             |  
|-------------------------------------------------------- |  | -------------------------------------- | ----------- | ------------- | - | ----------- | - | ---------- | ----------- | - | - | ----------- | -
|FISCAL 2006 QUARTERLY                                    |  | Three
  months ended                   |            
|STATEMENT OF OPERATIONS DATA:                            |  | September
  30                         |             | December
  31 |   | March
  31, |   | June
  30, |            
|                                                         |  |                                        |             |               |   |             |   |            |             |   |   |             |  
|                                                         |  | (in
  thousands, except share amounts) |            
|Total revenues                                           |  | $                                      | 381         |               | $ | 168         |   | $          | 284         |   | $ | 142         |  
|Cost of Sales                                            |  |                                        | 337         |               |   | 135         |   |            | 256         |   |   | 246         |  
|Research and development                                 |  |                                        | 1,861       |               |   | 1,961       |   |            | 2,298       |   |   | 1,915       |  
|General and administrative                               |  |                                        | 1,092       |               |   | 2,090       |   |            | 4,820       |   |   | 3,119       |  
|Depreciation and amortization                            |  |                                        | 20          |               |   | 20          |   |            | 17          |   |   | 22          |  
|Operating loss                                           |  |                                        | (2,929      | )             |   | (4,038      | ) |            | (7,107      | ) |   | (5,160      | )
|Interest expense, Net                                    |  |                                        | (14         | )             |   | (6          | ) |            | (5          | ) |   | (10         | )
|OTHER income (EXPENSE) NET                               |  |                                        | (12         | )             |   | (4,270      | ) |            | (498        | ) |   | (402        | )
|Net loss                                                 |  | $                                      | (2,955      | )             | $ | (8,314      | ) | $          | (7,610      | ) | $ | (5,572      | )
|                                                         |  |                                        |             |               |   |             |   |            |             |   |   |             |  
|Basic and diluted net loss per share                     |  | $                                      | (.02        | )             | $ | (.04        | ) | $          | (.03        | ) | $ | (.03        |  
|                                                         |  |                                        |             |               |   |             |   |            |             |   |   |             |  
|Shares used in basic and diluted net loss per
  share(1) |  |                                        | 152,291,645 |               |   | 174,998,048 |   |            | 262,539,165 |   |   | 270,387,574 |  
|                                                         |  |                                        |             |               |   |             |   |            |             |   |   |             |  

46

---

|                                                         |  |                                        |            |               |   |            |   |           |             |   |   |             |  
|-------------------------------------------------------- |  | -------------------------------------- | ---------- | ------------- | - | ---------- | - | --------- | ----------- | - | - | ----------- | -
|                                                         |  |                                        |           
|FISCAL 2005 QUARTERLY                                    |  | Three
  months ended                   |           
|STATEMENT OF OPERATIONS DATA:                            |  | September
  30                         |            | December
  31 |   | March
  31 |   | June
  30 |            
|                                                         |  |                                        |            |               |   |            |   |           |             |   |   |             |  
|                                                         |  | (in
  thousands, except share amounts) |           
|Total revenues                                           |  | $                                      | 179        |               | $ | 296        |   | $         | 564         |   | $ | 672         |  
|Costs and Expenses:                                      |  |                                        |            |               |   |            |   |           |             |   |   |             |  
|Cost of Sales                                            |  |                                        | 130        |               |   | 245        |   |           | 448         |   |   | 623         |  
|Research and development                                 |  |                                        | 1,101      |               |   | 1,055      |   |           | 1,664       |   |   | 1,307       |  
|General and administrative                               |  |                                        | 709        |               |   | 2,071      |   |           | 2,639       |   |   | 1,032       |  
|Depreciation and amortization                            |  |                                        | 1          |               |   | 127        |   |           | 62          |   |   | 1           |  
|                                                         |  |                                        |            |               |   |            |   |           |             |   |   |             |  
|Operating loss                                           |  |                                        | (1,762     | )             |   | (3,203     | ) |           | (4,249      | ) |   | (2,291      | )
|Interest expense, Net                                    |  |                                        | (29        | )             |   | (66        | ) |           | (37         | ) |   | 21          |  
|Other Income (Expense) Net                               |  |                                        | (41        | )             |   |           |   |           | (59         | ) |   | 482         |  
|Net loss                                                 |  | $                                      | (1,832     | )             | $ | (3,269     | ) | $         | (4,345      | ) | $ | (1,788      | )
|                                                         |  |                                        |            |               |   |            |   |           |             |   |   |             |  
|Basic and diluted net loss per share                     |  | $                                      | (.02       | )             | $ | (.04       | ) | $         | (.04        | ) | $ | (.01        | )
|                                                         |  |                                        |            |               |   |            |   |           |             |   |   |             |  
|Shares used in basic and diluted net loss per
  share(1) |  |                                        | 89,719,962 |               |   | 93,388,984 |   |           | 120,015,504 |   |   | 137,719,500 |  
|                                                         |  |                                        |            |               |   |            |   |           |             |   |   |             |  

|                                                         |  |                                        |               |   |            |            |           |   |            |   |   |            |  
|-------------------------------------------------------- |  | -------------------------------------- | ------------- | - | ---------- | ---------- | --------- | - | ---------- | - | - | ---------- | -
|FISCAL 2004 QUARTERLY                                    |  | Three
  months ended                   |              
|STATEMENT OF OPERATIONS DATA:                            |  | September
  30                         | December
  31 |   | March
  31 |            | June
  30 |  
|                                                         |  |                                        |               |   |            |            |           |   |            |   |   |            |  
|                                                         |  | (in
  thousands, except share amounts) |              
|Total revenues                                           |  | $                                      | 2,489         |   | $          | 1,291      |           | $ | 555        |   | $ | 306        |  
|Costs and Expenses:                                      |  |                                        |               |   |            |            |           |   |            |   |   |            |  
|Cost of sales                                            |  |                                        | 2,099         |   |            | 1,191      |           |   | 484        |   |   | 294        |  
|Research and development                                 |  |                                        | 611           |   |            | 843        |           |   | 1,404      |   |   | 1,212      |  
|General and administrative                               |  |                                        | 605           |   |            | 914        |           |   | 803        |   |   | 1,856      |  
|Depreciation and amortization                            |  |                                        | 46            |   |            | 28         |           |   | 27         |   |   | 22         |  
|                                                         |  |                                        |               |   |            |            |           |   |            |   |   |            |  
|Operating loss                                           |  |                                        | (872          | ) |            | (1,685     | )         |   | (2,162     | ) |   | (3,078     | )
|Interest expense, Net                                    |  |                                        | (16           | ) |            | (16        | )         |   | (20        | ) |   | (59        | )
|Other Income (Expense) Net                               |  |                                        | 23            |   |            |           |           |   | (152       | ) |   | 278        |  
|Net Loss                                                 |  | $                                      | (865          | ) | $          | (1,701     | )         | $ | (2,334     | ) | $ | (2,859     | )
|                                                         |  |                                        |               |   |            |            |           |   |            |   |   |            |  
|Basic and diluted net loss per share                     |  | $                                      | (.01          | ) | $          | (.02       | )         | $ | (.03       | ) | $ | (.03       | )
|Shares used in basic and diluted net loss per
  share(1) |  |                                        | 71,725,318    |   |            | 72,814,272 |           |   | 81,564,405 |   |   | 84,885,017 |  
|                                                         |  |                                        |               |   |            |            |           |   |            |   |   |            |  

47

---

ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS AND
PLAN OF OPERATIONS

The following is management's discussion and analysis
of certain significant factors, which have affected mPhase's financial position
and should be read in conjunction with the accompanying financial statements,
financial data and the related notes.

RESULTS
OF OPERATIONS

OVERVIEW

mPhase Technologies, Inc. (OTC BB: XDSL.OB) is a
development company specializing in microfluidics,
microelectromechanical systems (MEMS) and nano- technology. Through its wholly
owned subsidiary AlwaysReady, Inc., mPhase is focused on commercializing its
first nanotechnology-enabled product for military and commercial applications -
The Smart NanoBattery providing Power On CommandTM. Our new well-patented
battery technology, based on the phenomenon of electrowetting, offers a unique
way to store energy and manage power that will revolutionize the battery
industry. Features of the Smart NanoBattery include: potentially infinite shelf
life, environmentally friendly design, fast ramp to power, programmable
control, and direct integration with microelectronic devices.

The platform technology behind the Smart NanoBattery
is a porous nanostructured material used to repel and precisely control the
flow of liquids. The material has a Smart Surface that can potentially be designed
for self- cleaning applications, water purification/desalination, liquid
filtration/separation, and drug delivery. mPhase has been awarded a Phase II
Small Business Technology Transfer Program (STTR) grant, part of the Small
Business Innovation Research (SBIR) program, from the U.S. Army for continued
development of a reserve Smart Nano- Battery for a critical computer memory
application. mPhase Technologies, Inc. was founded in 1996 and is headquartered
in Little Falls, New Jersey, with additional offices in Norwalk, Connecticut,
and New York City.

mPhase Technologies, Inc., is an inventive and
innovative development company specializing in microfluidics, micro-
electromechanical systems (MEMS) and nanotechnology.A public company trading
under the stock symbol OTC BB: XDSL, mPhase was founded in 1996 and is
headquartered in Little Falls, New Jersey, with additional offices in Norwalk,
Connecticut, and New York City.In 2004, mPhase Technologies collaborated with
the renowned Bell Laboratories to develop a new technology called the Smart
NanoBattery that has the potential to revolutionize the battery industry. This
well-patented technology is based on a phenomenon known as electrowetting that
provides a unique way to activate the battery to gain access to energy stored
and manage power. The platform technology behind the Smart NanoBattery is a
porous nanostructured component that repels and precisely controls the flow of
certain liquid.

mPhase's Smart NanoBattery technology has been
incorporated in leading-edge research and development projects supported by
various groups within the U.S. Army for mission critical static random access
memory (SRAM) backup and guided munitions applications. mPhase also sees
opportunities beyond batteries given the versatility of its enabling platform
technology.

m Phase received a Small Business Technology Transfer
(STTR) Program Phase I grant last year for $100,000 from the U.S. Army and in
September 2008 was awarded a prestigious $750,000 (net $500,000) Phase II STTR
grant to continue battery development work for the SRAM project. The company
has also been working with the U.S. Army as part of a Cooperative Research and
Development Agreement (CRADA).

Recently, through its wholly-owned subsidiary, mPhase
has focused on development of a lithium Smart NanoBattery. Working closely with
Rutgers University, mPhase introduced the first version of the lithium Smart
NanoBattery designed for portable electronics and microelectronic applications.

One version of the lithium battery based on a breakable separator is
being developed for an emergency flashlight application. mPhase collaborates
with other companies and organizations and is actively seeking partners
interested in using the Smart NanoBattery or its platform technology for power
systems and other applications.

48

---

Controlling Surface Properties

The surface is
an important part of virtually every physical object and often plays an
overriding role in many processes, beyond just connectivity and structural
support, but more deeply into areas involving chemical and biological
interactions. In some instances, the surface provides an easy entry into the
chemical or biological systems, in others it protects the internal elements of
the object, surrounded by the surfaces.

Microscopic Changes, World-Changing
InnovationmPhase's platform technology is the Smart Surface. By being able to control
the surface properties of materials down to the nanometer scale, new and
improved devices can be designed and built that may lead to compelling business
opportunities. One type of smart surface of particular interest allows the
properties to be changed in response to an external stimulus.

Initially,
mPhase's development focused on MEMS devices by manipulating the surface of
silicon materials  the same material used to make microelectronic materials
and devices. Using physical and chemical processes, the surface of the silicon
is modified to make solid porous structures known as membranes. This is where
microfluidics comes into play. These membranes can be used to selectively
control the flow of liquids through the pores or openings at the micrometer
length scale.

Surfaces may
be characterized as hydrophilic
or hydrophobic depending on
whether or not they attract or repel water (or other liquids). A hydrophilic
surface can be wet and adsorbs water. A hydrophobic surface, on the other hand,
cannot be wet. Hydrophilic and hydrophobic surfaces are abundant in nature and
in synthetic materials, both organic and inorganic in chemical composition.

Platform Technology

A familiar
example of a hydrophilic surface is a sponge that readily soaks up water. By
contrast, many plant leaves and flower petals are hydrophobic, as are insect
parts and bird feathers. Synthetic hydrophobic surfaces include ScotchgardTM
treated fabric, Teflon® coated metal, or Rain-X® coated glass. On a hydrophobic
surface, water beads up and can move around without being absorbed by the solid
material that it is resting on.

Engineering Inspired by Nature

But there is
more. So-called superhydrophobic
surfaces are also found in nature and can now be replicated in the lab. The
lotus leaf and rose petal, for example, exhibit superhydrophobicity. Here water
droplets form almost perfect spheres with hardly any contact with the
underlying solid surface. This makes the liquid even easier to move and
manipulate.

The synthesis
of superhydrophobic surfaces has recently been made possible by advances in
nanotechnology and mPhase is leading the way to better understand and create
materials and devices incorporating these unique surface properties.

49

---

Enormous Application Possibilities

As mPhase's
research and development efforts evolve, in addition to silicon materials, the
ability to control the surface properties of materials can be extended to other
substances such as polymers, ceramics, metals and fibers as examples, providing
opportunities for our platform technology to be used in a range of potential
applications such as energy storage and power management for portable
electronics and microelectronics, self-cleaning surfaces, filters for water
purification or desalination systems, materials for environmental remediation
that separate liquids or solvents, and other situations where the control of
the interaction of a solid surface exposed to a liquid is vitally important.

Building a Better Battery

Battery
technology has changed little in its fundamentals over the past 150 years. As a
result, ordinary batteries begin dissipating energy as soon as they are
assembled and therefore have limited shelf life. Chemistries are fixed inside
the package so the user cannot interact with the contents to program
functionality. The size and form of batteries have not kept pace with the
miniaturization of electrical components, microprocessors and integrated
circuits. As a result, the optimal implementation of an electronic device is
not always achieved. Some batteries contain chemicals that are not considered
safe or environmentally friendly ("green"). This makes disposal a potential
issue.

mPhase is
challenging this convention by using their proprietary superhydrophobic porous
silicon membrane technology as the basis to build the Smart NanoBattery
providing Power On CommandTM.

Infinite Shelf Life & Improved Power
Management

Superhydrophobicity
initially keeps the liquid electrolyte physically separated from the solid
electrodes of the battery, thus preventing the chemical reactions from
occurring that cause the battery to provide power. This gives the Smart
NanoBattery the benefit of potentially infinite shelf life.

A conventional
battery loses some capacity while sitting on the shelf in its package or stored
in an electronic or electrical device, even before being used for the first
time. On the other hand, the Smart NanoBattery is built so that it is inactive
and remains that way indefinitely until it is turned on. No power is lost to
self-discharge or leakage current prior to activation. When needed, the Smart
NanoBattery can be activated on command via the phenomenon of electrowetting.
The surface properties of the porous silicon membrane are selectively
controlled to shift instantly from a superhydrophobic to hydrophilic state. In
other words, electrowetting acts as the triggering mechanism.

By
incorporating the phenomenon of electrowetting on nanostructured surfaces into
a revolutionary way of storing energy, the Smart NanoBattery provides power to
portable electronic and microelectronic devices exactly when and where it is
needed. It is an alternative and an augmentation to conventional batteries,
still converting stored chemical energy into usable electrical energy, but in a
way that is potentially more reliable, more versatile, more environmentally
friendly, and less expensive than the industry norm.

New Products developed during Fiscal Year
2009

mPhase has
successfully fabricated and demonstrated its first 3-volt lithium-based based
upon a mechanical and industrial engineering design allowing manual instead of
electrical activation by the user, a feature known as Power on CommandTM. The
battery will be used as a reserve battery in the Company's new emergency
flashlight being developed by and Co-Branded with Porsche Design Studio that
designs high-end accessory products for the Porsche automobile company. By
separation of the electrolyte in a proprietary pouch that is triggered by a
patent-pending designed trigger mechanism, the battery also has a shelf life
far longer than conventional batteries. The Company has completed a prototype
design and is anticipating commercial production and distribution of its
emergency flashlight during the third quarter of fiscal year 2010.

50

---

Delivering Guaranteed Power on Command

mPhase is
exploring military and commercial applications of smart surfaces in which the
properties can be accurately and precisely controlled down to the nanometer
scale. Electrowetting allows the switching from a hydrophobic to hydrophilic
state as a result of an electronic stimulus.

The Smart
NanoBattery, mPhase's first smart surface product, has a unique architecture
that enables a shelf life of decades, remote activation, programmable control,
scalable manufacturing, and adaptability to multiple configurations. The value
proposition to the end user is to have a source of energy or power that is
literally always ready - reliable, convenient, low cost - a battery guaranteed
to work at full capacity when and where needed

The Smart
NanoBattery can conceivably supply power "on command"to a wide variety of portable electronic and
microelectronic devices used in military, medical, industrial, and consumer
applications.

mPhase has
already proven that the battery works in lab tests as well as in a significant
field test conducted for the U.S. Army as part of a guided munitions project.
The relationship with the Army also includes a $850,000 funded project to
develop a battery for a mission critical computer memory backup application.
The target is a small footprint, 3-volt lithium battery with a minimum shelf
life of 20 years and uninterruptible power output during this time period. No
other battery technology available today can deliver the long-term performance
requirements specified by the U.S. Army for this application.

The Smart
NanoBattery can potentially be designed to accommodate a variety of
sophisticated portable electronic and microelectronic devices including next-
generation cell phones and PDAs, handheld gaming devices, wireless sensor
systems, RFID tags, high-tech flashlights and beacons, health alert alarms, and
non- implantable and implantable medical devices such as pacemakers.

Initial
applications will address the need to supply emergency and backup power to a
range of products for defense and security, with future applications in the
commercial and consumer arenas.

As its first
commercial product, mPhase is developing an emergency flashlight using a
simplified version of the Smart NanoBattery with a patent-pending breakable
separator in place of the electrowettable membrane. The emergency flashlight is
envisioned as a compact device that would be activated with a simple
push-button switch to provide Power On CommandTM in the event of an emergency.
The device would be ideal for storing in the glove compartment of a car, on
boats, trains or planes, coupled with fire extinguishers, or packed with
safety, first aid and survival kits.

Electrowetting
is the physical phenomenon by which a voltage is used to change the wetting
properties of a liquid/solid interface. An example of this is a water droplet
on a hydrophobic (water repelling) surface. A water droplet will minimize its
contact with such a surface. In its battery application, mPhase uses
electrowetting as a new technique to activate a battery once it is ready for
first time use.

TWELVE MONTHS ENDED
JUNE 30, 2009 VS. JUNE 30, 2008

Revenues. Total revenues for the year ended June
30, 2009 increased from $112,928 in 2008 to $186,579 in 2009. The Revenue
for the FYE was derived from the testing of the Company's nanotechnology
battery

Cost of sales.
Cost of sales decreased  $949 for the year ended June 30, 2009.
In addition, grants and fees received in connection with our Nanotechnology
power cell have relatively low associated cost of sales.

Research and
Development. Research and development expenses
were $1,255,665 for the year ended June 30, 2009 as compared to $988,091 in the
year ended June 30, 2008, an increase of $267,574. During the year, as a result
of the refocus of efforts exclusively into the nanotechnology battery research
cost dropped significantly.

General and
Administrative Expenses. Selling, general and
administrative expenses were $9,554,190 for the year ended June 30, 2009 up
from $4,031,618 for the comparable period in 2008, an increase of $5,522,572.
During fiscal year ended June 30, 2009, the Company incurred non-cash charges
amounting to $7,596,963 for stock based compensation awarded to officers,
employees and consultants. During fiscal year ended June 30, 2008, such charges
amounted to $185,874 ;an increase of $7,411,089 in fiscal year ended June 30,
2009. This was partially offset by the reduction of salaries of employees in
September of 2008 resulting in lower payroll of approximately $229,963 as
compared to $600,000 for fiscal year ended June 30, 2008. Expenses were reduced
across the board, including a reduction in legal expense of $99,980, marketing
related expenses of $30,770 and rent expense of $102,049.

Other Income and Expense.
The current FYE 2009
  reflects non-cash charges of $380,172 for reparations, and net settlement
  income of $141,266. During the prior FYE 2008, reparation expense amounted to
  $392,038 and settlement income was $200,890. In addition during FYE 2009, the
  Company realized a non-cash net  loss of approximately $2,766,554 compared to
  a credit to earnings of $2,411,648 in FYE 2008 resulting from the issuance and
  the changes in the derivative liability values relative to convertible debt.
  The current FYE 2009 includes a gain resulting from the change in derivative
  value of $617,592 offset in part by amortization of debt discount, stock
  issuance costs and other charges amounting to $3,014,927. This compares to a
  gain resulting from the change in derivative value of $4,410,860 offset in
  part by amortization of debt discount, stock issuance cost and other charges
  amounting to $1,899,212 as well as a non-cash interest charge of $100,000 in
  FYE 2008.

Net loss. mPhase recorded a net loss of $15,096,377
for the year ended June 30, 2009 as compared to a loss of $3,383,821 for
the same period ended June 30, 2008. This represents a loss per common share of
($.03) in 2009 as compared to $(.01) in 2008, based upon weighted average common
shares outstanding of 592,455,950 and 405,032,339 during the periods ending June 30,
2009 and June 30, 2008 respectively.

51

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TWELVE MONTHS ENDED
JUNE 30, 2008 VS. JUNE 30, 2007

Revenues. Total revenues for the year ended June
30, 2008 decreased from $153,504 to $112,928. The decrease was primarily
attributable the phasing out of Company's IPTV products. Revenue for the FYE
was derived from the testing the Company's nanotechnology battery

Cost of sales.
Cost of sales was declined by approximately $89,000 for the year ended June 30,
2008. The decrease results from the shift in strategy related to the IPTV
segment and the sale of component parts (POTS Splitters etc) to an IPTV
solution system based product such as (Comstar/Odessa). In addition, advisory
fees received in connection with our Nanotechnology power cell have no
associated cost of sale.

Research and
Development. Research and development expenses
were $988,091 for the year ended June 30, 2008 as compared to $6,393,215 in the
year ended June 30, 2007, a decrease of $5,405,124. During the year, as a
result of the refocus of efforts exclusively into the nanotechnology battery
research cost dropped significantly. The phasing out of research efforts
relative to IPTV and the magnetometer reduced cost by approximately $3.1
million and $1.2 million, respectively. In addition, included in 2008 results,
is the reversal of a $400,000 accrual recorded in June of 2007, after a
reassessment of our strategy related to the Magnetometer and the lack of a
contractual obligation.

General and
Administrative Expenses. Selling, general and
administrative expenses were $4,031,618 for the year ended June 30, 2008 down
from $8,684,053 for the comparable period in 2007, a decrease of $4,652,435.
During fiscal year ended June 30, 2008, the company incurred non-cash charges
amounting to $185,874 for stock based compensation awarded to officers,
employees and consultants. During fiscal year ended June 30, 2007, such charges
amounted to $3,363,218 a decrease of $3,016,233. In addition, the number of
employees decreased by 15 resulting in lower payroll of approximately $600,000
and reduced level of expenses across the board including: legal $400,000,
marketing related $250,000 and travel $320,000.

Other Income and
Expense. The current FYE 2008 reflects non cash
charges of $392,038 for reparations, $505,910 charges related to the impairment
of Granita Inventory and net settlement income of $200,890 During the prior FYE
2007, reparation expense amounted to $1,874,020 and settlement income was
$336,009.In addition, during FYE 2008, the Company realized a non-cash net
gains of approximately $2,411,648 resulting from the issuance and the changes
in value relative to convertible debt. Included is a gain resulting from the
change in derivative value of $4,410,860 offset in part by amortization of debt
discount, stock issuance cost and other charges amounting to $1,899,212 as well
as a non cash interest charge of $100,000

Net loss. mPhase recorded a net loss of
$3,383,821
million for the year ended June 30, 2008 as compared to a loss of $16.9 million
for the same period ended June 30, 2007. This represents a loss per common
share of ($.01) in 2008 as compared to $(.05) in 2007, based upon weighted
average common shares outstanding of 405,032,339 and 310,395,562 during the
periods ending June 30, 2008 and June 30, 2007 respectively.

52

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CURRENT PLAN OF OPERATIONS

The Company is currently finalizing the design and development of its
first generation emergency flashlight product containing its manually-activated
reserve battery. The Company expects that limited commercial production and
distribution for sale of such flashlight will occur not later than the third
quarter of fiscal year 2010.

Expanded Market Potential for Proprietary
Membrane Technology -

The core
membrane technology used to enable the Smart NanoBattery's propriety membrane
design can potentially be used to develop other non-power source applications
and products. The Company's market potential for using the membrane design of
this patent pending core technology broadens the application areas outside the
portable power energy field.

The Company's
permeable membrane design consisting of both micro and nano scale silicon
features, that are coated with a monolayer chemistry used to repel liquids. The
membrane works using microfluidics principle that permits the dynamic control
of surfaces when interacting with liquids, and as a result, the membrane can be
tuned to filter out certain types of materials. In the reserve battery
application, the properties of the membrane are used to create a super hydrophobic
that prevents the batteries electrolyte from coming into contact with the dry
electrodes of the battery until activation. In a similar way, the membrane can
be designed so that it can control the passing of liquids through the pores of
the membrane, acting as a filter, allowing and restricting materials to pass
through the membrane. This ability opens up the potential to use the membrane's
design in new configurations for applications that require controlled filtering
of materials used in the health, environmental, food services as well as other
industries.

RESEARCH AND DEVELOPMENT

mPhase
throughout its history has outsourced its research and development activity
with respect to all of its product lines. The Company engaged the Bell Labs
division of Lucent Technologies in February of 2004 to development a power cell
using the science of nanotechnology. The Company terminated its development
efforts with Lucent Bell Labs in fiscal years 2008 with respect to micro power
cell products using the science of nanotechnology since the facilities at Bell
Labs were only able to provide development of zinc based batteries. The Company
has determined that in order to develop a commercially viable product that
higher energy lithium based batteries are required and has established a
research relationship with Rutgers University that has facilities capable of
handling development of lithium batteries.

From March of
2005 through March of 2007, the Company pursuant to the terms of a Project
Development Agreement engaged Bell Labs to development a magnetometer or
electronic sensor products using the science of nanotechnology. Such Project
Development Agreement was not renewed by the Company in order to conserve
financial resources. No further development has occurred on the magnetometer,
however, the Company, believes that the intellectual property created may have
significant value in the future depending upon further scientific progress in
the field and market developments.

Since
inception, but prior to the end fiscal year 2006, the Company incurred $13.5
million for research and development conducted by Georgia Tech Research
Corporation in connection with its legacy Traverser DVDDS technology that was a
proprietary end to end solution of hardware and software enabling
telecommunications service providers to delivery broadcast television,
high-speed internet and voice over copper telephone lines In fiscal year 2003
the Company began the transition of its product to development of a carriers
standard open platform using middleware platform and transferred its research
and development from Georgia Tech Research Corporation to the Bell Labs
division of Lucent Technologies Inc. In May of 2007, the Company decided not to
renew its Project Development Agreement for its TV+ solution with Bell Labs and
chose a number of new software vendors to finalize its IPTV solution. The
Company incurred research and development expenses with Lucent for fiscal years
ended June 30, 2007 and 2006 of $2.3 million and $4.4 million. It should be noted
that all such expenditures during with Lucent/Bell Labs in FYE 2007, have been
in connection with Nanotechnology.

During the
year ended June 30, 2008, the Company incurred research and development
expenses of $188,000 related to the development IPTV solutions compared to $4.1
million for the same period ended June 30, 2007. In addition the Company
incurred research and development expenses for the fiscal year June 30, 2008 of
$800,000 for its nanotechnology products as compared to $2.3 million for fiscal
year ended June 30, 2007.

The amount of research and development costs the Company has
expended from its inception through June 30, 2009 is $60,216,173. During the
fiscal year ended June 30, 2009, the Company incurred research and development
expenses of $1,225,655 all of which was in connection with its nanotechnology,
manually activated battery and emergency flashlight products.

STRATEGIC ALLIANCES IMPLEMENTED

The Company
and Lucent share jointly in certain intellectual property developed with respect
to nanotechnology products. The Company has established a working relationship
with Rutgers University for development and testing of Lithium based batteries.
In addition, the Company has a co-branding agreement with Porsche Design Studio
for its emergency flashlight product.

53

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CRITICAL ACCOUNTING POLICIES

RESEARCH AND DEVELOPMENT

Research and development costs are charged to
operations as incurred in accordance with Statement of Financial Accounting
Standards ("SFAS"), No.2, "Accounting for Research and Development Cost."

OPTIONS,
  WARRANTS AND OTHER CONVERTIBLE EQUITY INSTRUMENTS

STOCK BASED COMPENSATION

On July 1, 2005, the Company adopted the provisions of
  Financial Accounting Standards Board Statement No. 123R,

MATERIAL EQUITY INSTRUMENTS

The Company has material equity instruments including
  Convertible Debentures and Convertible Notes that are accounted for as
  Derivative liabilities (SEE BELOW) and options and warrants that are evaluated
  quarterly for potential reclassification as liabilities pursuant to EITF 00-19
  (SEE ALSO NOTE 8 "Stockholders Equity" under the caption "Other Equity"). The
  Company utilized a sequencing method prescribed by EITF 00-19, based upon
  applying shares available to contracts with the earliest inception date first.
  During the fiscal year ended June 30, 2008 the Company reclassified contracts
  for warrants to purchase 12,604,168 shares at fixed prices ranging from $.13
  to $.15 per share to liabilities.

The liability was recorded at the fair market
  value, such estimated value, as restated, was based upon the contractual life
  of the free standing warrants, using the Black Sholes pricing model, based on
  the following weighted average assumptions: annual expected return of 0%, an
  average life of 5 years, annual volatility 81% and a risk-free interest rate
  2.25%. At the issuance date of the free standing warrants, such warrants were
  issued during the fourth quarter of fiscal June 30, 2008; the estimated value
  approximated $1,006,200 and as recalculated on the quarterly measurement
  dates, at June 30, 2008 the estimated value approximated $433,300. During
  fiscal year ended 2009, the estimated value was determined to no longer be
  material. The net change in the liability was credited to the
  change in derivative value in the Consolidated Statement of Operations for the
  Fiscal years ended June 30, 2008 and 2009 for $572,900 and $433,300,
  respectively, for each of these periods in accordance FASB Standards
  Codification Topic 815 (previously known EITF 00-19).
  Effective May, 2009, warrants to
  purchase 11,111,112 shares, and effective September, 2009, warrants to
  purchase 1,493,056 shares; representing all of the contracts for warrants to
  purchase 12,604,168 shares that were reclassified to liabilities during the
  fiscal year ended June 30, 2008, were reclassified to permanent equity.
  Subsequent to September 30, 2009 the Company has not entered into, and
  presently the Company does not have, any have contracts for warrants or other
  equity instruments subject to reclassification to liabilities as prescribed by
  FASB Standards Codification Topic 815 (previously known EITF 00-19),

DERIVATIVE FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards (SFAS) No. 133,
  "Accounting for Derivative Instruments and Hedging Activities," as amended and
  EITF Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed
  to, and Potentially Settled in, a Company's Own Stock" require all derivatives
  to be recorded on the balance sheet at fair value. The conversion
  features of the convertible debentures are embedded derivatives and are
  separately valued and accounted for on our balance sheet with changes in fair
  value recognized during the period of change as a separate component of other
  income/expense. Fair values for exchange-traded securities and derivatives are
  based on quoted market prices. The pricing model we use for determining fair
  value of our derivatives is the Black-Scholes Pricing Model. Valuations
  derived from this model are subject to ongoing internal and external
  verification and review. The model uses market-sourced inputs such as interest
  rates and stock price volatilities. Selection of these inputs involves
  management's judgment and may impact net income.

REPARATION EXPENSE

As an
incentive for additional equity contributions, the Company will from time to
time, adjust the cost of past private purchases of common stock through the
issuance of additional shares in such magnitude as to reduce an investor's cost
to an average price that more closely approximates current market value. The
market value of additional shares issued without cash investment is charged to
Reparation Expense, which is included in Other Expenses.

MATERIAL RELATED PARTY TRANSACTIONS

The Company
records material related party transactions. The Company incurs costs for
engineering, design and production of prototypes and certain administrative
functions from Microphase Corporation and the purchase of finished goods,
primarily consisting of DSL splitter shelves and filters, from Janifast
Limited. In March of 2009, Janifast Ltd ceased operations and began a process
of liquidation owing to its financial condition as well as the global financial
crisis that began in September of 2008.

The Company
has incurred costs for obtaining transmission rights. This enabled the Company
to obtain re-transmission accreditation to proprietary television content that
the Company plans to provide with its flagship product, the Traverser within
its incorporated joint venture mPhase Television.Net, in which the Company owns
a 56.5% interest.

Directors that
are significant shareholders of Janifast Limited include Messrs Ronald A.
Durando, Gustave T. Dotoli, and the Chairman of Microphase Corporation Necdet
F. Ergul.

Mr. Abraham Biderman
is a Managing Director of Eagle Advisers, Inc., a firm that performs investment
banking services for the Company and was employed until September 30, 2003 by
our former investment banking firm Lipper & Company.

Mr. Durando,
the President and CEO of mPhase, owns a controlling interest and is a director
of Janifast Limited. Mr. Durando is Chief Operating Officer and Mr. Dotoli is
an officer of Microphase Corporation. Mr. Ergul, who was the chairman of the
board of mPhase until November 2007, owns a controlling interest and is a
director of Microphase Corporation and Janifast Ltd. Microphase, Janifast and
Hart Telephone have converted significant liabilities to equity in fiscal years
June 30, 2001, 2002 and in the current fiscal year.

The following summarizes compensation to
related parties for the fiscal year ended June 30, 2006:

|                                    |  |         |           |        |   |           |  |          |         |        |   |         |  |          |         |            |   |                 |  |   |           |  |   |           |  |   |           | 
|----------------------------------- |  | ------- | --------- | ------ | - | --------- |  | -------- | ------- | ------ | - | ------- |  | -------- | ------- | ---------- | - | --------------- |  | - | --------- |  | - | --------- |  | - | --------- | 
|                                    |  | Durando |           | Dotoli |   | Ergul     |  | Biderman |         | Smiley |   | Guerino |  | Janifast |         | Microphase |   | TOTAL
  RELATED | 
|                                    |  |         |           |        |   |           |  |          |         |        |   |         |  |          |         |            |   |                 | 
|Consulting/Salary                   |  | $       | 643,600   |        | $ | 357,000   |  |          |         |        | $ | 39,000  |  | $        | 175,000 |            |   |                 |  |   |           |  |   |           |  | $ | 1,214,600 | 
|Directors Stipend                   |  | $       | 7,500     |        | $ | 7,500     |  |          |         |        |   |         |  |          |         |            | $ | 7,500           |  |   |           |  |   |           |  | $ | 22,500    | 
|Rent                                |  |         |           |        |   |           |  |          |         |        | $ | 36,000  |  |          |         |            |   |                 |  |   |           |  | $ | 204,444   |  | $ | 240,444   | 
|Cost of
  Sales/Royalty             |  |         |           |        |   |           |  |          |         |        |   |         |  |          |         |            |   |                 |  | $ | 770,441   |  | $ | 32,014    |  | $ | 802,455   | 
|Loan Interest                       |  |         |           |        |   |           |  |          |         |        |   |         |  |          |         |            |   |                 |  |   |           |  | $ | 10,800    |  | $ | 10,800    | 
|R&D                                 |  |         |           |        |   |           |  |          |         |        |   |         |  |          |         |            |   |                 |  |   |           |  | $ | 197,639   |  | $ | 197,639   | 
|SG&A                                |  |         |           |        |   |           |  |          |         |        |   |         |  |          |         |            |   |                 |  |   |           |  | $ | 86,923    |  | $ | 86,923    | 
|Estimated Value
  of Stock Issued   |  | $       | 1,260,000 |        | $ | 525,000   |  | $        | 210,000 |        | $ | 105,000 |  | $        | 331,213 |            |   |                 |  |   |           |  |   |           |  | $ | 2,431,213 | 
|Estimated Value
  of Options Issued |  | $       | 1,596,200 |        | $ | 836,400   |  | $        | 273,740 |        | $ | 85,890  |  | $        | 213,850 |            | $ | 56,990          |  |   |           |  |   |           |  | $ | 3,063,070 | 
|Reparations
  Shares                |  |         |           |        |   |           |  |          |         |        |   |         |  |          |         |            |   |                 |  | $ | 834,633   |  | $ | 728,434   |  | $ | 1,563,067 | 
|Totals                              |  | $       | 3,507,300 |        | $ | 1,725,900 |  | $        | 483,740 |        | $ | 265,890 |  | $        | 720,063 |            | $ | 64,490          |  | $ | 1,605,074 |  | $ | 1,260,254 |  | $ | 9,632,711 | 

54

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The Following Summaries Compensation to
Related Parties for the Fiscal Year Ended June 30, 2007

|                                           |  |         |           |        |   |         |  |          |         |        |   |         |  |          |         |          |   |            |  |                 |       |  |   |         |  |   |         |  |   |           | 
|------------------------------------------ |  | ------- | --------- | ------ | - | ------- |  | -------- | ------- | ------ | - | ------- |  | -------- | ------- | -------- | - | ---------- |  | --------------- | ----- |  | - | ------- |  | - | ------- |  | - | --------- | 
|                                           |  | Durando |           | Dotoli |   | Ergul   |  | Biderman |         | Smiley |   | Guerino |  | Lawrence |         | Janifast |   | Microphase |  | TOTAL
  RELATED |      
|                                           |  |         |           |        |   |         |  |          |         |        |   |         |  |          |         |          |   |            |  |                 |      
|Consulting /
  Salary                      |  | $       | 393,600   |        | $ | 282,000 |  |          |         |        |   |         |  | $        | 200,000 |          |   |            |  |                 |       |  |   |         |  |   |         |  | $ | 875,600   | 
|Directors Stipend
  and Interest           |  | $       | 7,500     |        | $ | 7,538   |  | $        | 3,750   |        | $ | 3,750   |  | $        | 8,550   |          | $ | 3,750      |  | $               | 3,750 |  |   |         |  |   |         |  | $ | 38,588    | 
|Rent                                       |  |         |           |        |   |         |  |          |         |        |   |         |  |          |         |          |   |            |  |                 |       |  |   |         |  | $ | 60,000  |  | $ | 60,000    | 
|R&D                                        |  |         |           |        |   |         |  |          |         |        |   |         |  |          |         |          |   |            |  |                 |       |  |   |         |  | $ | 236,492 |  | $ | 236,492   | 
|Finders Fees
  (including common shares)   |  |         |           |        |   |         |  |          |         |        | $ | 520,000 |  |          |         |          |   |            |  |                 |       |  |   |         |  |   |         |  | $ | 520,000   | 
|Cost of Sales and
  SG&A                   |  |         |           |        |   |         |  |          |         |        |   |         |  |          |         |          |   |            |  |                 |       |  | $ | 110,912 |  | $ | 36,342  |  | $ | 147,254   | 
|Reparations and
  Stock Based Compensation |  | $       | 1,044,000 |        | $ | 555,000 |  | $        | 201,000 |        | $ | 16,800  |  | $        | 306,250 |          | $ | 14,700     |  |                 |       |  | $ | 138,462 |  |   |         |  | $ | 2,276,212 | 
|Totals                                     |  | $       | 1,445,100 |        | $ | 844,538 |  | $        | 204,750 |        | $ | 540,550 |  | $        | 514,800 |          | $ | 18,450     |  | $               | 3,750 |  | $ | 249,374 |  | $ | 332,834 |  | $ | 4,154,146 | 
|PacketPort.com
  legal expense             |  |         |           |        |   |         |  |          |         |        |   |         |  |          |         |          |   |            |  |                 |       |  |   |         |  |   |         |  | $ | 611,807   | 
|Total
  expense to related parties         |  |         |           |        |   |         |  |          |         |        |   |         |  |          |         |          |   |            |  |                 |       |  |   |         |  |   |         |  | $ | 4,765,953 | 

The Following Summaries Compensation to
Related Parties for the Fiscal Year Ended June 30, 2008

|                       |  |         |         |        |   |          |  |        |         |            |   |                 |  |   |         |  |   |           | 
|---------------------- |  | ------- | ------- | ------ | - | -------- |  | ------ | ------- | ---------- | - | --------------- |  | - | ------- |  | - | --------- | 
|                       |  | Durando |         | Dotoli |   | Biderman |  | Smiley |         | Microphase |   | TOTAL
  RELATED | 
|                       |  |         |         |        |   |          |  |        |         |            |   |                 | 
|Consulting / Salary    |  | $       | 393,600 |        | $ | 282,000  |  |        |         |            | $ | 200,000         |  |   |         |  | $ | 875,600   | 
|Interest               |  | $       | 19,490  |        | $ | 4,156    |  |        |         |            | $ | 18,752          |  |   |         |  | $ | 42,398    | 
|Rent                   |  |         |         |        |   |          |  |        |         |            |   |                 |  | $ | 60,000  |  | $ | 60,000    | 
|R&D                    |  |         |         |        |   |          |  |        |         |            |   |                 |  | $ | 28,151  |  | $ | 28,151    | 
|Finders Fees           |  |         |         |        |   |          |  | $      | 188,472 |            |   |                 |  | $ | 188,472 |  |   |           | 
|Cost of Sales and SG&A |  |         |         |        |   |          |  |        |         |            |   |                 |  | $ | 30,089  |  | $ | 30,089    | 
|                       |  |         |         |        |   |          |  |        |         |            |   |                 |  |   |         |  |   |           | 
|Totals                 |  | $       | 413,090 |        | $ | 286,156  |  | $      | 188,472 |            | $ | 218,752         |  | $ | 118,240 |  | $ | 1,224,710 | 

Summary of compensation to related parties for the Fiscal Year Ended June 30,
2009

|                                            | Durando    | Dotoli     | Smiley     | Biderman  | Microphase | Total      
|------------------------------------------- | ---------- | ---------- | ---------- | --------- | ---------- | -----------
|Consulting / Salary                         | $275,718   | $229,000   | $182,292   |           |            | $687,010   
|Interest                                    | $61,473    | $62,514    | $21,048    |           |            | $145,035   
|Rent                                        |            |            |            |           | $36,000    | $36,000    
|G&A                                         |            |            |            |           | $16,773    | $16,773    
|R&D                                         |            |            |            |           | $150,000   | $150,000   
|Finders Fees                                |            |            |            | $80,000   |            | $80,000    
|Stock based compensation (shares issued)*   | $1,541,700 | $913,600   | $571,000   | $228,400  |            | $3,254,700 
|Stock based compensation (options issued)** | $1,944,912 | $1,166,947 | $700,168   | $77,796   |            | $3,889,823 
|Total compensation                          | $3,823,803 | $2,372,061 | $1,474,508 | $386,196  | $202,773   | $8,259,341 
|                                            |            |            |            |           |            |            
|Common stock issued*                        | 27,000,000 | 16,000,000 | 10,000,000 | 4,000,000 |            | 57,000,000 
|Options issued (5years @ 5 cents)**         | 50,000,000 | 30,000,000 | 18,000,000 | 2,000,000 |            | 100,000,000

55

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Amounts due to Officers 
For the year ended June 30, 2009

| |  |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  |  | 

|                                      |  |               |          |              |   |                 |   |       |         |   |   |           |  
|------------------------------------- |  | ------------- | -------- | ------------ | - | --------------- | - | ----- | ------- | - | - | --------- | -
|                                      |  | RON
  DURANDO |          | GUS
  DOTOLI |   | MARTIN
  SMILEY |   | TOTAL |        
|                                      |  |               |          |              |   |                 |   |       |        
|NOTES PAYABLE OFFICERS                |  |               |          |              |   |                 |   |       |         |   |   |           |  
|BALANCE 6/30/07                       |  | $             | 85,000   |              | $ | 75,000          |   | $     | 161,000 |   | $ | 321,000   |  
|July 2007 Advances (Payments)         |  | $             | (30,000  | )            | $ | (75,000         | ) |       |         |   | $ | (105,000  | )
|August 2007 Advances (Payments)       |  | $             | 35,000   |              | $ | 75,100          |   | $     | 35,000  |   | $ | 145,100   |  
|Sept 2007 Advances (Payments)         |  | $             | 110,000  |              |   |                 |   |       |         |   | $ | 110,000   |  
|Assumption of Note Payable- Sovereign |  | $             | 110,000  |              |   |                 |   |       |         |   | $ | 110,000   |  
|Oct 2007 Advances (Payments)          |  | $             | 25,000   |              | $ | 25,000          |   | $     | 25,000  |   | $ | 75,000    |  
|Nov 2007 Advances (Payments)          |  | $             | 76,000   |              | $ | 36,000          |   | $     | 11,000  |   | $ | 123,000   |  
|Dec 2007 Advances (Payments)          |  | $             | 25,000   |              | $ | 0               |   | $     | 0       |   | $ | 25,000    |  
|                                      |  |               |          |              |   |                 |   |       |         |   |   |           |  
|Transferred to Deferred Comp          |  | $             | (148,000 | )            | $ | (123,500        | ) |       |         |   | $ | (271,500  | )
|Jan 2008 Advances (Payments)          |  | $             | 2,000    |              | $ | 32,000          |   |       |         |   | $ | 34,000    |  
|Feb 2008 Advances (Payments)          |  | $             | 0        |              | $ | 55,000          |   | $     | 72,038  |   | $ | 127,038   |  
|Mar 2008 Advances (Payments)          |  | $             | (180,000 | )            | $ | (47,500         | ) | $     | (40,000 | ) | $ | (267,500  | )
|April 2008 Advances (Payments)        |  | $             | (110,000 | )            | $ | (52,100         | ) | $     | (45,000 | ) | $ | (207,100  | )
|                                      |  |               |          |              |   |                 |   |       |         |   |   |           |  
|May 2008 Advances (Payments)          |  |               |          |              |   |                 |   | $     | (15,000 | ) | $ | (15,000   | )
|                                      |  |               |          |              |   |                 |   |       |         |   |   |           |  
|June 2008 Advances (Payments)         |  |               |          |              |   |                 |   |       |         |   |   |           |  
|BALANCE Notes Payable Officers        |  | $             | 0        |              | $ | 0               |   | $     | 204,038 |   | $ | 204,038   |  
|                                      |  |               |          |              |   |                 |   |       |         |   |   |           |  
|Deferred Compensation                 |  | $             | 278,000  |              | $ | 323,500         |   |       |         |   | $ | 601,500   |  
|                                      |  |               |          |              |   |                 |   |       |         |   |   |           |  
|Due To Officers                       |  |               |          |              |   |                 |   |       |         |   |   |           |  
|BALANCE 6/30/07                       |  | $             | 188,400  |              | $ | 75,500          |   |       |         |   | $ | 263,900   |  
|Consulting Fee Earned -1st Qtr        |  | $             | 98,400   |              | $ | 70,500          |   |       |         |   | $ | 168,900   |  
|Consulting Fees Paid - 1st Qtr        |  | $             | (39,500  | )            | $ | (32,500         | ) |       |         |   | $ | (72,000   | )
|Consulting Fee Earned - 2nd Qtr       |  | $             | 98,400   |              | $ | 70,500          |   |       |         |   | $ | 168,900   |  
|Consulting Fees Paid - 2nd Qtr        |  | $             | (10,000  | )            | $ | (10,000         | ) |       |         |   | $ | (20,000   | )
|Consulting Fee Earned - 3rd Qtr       |  | $             | 98,400   |              | $ | 70,500          |   |       |         |   | $ | 168,900   |  
|Consulting Fees Paid - 3rd Qtr        |  | $             | (12,000  | )            | $ | (8,500          | ) |       |         |   | $ | (20,500   | )
|Consulting Fee Earned - 4th Qtr       |  | $             | 98,400   |              | $ | 70,500          |   |       |         |   | $ | 168,900   |  
|Consulting Fees Paid - 4th Qtr        |  | $             | (221,510 | )            | $ | (204,244        | ) |       |         |   | $ | (425,754  | )
|                                      |  |               |          |              |   |                 |   |       |         |   |   |           |  
|Balance Due to Officers               |  | $             | 298,990  |              | $ | 102,256         |   |       |         |   | $ | 401,246   |  
|                                      |  |               |          |              |   |                 |   |       |         |   |   |           |  
|Interest Payable                      |  | $             | 0        |              | $ | 0               |   | $     | 18,751  |   | $ | 18,751    |  
|                                      |  |               |          |              |   |                 |   |       |         |   |   |           |  
|Totals Payable to Officers            |  | $             | 576,990  |              | $ | 425,756         |   | $     | 222,789 |   | $ | 1,225,535 |  
|                                      |  |               |          |              |   |                 |   |       |         |   |   |           |  

Summary of amounts due to Officers 
For the year ended June 30, 2009

|                                                               |   | RON     |   | GUS     |   | MARTIN  |   |          
|-------------------------------------------------------------- | - | ------- | - | ------- | - | ------- | - | ---------
|Summary of payables
    to related parties as of June 30, 2009 |   | DURANDO |   | DOTOLI  |   | SMILEY  |   | TOTAL    
|Notes Payable                                                  | $ | 617,420 | $ | 450,756 | $ | 264,224 | $ | 1,332,400
|Due to Officers /
    Affiliates                               | $ | 0       | $ | 5,550   | $ |         | $ | 5,550    
|Interest Payable                                               | $ | 61,473  | $ | 62,514  | $ | 9,605   | $ | 133,592  
|                                                               |   |         |   |         |   |         |   |          
|Total Payable to
    Officers                                  | $ | 678,893 | $ | 518,820 | $ | 273,829 | $ | 1,471,542



LIQUIDITY AND CAPITAL RESOURCES

Through June 30, 2009, the Company has incurred development
stage losses totaling approximately $186,791,817  and had cash and cash
equivalents of $100,138. At June 30, 2009, mPhase had a working capital deficit
of $3,990,645 as compared to a working capital deficit of $3,853,019 as of June
30, 2008. The Company has a Convertible Debenture equity line of credit with JMJ
Financial that should enable the Company to raise $300,000 per month for the
next fiscal year. Draws under this facility commenced in March of 2008. The
Company believes this will be sufficient for its short-term liquidity. In the
longer term, we estimate that the Company will need to raise approximately $5-10
million of additional capital above the funds anticipated from the monthly
conversion by JMJ, to meet longer term liquidity needs through June 30, 2010.
Such monies would be necessary primarily to fund future expenditures for
commercialization of its SmartBattery products. Finally, depending upon sales
and margins in fiscal year 2010, additional capital may be required to fund a
portion of any growth necessary in operations.

Cash used in operating activities was $2,599,909 million
during the twelve months ended June 30, 2009. During such period, the cash used
by operating activities consists principally of the net loss ($15,096,377) less
non cash changes related to convertible debt issued and associated changes in
derivative value ($2,766,554) and the reduction of accounts payable ($275,321).
These amounts are offset in part by non-cash charges related to issuance of
common stock and options for services and reparation cost of $7,596,963 and
$432,172 respectively.

During the twelve-month period ended June 30, 2009, the
Company raised capital through private placements with accredited investors,
whereby the Company issued 72,333,333 million shares of the Company's common
stock, generating net proceeds to the Company of $720,000.

56

---

During the
twelve-month period ended June 30, 2008, the Company raised capital through
private placements with accredited investors, whereby the Company issued
24.6 million
shares of the Company's common stock, generating net proceeds to the Company of
$1,144,247 and generated $650,000 of funds through the conversion of
warrants into 11,111,113 shares of the Company's common stock.

As a result,
conversion of debt with related parties and strategic vendors during the
periods enumerated is as follows:

Equity Conversions of Debt and Other
Financial Instruments with Related Parties

|                                |  |      |           |      |  |      |  |  |      | 
|------------------------------- |  | ---- | --------- | ---- |  | ---- |  |  | ---- | 
|                                |  | 2007 |           | 2008 |  | 2009 | 
|                                |  |      |           |      |  |      | 
|Janifast:                       |  |      |           |      |  |      |  |  |      | 
|Number of
  shares              |  |      | 830,769   |      |  |      |  |  |      | 
|Number of
  warrants            |  |      | 0         |      |  |      |  |  |      | 
|Amount
  converted to equity    |  | $    | 108,000   |      |  |      |  |  |      | 
|Microphase Corporation:         |  |      |           |      |  |      |  |  |      | 
|Number of
  shares              |  |      | 0         |      |  |      |  |  |      | 
|Number of
  warrants            |  |      | 0         |      |  |      |  |  |      | 
|Amount
  converted to equity    |  | $    | 0         |      |  |      |  |  |      | 
|Strategic Vendor Conversions:   |  |      |           |      |  |      |  |  |      | 
|Number of
  shares              |  |      | 5,242,959 |      |  |      |  |  |      | 
|Number of
  warrants            |  |      | 0         |      |  |      |  |  |      | 
|Amount
  converted to equity    |  | $    | 1,996,561 |      |  |      |  |  |      | 
|Officers                        |  |      |           |      |  |      |  |  |      | 
|Number of
  shares              |  |      | 0         |      |  |      |  |  |      | 
|Number of
  warrants (A)        |  |      | 0         |      |  |      |  |  |      | 
|Amount
  converted to equity    |  | $    | 0         |      |  |      |  |  |      | 
|Total Related Party Conversions |  |      |           |      |  |      |  |  |      | 
|Number of
  shares              |  |      | 6,073,728 |      |  | NONE |  |  | NONE | 
|Number of
  warrants            |  |      | 0         |      |  |      |  |  |      | 
|Amount
  converted to equity    |  | $    | 2,104,561 |      |  |      |  |  |      | 

LOSSES DURING THE DEVELOPMENT STAGE AND
MANAGEMENT'S PLANS

Through June
30, 2009, the Company incurred development stage losses totaling approximately
$186.8 million and at June 30, 2009 had a working capital deficit of $3,990,645.
Funding in our tradition capital markets was difficult during FYE 2009.
Management of the Company desired to avoid unnecessary dilution by issuing
large amounts of equity at depressed prices to raise larger sums of cash.
Alternatively the Company was able to enter into Convertible Debt arrangements
with independent investors to provide liquidity and capital resources during
the year. Such arrangements should provide the Company with approximately
$300,000 per month through August of 2010. These arrangements will likely provide much of the working capital
anticipated to be needed during the next FYE. In addition and from time to time
during FYE 2009, the Company raised necessary working capital via bridge loans
from officers. Such loans have subsequently been repaid (see notes payable to
officers). The Company's ability to continue as a going concern and its future
success is dependent upon its ability to raise capital in the near term to: (1)
satisfy its current obligations, (2) continue its research and development
efforts, (3) continue its efforts to commercialize and sell and receive
military grants for its SmartBattery (4) commercialize and sell its emergency
flashlight containing its manually- activated reserve battery.

The Company is
currently focused upon development and commercialization of its emergency
flashlight "Always Ready" battery product as well as completing its Phase II
Army Grant to develop a single and multiple array of reserve batteries for a
computer backup source of power using the science of nanotechnology. The
Company believes that such battery has a much longer shelf life than
conventional batteries and will have significant commercial and military
applications. The Company has temporarily suspended, to conserve financial
resources, development of its magnetometer sensor devices also developed using
the science of nanotechnology. In addition, although the Company has suspended
all activity related to its IPTV business, it continues to believe that the
intellectual property created over years of development of its TV+ solution may
have significant value as the market for IPTV further develops.

On August 30,
2004, the Company entered into a Payment Agreement with Piper & Rudnick
LLC, its outside counsel in connection with the renegotiation of a Payment
Agreement effective June 30, 2004. The Company, currently owes $65,000 that is
overdue under the terms of such agreement.

57

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ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES
ABOUT MARKET RISKS

The Company is
not exposed to changes in interest rates as the Company has no floating rate
debt arrangements and no investments in certain held-to-maturity securities.
Under our current policies, we do not use interest rate derivative instruments
to manage exposure to interest rate changes. A hypothetical 100 basis point
adverse move in interest rates along the interest rate yield curve would not
materially affect the fair value of any financial instruments at June 30, 2008.
We believe that interest rate risks for our accounts receivable are
insignificant. Sales to customers are denominated in dollars. Accordingly, we
are not directly exposed to market risks from currency fluctuations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA

See pages beginning 73.

ITEM 8A.

Assessment of Internal ControlsEvaluation of Disclosure Controls and Procedures

The Company has implemented disclosure
  controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the
  Securities Exchange Act of 1934 (the Exchange Act''), that are designed to
  ensure that information required to be disclosed in the Company's Exchange Act
  reports are recorded, processed, summarized, and reported within the time
  periods specified in rules and forms of the Securities and Exchange
  Commission, and that such information is accumulated and communicated to our
  management, including our Chief Executive Officer and Chief Financial Officer,
  as appropriate, to allow timely decisions regarding required disclosure.

As of June 30, 2009, the management of the
  Company carried out an assessment, under the supervision of and with the
  participation of the Chief Financial Officer, of the effectiveness of the
  design and operation of our disclosure controls and procedures pursuant to
  Exchange Act Rules 13a-15(b) and 15d-15(b). As of the date of this assessment,
  the Chief Financial Officer initially concluded that the Company's disclosure
  controls and procedures were effective as of June 30, 2009; however we did
  note certain deficiencies considered to be a reportable condition which it
  described as a deficiency. In light of the restatements of the financial
  statements for the fiscal years ended June, 30, 2008 and 30, 2009, and the
  Consolidated Statements of Operations included in its nterim quarterly reports
  for the three months ended September 30, 2008; six months ended December 31,
  2008 and the nine months ended March 31, 2009; management has revised its
  conclusion and considers the condition identified at that time now to have
  been a material weakness.

Management has now determined the Companys
  disclosure controls and procedures were not effective as of June 30, 2009 .The
  Company's management performed additional accounting and financial analyses
  and other post-closing procedures including detailed validation work with
  regard to all the balance sheet account balances, additional analysis on
  income statement amounts and managerial review of all significant account
  balances and disclosures in the Annual Report on Form 10-K, to ensure that the
  Company's Annual Report and the financial statements forming part thereof are
  in accordance with accounting principles generally accepted in the United
  States of America. Accordingly, management believes that the financial
  statements included in this Annual Report, as restated, fairly present, in all
  material respects, the Company's financial condition, results of operations,
  and cash flows for the periods presented.

Management's Report on Internal Control
  over Financial Reporting

Management of the Company is responsible for
  establishing and maintaining adequate internal control over financial
  reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
  Exchange Act. The Company's internal control over financial reporting is a
  process designed to provide reasonable assurance regarding the reliability of
  financial reporting and the preparation of financial statements for external
  reporting purposes in accordance with accounting principles generally accepted
  in the United States of America. The Company utilizes the COSO Framework for
  internal control over financial reporting. Internal control over financial
  reporting includes those policies and procedures that (i) pertain to the
  maintenance of records that, in reasonable detail, accurately and fairly
  reflect the transactions and dispositions of the assets of the Company; (ii)
  provide reasonable assurance that transactions are recorded as necessary to
  permit preparation of financial statements in accordance with generally
  accepted accounting principles, and that receipts and expenditures of the
  Company are being made only in accordance with authorizations of management
  and directors of the Company; and (iii) provide reasonable assurance regarding
  prevention or timely detection of unauthorized acquisition, use, or
  disposition of the Company's assets that could have a material effect on the
  interim or annual financial statements.

58

---

Because of its inherent limitations,
  internal control over financial reporting may not prevent or detect
  misstatements. Also, projections of any evaluation of effectiveness to future
  periods are subject to the risk that controls may become inadequate because of
  changes in conditions, or that the degree of compliance with policies or
  procedures may deteriorate.

The Company's management assessed the
  effectiveness of the Company's internal control over financial reporting as of
  June 30, 2009. A material weakness is a deficiency, or a combination of
  deficiencies, in internal control over financial reporting, such that there is
  a reasonable possibility that a material misstatement of the Company's annual
  or interim financial statements will not be prevented or detected on a timely
  basis. Our evaluation initially concluded that the company had no material
  weakness which would result in the reasonable possibility of a material
  misstatement described above; yet it did bring certain matters to our
  attention and we noted that we consider being a reportable condition. In light
  of the restatements of the financial statements for the fiscal years ended
  June, 30, 2008 and 30, 2009, and the Consolidated Statements of Operations
  included in its Interim quarterly reports for the three months ended September
  30, 2008; six months ended December 31, 2008 and the nine months ended March
  31, 2009; management has revised its conclusion and considers the condition
  identified at that time now to have been a material weakness.

We noted that a condition which management
  now considers a material weakness existed because of the Company's lack of
  sufficient resources of sufficient resources of accounting personnel with an
  appropriate level of knowledge and experience commensurate with the
  increasingly expanding financial reporting requirements of the Company, in
  both scope and complexity, as promulgated by SEC and generally accepted
  accounting principles (GAAP). The Company has obtained, on a fee basis, an
  outside consultant to act as an accounting manager to assist the Company with
  the accounting of convertible debentures and derivatives.

Management concluded that the Company did
  not maintain an effective level of internal control over financial reporting
  as of June 30, 2009.

This report does not include an attestation
  report of our registered public accounting firm regarding our internal
  controls over financial reporting. The disclosure contained under this Item 8A
  was not subject to attestation by our registered public accounting firm
  pursuant to temporary rules of the SEC that permit us to provide only the
  disclosure under this Item 8A in this annual report.

Changes in Internal Control over
  Financial Reporting

The Company has made steps toward the
  improving the internal control condition described above. The Company has
  obtained, on a fee basis, an outside consultant to act as an accounting
  manager to assist the Company with the accounting of convertible debentures
  and derivatives. However, Mphase Technologies is a small company with a total
  staff of approximately 9 employees and consultants. This size limits and may
  continue to limit, the Company's ability to provide for adequate backup of
  financial personnel Accordingly, efforts individually and in the aggregate
  maybe insufficient to fully eliminate the condition that could adversely
  affect the organization's ability to record, summarize and report financial
  data consistent with the assertions of management in the financial statements.

There were no changes in our internal
  control over financial reporting during the fiscal year ended June 30, 2009
  that have materially affected, or are reasonably likely to materially affect,
  our internal controls over financial reporting.

59

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

Executive
officers are selected by the Board of Directors. No family relationships exist
between any of the executive officers or directors. The following table sets
forth certain information with respect to each person, who is an executive
officer or director. mPhase's executive officers and directors as of June 30,
2008 are as follows:

|                                           |  |     |  |                                       
|------------------------------------------ |  | --- |  | --------------------------------------
|NAME                                       |  | AGE |  | POSITION(S)                           
|                                           |  |     |  |                                       
|Ronald A.
  Durando                        |  | 52  |  | Chief
  Executive Officer and Director
|Gustave T. Dotoli
  (2)                    |  | 73  |  | Chief
  Operating Officer and Director
|Martin
  Smiley                            |  | 62  |  | Chief
  Financial Officer             
|OUTSIDE
  DIRECTORS                        |  |     |  |                                       
|Anthony H.
  Guerino (1)(2)                |  | 63  |  | Director                              
|Abraham
  Biderman (1)(2)                  |  | 62  |  | Director                              
|Dr. Victor
  Lawrence                      |  | 60  |  | Director                              
|(1) Member
  of the Audit Committee        |  |     |  |                                       
|(2) Member
  of the Compensation Committee |  |     |  |                                       

RONALD A.
DURANDO is a co-founder of mPhase and has served as the Company's President,
Chief Executive Officer and Director since its inception in October 1996. Since
1994, Mr. Durando has been an Officer of Microphase Corporation. Mr. Durando is
not a Director of Microphase Corporation. From 1986-1994, Mr. Durando was
President and Chief Executive Officer of Nutley Securities, Inc., a registered
broker-dealer. In addition, Mr. Durando is also Chairman of the Board of
Janifast, Ltd., a Hong Kong company, for operational and manufacturing
companies in China. Mr. Durando is also President and a Director of
PacketPort.com, Inc. ("Packet Port").

GUSTAVE T.
DOTOLI has served as mPhase's Chief Operating Officer since October 1996 and
has been a Director since October 1996. Prior to joining the Company, Mr.
Dotoli was President and CEO of State Industrial Safety, Inc. from 1986-1996.
In addition, Mr. Dotoli currently serves as the Vice President of Corporate
Development of Microphase Corporation. Mr. Dotoli is also a Director and Vice
President of Packet Port. He is formerly the President and Chief Executive
Officer of the following corporations: Imperial Electro- Plating, Inc., World
Imports USA, Industrial Chemical Supply, Inc., SISCO Beverage, Inc. and Met
Pack, Inc. Mr. Dotoli received a B.S. in Industrial Engineering from Fairleigh
Dickenson University in 1959.

ANTHONY H.
GUERINO has been a member of the Board since February 23, 2000. Since December
1997, Mr. Guerino has been an attorney in private practice in New Jersey. Prior
thereto, Mr. Guerino served as a judge of the Newark Municipal Courts for over
twenty (20) years, periodically sitting in the Essex County Central Judicial
Processing Court at the Essex County Courthouse. Mr. Guerino has been a
chairperson for and member of several judicial committees and associations in
New Jersey, and has been an instructor for the Seton Hall School of Law's Trial
Moot Court Program.

ABRAHAM
BIDERMAN has been a member of the Board since August 3, 2000. He currently is
the Managing Director of Eagle Advisers, Inc, a small investment banking firm.
From 1990 through September 30, 2003, Mr. Biderman was been employed by Lipper
& Co. as Executive Vice President; Executive Vice President, Secretary and
Treasurer of the Lipper Funds; and Co-Manager of Lipper Convertibles, L.P.
Prior to joining Lipper & Co. in 1990, Mr. Biderman was Commissioner of the
New York City Department of Housing, Preservation and Development from 1988 to
1989 and Commissioner of the New York City Department of Finance from 1986 to
1987. He was Chairman of the New York City Retirement System from 1986 to 1989.
Mr. Biderman was Special Advisor to former Mayor Edward I. Koch from 1985 to
1986 and assistant to former Deputy Mayor Kenneth Lipper from 1983 to 1985. Mr.
Biderman is a Director of the Municipal Assistance Corporation for the City of
New York. Mr. Biderman graduated from Brooklyn College and is a certified
public accountant.

MARTIN SMILEY
was elected on June 28, 2006 to the Board of Directors he joined mPhase as
Executive Vice President, Chief Financial Officer and General Counsel in August
2000. Mr. Smiley has over twenty years experience as a corporate finance and
securities attorney and as an investment banker. Prior to joining the company,
Mr. Smiley served as a Principal at Morrison & Kibbey, Ltd., a mergers and
acquisitions and investment banking firm from 1998 to 2000, and as a Managing
Director for CIBC Oppenheimer Securities from 1994 to 1998. He served as a Vice
President of Investment Banking at Chase Manhattan Bank from 1989 to 1994, and
as a Vice President and Associate General Counsel for Chrysler Capital
Corporation from 1984 to 1989. Mr. Smiley graduated with a B.A. in Mathematics
from the University of Pennsylvania and earned his law degree from the
University of Virginia School Of Law.

60

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DR VICTOR
LAWRENCE is bachelor Chair professor of Electrical Engineering and Associate
Dean for Special Programs, in the Charles V Schafer, Jr. School of Engineering,
at Steven Institute of Technology. Dr. Victor Lawrence is a member of the
National Academy of Engineering and has worked in the information technology
and communications field for over thirty years. He is an industry leader in
digital communications R&D and services, an entrepreneur, an active member
of engineering professional organizations, an author, and a teacher who has
extensive international experience. Prior to joining Steven Institute of
Technology Dr. Lawrence was Vice President, Advanced Communications Technology,
Bell Laboratories, Lucent Technologies. He led the development of technologies
that go into the most innovative, reliable, and cost-effective communications
networks for the leading telecommunications service providers. He has supported
Lucent's businesses with a staff of about 500 leading technologists and a
budget of about $100M. Major projects included gigabit, photonic, and wireless
networking developments and services. He was responsible for a team of
engineers that worked on performance analysis, simulations and development of
broadband access and backbone networks for many national and international
service providers. All of Lucent's R&D organizations relied on his
high-technology support of computer-aided hardware design, physical and thermal
design, systems compliance testing and certification, and design for high
performance network control, signaling, and management. Earlier, he was
Director, Advanced Multimedia Communications at Bell Labs, where he was
responsible for systems engineering, exploratory development of multimedia
signal processing, transmission, and switching, including speech and audio
coding, modems, broadband transmission, ATM switching and protocols, and
wireless communication and signal processing. He held a variety of leadership
positions in data communications research, digital techniques, and information
systems. His application of digital signal processing to data communications in
the late 1980s and early 1990s led to many significant advances in high-speed
transmission over copper lines (e.g., voice band modems and DSL), which helped
create a global industry that leverages the public switched telephone network.
Dr. Lawrence played a significant role in the development of every major
international voiceband modem standard, making high-speed data communication
over international networks possible. The universal availability of high-speed
data connectivity stimulated the growth and widespread use of the Internet. He
led the development of high-speed modem/fax chip sets that are used in data
terminals, computers, and voice terminals for secure communications worldwide.
His work on high-speed transceivers for local loop and for premises
applications led to the development of a variety of DSL technologies, many of
which are deployed today for broadband services. Entrepreneurship Dr. Lawrence
spun off several ventures internal and external to Lucent to maximize the
impact of technology developed in his organization.

At each annual
meeting of stockholders, the newly elected directors' terms begin on the date
of election and qualification, and continue through the next annual meeting
following election. Terms may differ in the case where a director resigns, is
removed from office, or until the time when a successor director is elected and
qualified.

SECTION 16 (A) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE

Directors,
executive officers, and individual owning more than 10 percent of mPhase common
stock are required to file initial reports of ownership and changes in
ownership with the SEC under Section 16(a) of the Securities Exchange Act of
1934, as amended. The SEC regulations also require those persons to provide
copies of all filed Section 16(a) reports to the Company. mPhase has reviewed
the report copies filed in fiscal year 2007, and based also on written
representations from those persons, the Company believes that there was
compliance with Section 16(a) filing requirements for fiscal year 2009. All the
officers and directors filed all of the required forms in a timely manner.

61

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ITEM 11. EXECUTIVE COMPENSATION

The following
table sets forth, for the fiscal year ended June 30, 2009 and the two previous
fiscal years, the compensation earned by mPhase's chief executive officer and
the four other executive officers, whose compensation was greater than $100,000
for services rendered in all capacities to the Company for the year ended June
30, 2009.

SUMMARY EXECUTIVE COMPENSATION

|                            |  |      |  |        |         |       |   |                |  |                 |           |                        |   |                 |  |       |  |       |  |   |           |    |   |           | 
|--------------------------- |  | ---- |  | ------ | ------- | ----- | - | -------------- |  | --------------- | --------- | ---------------------- | - | --------------- |  | ----- |  | ----- |  | - | --------- | -- | - | --------- | 
|NAME &
  PRINCIPAL POSITION |  | YEAR |  | SALARY |         | BONUS |   | STOCK
  AWARDS |  | OPTION
  AWARDS |           | NON EQUITY
  INCENTIVE |   | PENSION
  VALUE |  | OTHER |  | TOTAL | 
|                            |  |      |  |        |         |       |   |                |  |                 |           |                        |   |                 |  |       |  |       | 
|Ronald Durando              |  | 2009 |  | $      | 275,718 |       | $ | 0              |  | $               | 1,541,700 |                        | $ | 1,944,912       |  | N/A   |  | N/A   |  | $ | 61,473    |    | $ | 3,823,803 | 
|President                   |  | 2008 |  |        | 393,600 |       | $ | 0              |  | $               | 0         |                        | $ | 0               |  | N/A   |  | N/A   |  | $ | 19,490    | #4 | $ | 413,090   | 
|Chief Executive Officer     |  | 2007 |  | $      | 393,600 |       | $ | 0              |  | $               | 860,000   |                        | $ | 196,000         |  | N/A   |  | N/A   |  | $ | 7,500     | #1 | $ | 1,457,100 | 
|                            |  |      |  |        |         |       |   |                |  |                 |           |                        |   |                 |  |       |  |       |  |   |           |    |   |           | 
|Gustave Dotoli              |  |      |  |        |         |       |   |                |  |                 |           |                        |   |                 |  |       |  |       |  |   |           |    |   |           | 
|Chief Operating Officer     |  | 2009 |  | $      | 229,000 |       | $ | 0              |  | $               | 913,600   |                        | $ | 1,166,947       |  | N/A   |  | N/A   |  | $ | 62,514    |    | $ | 2,372,061 | 
|                            |  | 2008 |  | $      | 282,000 |       | $ | 0              |  | $               | 0         |                        | $ | 0               |  | N/A   |  | N/A   |  | $ | 4,156     | #4 | $ | 286,156   | 
|                            |  | 2007 |  | $      | 282,000 |       | $ | 0              |  | $               | 450,000   |                        | $ | 126,000         |  | N/A   |  | N/A   |  | $ | 7,538     | #2 | $ | 865,538   | 
|                            |  |      |  |        |         |       |   |                |  |                 |           |                        |   |                 |  |       |  |       |  |   |           |    |   |           | 
|Martin Smiley               |  | 2009 |  | $      | 182,292 |       | $ | 0              |  | $               | 571,000   |                        | $ | 700,168         |  | N/A   |  | N/A   |  | $ | 21,048    |    | $ | 1,474,508 | 
|Executive Vice President    |  | 2008 |  | $      | 200,000 |       | $ | 0              |  | $               | 0         |                        | $ | 0               |  | N/A   |  | N/A   |  | $ | 18,752 #4 |    | $ | 218,752   | 
|CFO and General Council     |  | 2007 |  | $      | 200,000 |       | $ | 0              |  | $               | 262,500   |                        | $ | 56,000          |  | N/A   |  | N/A   |  | $ | 8,550 #3  |    | $ | 527,050   | 

Footnotes

#1 consists of
directors fees of $7,500 in 2007
# 2 consists of directors fees of $7,500 in 2007 plus interest of $38 in 2007 on
loan to the Company 
#3 consists of directors fees of $3,750 plus $4,800 interest on loans to the
Company 
#4 Interest on loans to the Company

62

---

OUTSTANDING EQUITY AWARDS 
at FISCAL YEAR END JUNE 30, 2009

|                  |  |                                                                   |  |                                                                     |  |                                                   |  |                       |      |                        |            |                                                    |   |                                   |   |                  |   | 
|----------------- |  | ----------------------------------------------------------------- |  | ------------------------------------------------------------------- |  | ------------------------------------------------- |  | --------------------- | ---- | ---------------------- | ---------- | -------------------------------------------------- | - | --------------------------------- | - | ---------------- | - | 
|                  |  | Number of Securities underlying Unexercised Options (Exercisable) |  | Number of Securities underlying Unexercised Options (Unexercisable) |  | Equity Incentive Plan awards Number of Securities |  | Option Exercise Price |      | Option Expiration Date |            | Number of shares of stock that has not been vested |   | Market Value of Shares not vested |   | Equity Incentive |  
|Ronald
  Durando  |  | 2,500,000                                                         |  | 0                                                                   |  | 0                                                 |  | $                     | 0.35 |                        | 12/31/2009 |                                                    | 0 |                                   | 0 |                  | 0 | 
|President
  CEO   |  | 550,000                                                           |  | 0                                                                   |  | 0                                                 |  | $                     | 0.18 |                        | 2/23/2011  |                                                    | 0 |                                   | 0 |                  | 0 | 
|                  |  | 3,450,000                                                         |  | 0                                                                   |  | 0                                                 |  | $                     | 0.18 |                        | 2/23/2011  |                                                    | 0 |                                   | 0 |                  | 0 | 
|                  |  | 475,000                                                           |  | 0                                                                   |  | 0                                                 |  | $                     | 0.21 |                        | 2/23/2011  |                                                    | 0 |                                   | 0 |                  | 0 | 
|                  |  | 3,525,000                                                         |  | 0                                                                   |  | 0                                                 |  | $                     | 0.21 |                        | 2/23/2011  |                                                    | 0 |                                   | 0 |                  | 0 | 
|                  |  | 1,000,000                                                         |  | 0                                                                   |  | 0                                                 |  | $                     | 0.21 |                        | 3/28/2011  |                                                    | 0 |                                   | 0 |                  | 0 | 
|                  |  | 750,000                                                           |  | 0                                                                   |  | 0                                                 |  | $                     | 0.25 |                        | 6/14/2011  |                                                    | 0 |                                   | 0 |                  | 0 | 
|                  |  | 25,000                                                            |  | 0                                                                   |  | 0                                                 |  | $                     | 0.25 |                        | 6/14/2011  |                                                    | 0 |                                   | 0 |                  | 0 | 
|                  |  | 1,400,000                                                         |  | 0                                                                   |  | 0                                                 |  | $                     | 0.21 |                        | 8/24/2011  |                                                    | 0 |                                   | 0 |                  | 0 | 
|                  |  | 50,000,000                                                        |  | 0                                                                   |  | 0                                                 |  | $                     | 0.05 |                        | 9/16/2013  |                                                    | 0 |                                   | 0 |                  | 0 | 
|                  |  |                                                                   |  |                                                                     |  |                                                   |  |                       |      |                        |            |                                                    |   |                                   |   |                  |   | 
|                  |  |                                                                   |  |                                                                     |  |                                                   |  |                       |      |                        |            |                                                    |   |                                   |   |                  |   | 
|Gustave
  Dotoli  |  | 1,000,000                                                         |  | 0                                                                   |  | 0                                                 |  | $                     | 0.35 |                        | 12/31/2009 |                                                    | 0 |                                   | 0 |                  | 0 | 
|COO               |  | 550,000                                                           |  | 0                                                                   |  | 0                                                 |  | $                     | 0.18 |                        | 2/23/2011  |                                                    | 0 |                                   | 0 |                  | 0 | 
|                  |  | 1,250,000                                                         |  | 0                                                                   |  | 0                                                 |  | $                     | 0.18 |                        | 2/23/2011  |                                                    | 0 |                                   | 0 |                  | 0 | 
|                  |  | 475,000                                                           |  | 0                                                                   |  | 0                                                 |  | $                     | 0.21 |                        | 2/23/2011  |                                                    | 0 |                                   | 0 |                  | 0 | 
|                  |  | 1,325,000                                                         |  | 0                                                                   |  | 0                                                 |  | $                     | 0.21 |                        | 2/23/2011  |                                                    | 0 |                                   | 0 |                  | 0 | 
|                  |  | 750,000                                                           |  | 0                                                                   |  | 0                                                 |  | $                     | 0.21 |                        | 3/28/2011  |                                                    | 0 |                                   | 0 |                  | 0 | 
|                  |  | 500,000                                                           |  | 0                                                                   |  | 0                                                 |  | $                     | 0.25 |                        | 6/14/2011  |                                                    | 0 |                                   | 0 |                  | 0 | 
|                  |  | 25,000                                                            |  | 0                                                                   |  | 0                                                 |  | $                     | 0.25 |                        | 6/14/2011  |                                                    | 0 |                                   | 0 |                  | 0 | 
|                  |  | 900,000                                                           |  | 0                                                                   |  | 0                                                 |  | $                     | 0.21 |                        | 8/24/2011  |                                                    | 0 |                                   | 0 |                  | 0 | 
|                  |  | 30,000,000                                                        |  | 0                                                                   |  | 0                                                 |  | $                     | 0.05 |                        | 9/16/2013  |                                                    | 0 |                                   | 0 |                  | 0 | 
|                  |  |                                                                   |  |                                                                     |  |                                                   |  |                       |      |                        |            |                                                    |   |                                   |   |                  |   | 
|Martin
  Smiley   |  | 550,000                                                           |  | 0                                                                   |  | 0                                                 |  | $                     | 0.18 |                        | 2/23/2011  |                                                    | 0 |                                   | 0 |                  | 0 | 
|Executive VP      |  | 475,000                                                           |  | 0                                                                   |  | 0                                                 |  | $                     | 0.21 |                        | 2/23/2011  |                                                    | 0 |                                   | 0 |                  | 0 | 
|CFO Chief
  Legal |  | 25,000                                                            |  | 0                                                                   |  | 0                                                 |  | $                     | 0.21 |                        | 2/23/2011  |                                                    | 0 |                                   | 0 |                  | 0 | 
|Council           |  | 250,000                                                           |  | 0                                                                   |  | 0                                                 |  | $                     | 0.25 |                        | 6/14/2011  |                                                    | 0 |                                   | 0 |                  | 0 | 
|                  |  | 400,000                                                           |  | 0                                                                   |  | 0                                                 |  | $                     | 0.21 |                        | 6/24/2011  |                                                    | 0 |                                   | 0 |                  | 0 | 
|                  |  | 18,000,000                                                        |  | 0                                                                   |  | 0                                                 |  | $                     | 0.05 |                        | 9/16/2013  |                                                    | 0 |                                   | 0 |                  | 0 | 

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION

The members of
the Compensation Committee during fiscal 2009 were Messrs. Biderman and
Guerino. Neither Messrs. Biderman, nor Guerino have been one of mPhase's
officers or employees. None of the Company's directors or executive officers
served as a member of the Compensation Committee (or other board committee
performing equivalent functions or, in the absence of such committee, the
entire Board of Directors) of another entity during fiscal 2008 that has a
director or executive officer serving also as a director on mPhase's Board of
Directors.. Mr. Dotoli, together with Mr. Durando and Mr. Ergul, were
collectively controlling shareholders and Directors of Janifast Ltd. and Mr.
Dotoli. In March of 2009 Janifast Ltd terminated operations.

63

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT

The following
table sets forth as of June 30, 2009 certain information regarding the
beneficial ownership of our shares:

|   |                                                                                                                                       
|-- | --------------------------------------------------------------------------------------------------------------------------------------
|1. | by each
  person who is known by us to be the beneficial owner of more than five
  percent (5%) of its outstanding common stock;      
|   |                                                                                                                                       
|2. | each of our
  directors;                                                                                                              
|   |                                                                                                                                       
|3. | by each
  executive officer named in the Summary Compensation Table; and, by all of our
  directors and executive officers as a group.

|AFFILIATES (1 & 2) | Shares      | Warrants  | Options     | TOTAL       | %     
|------------------ | ----------- | --------- | ----------- | ----------- | ------
|                   |             |           |             |             |       
|Victor Lawrence    | -           | -         | -           | -           |       
|Anthony Guerino    | -           | -         | 765,000     | 765,000     | 0.05% 
|Abraham Biderman   | 1,076,900   | -         | 1,065,000   | 2,141,900   | 0.15% 
|Gustave Dotoli     | 22,793,033  |           | 36,775,000  | 59,568,033  | 4.20% 
|Ron Durando (3)    | 43,588,965  | 65,000    | 63,675,000  | 107,328,965 | 7.57% 
|Ned Ergul          | 2,850,000   |           | 2,655,000   | 5,505,000   | 0.39% 
|Martin Smiley      | 16,262,629  | 2,345,569 | 19,700,000  | 38,308,198  | 2.69% 
|Microphase         | 16,060,019  | 5,572,222 | -           | 21,632,241  | 1.54% 
|Janifast           | 8,227,778   | 1,950,000 | -           | 10,177,778  | 0.72% 
|Total Affiliates   | 110,859,324 | 9,932,791 | 122,510,000 | 243,302,115 | 17.33%

(1) Unless otherwise indicated, the address of each
beneficial owner is 587 Connecticut Avenue, Norwalk, Connecticut 06854-1711.

(2) Unless otherwise indicated, mPhase believes that all
persons named in the table have sole voting and investment power with respect to
all shares of the Company shares beneficially owned by them. The percentage for
each beneficial owner listed above is based on 1,103,089,650 shares outstanding
on June 30, 2009, and, with respect to each person holding options or warrants
to purchase shares that are exercisable within 60 days after June 30, 2009, the
number of options and warrants are deemed to be outstanding and beneficially
owned by the person for the purpose of computing such person's percentage
ownership, but are not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person.

(3) Includes 1,816,148 shares held by Durando Investment LLC,
Shares held by Janifast which Mr. Durando controls are stated separately.

(4) Does not include 90,519,050 and 36,510,585 shares
issuable for unpaid compensation, loans plus accord interest, if converted for
Messrs. Durando, Dotoli and Smiley respectively. Such conversions are subject to
availability of authorized shares.

64

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS

Material
Related Party Transactions

The Company
has material related party transactions. The Company incurs costs for
engineering, design and production of prototypes and certain administrative
functions from Microphase Corporation and the purchase of finished goods,
primarily consisting of DSL splitter shelves and filters, from Janifast
Limited. The Company has incurred costs for obtaining transmission rights. This
enabled the Company to obtain re-transmission accreditation to proprietary
television content that the Company plans to provide with its flagship product,
the TV+ within its incorporated joint venture mPhase Television.Net, in which
the Company owns a 56.5% interest.

Mr. Durando,
the President and CEO of mPhase, owns a controlling interest and is a director
and President of Janifast Limited. Mr. Durando and Mr. Dotoli are officers of
Microphase Corporation. Mr. Dotoli was also a shareholder of Janifast Limited
prior to its discontinuing operations in March of 2008. Mr. Ergul owns a
controlling interest and is a director of Microphase Corporation and is a
director and shareholder of Janifast Limited. Microphase Corporation and Janifast
Ltd., are significant shareholders of mPhase.

Management
believes the amounts charged to the Company by Microphase, Janifast Ltd, mPhase
Television.Net and Hart Telephone are commensurate to amounts that would be
incurred if outside parties were used. The Company believes Microphase
Corporation has the ability to fulfill their obligations to the Company without
further support from the Company.

Transactions
with Officers, Directors and their Affiliates

Directors that
were significant shareholders of Janifast Limited prior to its ceasing
operations in March of 2008 include Messrs Ronald A. Durando and Gustave T.
Dotoli.

The Following Summaries Compensation to
Related Parties for the Fiscal Year Ended June 30, 2009

|                                            |   |            |   |            |   |            |   |           |   |            |   | TOTAL      
|------------------------------------------- | - | ---------- | - | ---------- | - | ---------- | - | --------- | - | ---------- | - | -----------
|                                            |   | Durando    |   | Dotoli     |   | Smiley     |   | Biderman  |   | Microphase |   | RELATED    
|                                            |   |            |   |            |   |            |   |           |   |            |   |            
|Consulting / Salary                         | $ | 275,718    | $ | 229,000    | $ | 182,292    |   |           |   |            | $ | 687,010    
|Interest                                    | $ | 61,473     | $ | 62,514     | $ | 21,048     |   |           |   |            | $ | 145,035    
|G&A                                         |   |            |   |            |   |            |   |           | $ | 16,773     | $ | 16,773     
|Rent                                        |   |            |   |            |   |            |   |           | $ | 36,000     | $ | 36,000     
|R&D                                         |   |            |   |            |   |            |   |           | $ | 16,773     | $ | 150,000    
|Finders Fees                                |   |            |   |            |   | 571,000    | $ | 80,000    | $ | 150,000    | $ | 80,000     
|Stock based compensation (shares issued)*   | $ | 1,541,700  |   | 913,600    |   |            | $ | 228,400   |   |            | $ | 3,254,700  
|Stock based compensation (options issued)** | $ | 1,944,912  |   | 1,166,947  |   | 700,168    | $ | 77,796    |   |            | $ | 3,889,823  
|Total Compensation                          | $ | 3,823,803  |   | 2,372,061  |   | 1,474,508  | $ | 386,196   |   | 202,773    | $ | 8,259,341  
|                                            |   |            |   |            |   |            |   |           |   |            |   |            
|Common Stock Issued*                        |   | 27,000,000 |   | 16,000,000 |   | 10,000,000 |   | 4,000,000 |   |            |   | 57,000,000 
|Options issued (5 years @ 5 cents)**        |   | 50,000,000 |   | 30,000,000 |   | 18,000,000 |   | 2,000,000 |   |            |   | 100,000,000

65

---

Amounts due to Officers 
For the year ended June 30, 2008

|                                      |  |   |          |   |   |          |   |   |         |   |   |           |  
|------------------------------------- |  | - | -------- | - | - | -------- | - | - | ------- | - | - | --------- | -
|                                      |  |   | RON      |   |   | GUS      |   |   | MARTIN  |   |   |           |  
|                                      |  |   | DURANDO  |   |   | DOTOLI   |   |   | SMILEY  |   |   | TOTAL     |  
|                                      |  |   |          |   |   |          |   |   |         |   |   |           |  
|NOTES PAYABLE OFFICERS                |  |   |          |   |   |          |   |   |         |   |   |           |  
|BALANCE 6/30/07                       |  | $ | 85,000   |   | $ | 75,000   |   | $ | 161,000 |   | $ | 321,000   |  
|July 2007 Advances (Payments)         |  | $ | (30,000  | ) | $ | (75,000  | ) |   |         |   | $ | (105,000  | )
|August 2007 Advances (Payments)       |  | $ | 35,000   |   | $ | 75,100   |   | $ | 35,000  |   | $ | 145,100   |  
|Sept 2007 Advances (Payments)         |  | $ | 110,000  |   |   |          |   |   |         |   | $ | 110,000   |  
|Assumption of Note Payable- Sovereign |  | $ | 110,000  |   |   |          |   |   |         |   | $ | 110,000   |  
|Oct 2007 Advances (Payments)          |  | $ | 25,000   |   | $ | 25,000   |   | $ | 25,000  |   | $ | 75,000    |  
|Nov 2007 Advances (Payments)          |  | $ | 76,000   |   | $ | 36,000   |   | $ | 11,000  |   | $ | 123,000   |  
|Dec 2007 Advances (Payments)          |  | $ | 25,000   |   | $ | 0        |   | $ | 0       |   | $ | 25,000    |  
|                                      |  |   |          |   |   |          |   |   |         |   |   |           |  
|Transferred to Deferred Comp          |  | $ | (148,000 | ) | $ | (123,500 | ) |   |         |   | $ | (271,500  | )
|Jan 2008 Advances (Payments)          |  | $ | 2,000    |   | $ | 32,000   |   |   |         |   | $ | 34,000    |  
|Feb 2008 Advances (Payments)          |  | $ | 0        |   | $ | 55,000   |   | $ | 72,038  |   | $ | 127,038   |  
|Mar 2008 Advances (Payments)          |  | $ | (180,000 | ) | $ | (47,500  | ) | $ | (40,000 | ) | $ | (267,500  | )
|April 2008 Advances (Payments)        |  | $ | (110,000 | ) | $ | (52,100  | ) | $ | (45,000 | ) | $ | (207,100  | )
|                                      |  |   |          |   |   |          |   |   |         |   |   |           |  
|May 2008 Advances (Payments)          |  |   |          |   |   |          |   | $ | (15,000 | ) | $ | (15,000   | )
|                                      |  |   |          |   |   |          |   |   |         |   |   |           |  
|June 2008 Advances (Payments)         |  |   |          |   |   |          |   |   |         |   |   |           |  
|BALANCE Notes Payable Officers        |  | $ | 0        |   | $ | 0        |   | $ | 204,038 |   | $ | 204,038   |  
|                                      |  |   |          |   |   |          |   |   |         |   |   |           |  
|Deferred Compensation                 |  | $ | 278,000  |   | $ | 323,500  |   |   |         |   | $ | 601,500   |  
|                                      |  |   |          |   |   |          |   |   |         |   |   |           |  
|Due To Officers                       |  |   |          |   |   |          |   |   |         |   |   |           |  
|BALANCE 6/30/07                       |  | $ | 188,400  |   | $ | 75,500   |   |   |         |   | $ | 263,900   |  
|Consulting Fee Earned -1st Qtr        |  | $ | 98,400   |   | $ | 70,500   |   |   |         |   | $ | 168,900   |  
|Consulting Fees Paid - 1st Qtr        |  | $ | (39,500  | ) | $ | (32,500  | ) |   |         |   | $ | (72,000   | )
|Consulting Fee Earned - 2nd Qtr       |  | $ | 98,400   |   | $ | 70,500   |   |   |         |   | $ | 168,900   |  
|Consulting Fees Paid - 2nd Qtr        |  | $ | (10,000  | ) | $ | (10,000  | ) |   |         |   | $ | (20,000   | )
|Consulting Fee Earned - 3rd Qtr       |  | $ | 98,400   |   | $ | 70,500   |   |   |         |   | $ | 168,900   |  
|Consulting Fees Paid - 3rd Qtr        |  | $ | (12,000  | ) | $ | (8,500   | ) |   |         |   | $ | (20,500   | )
|Consulting Fee Earned - 4th Qtr       |  | $ | 98,400   |   | $ | 70,500   |   |   |         |   | $ | 168,900   |  
|Consulting Fees Paid - 4th Qtr        |  | $ | (221,510 | ) | $ | (204,244 | ) |   |         |   | $ | (425,754  | )
|                                      |  |   |          |   |   |          |   |   |         |   |   |           |  
|Balance Due to Officers               |  | $ | 298,990  |   | $ | 102,256  |   |   |         |   | $ | 401,246   |  
|                                      |  |   |          |   |   |          |   |   |         |   |   |           |  
|Interest Payable                      |  | $ | 0        |   | $ | 0        |   | $ | 18,751  |   | $ | 18,751    |  
|                                      |  |   |          |   |   |          |   |   |         |   |   |           |  
|Totals Payable to Officers            |  | $ | 576,990  |   | $ | 425,756  |   | $ | 222,789 |   | $ | 1,225,535 |  
|                                      |  |   |          |   |   |          |   |   |         |   |   |           |  

The Following Summaries Compensation to
Related Parties for the Fiscal Year Ended June 30, 2007

|                                           |  |         |           |        |   |         |  |          |         |        |   |         |  |          |         |          |   |            |  |                 |       |  |   |         |  |   |         |  |   |           | 
|------------------------------------------ |  | ------- | --------- | ------ | - | ------- |  | -------- | ------- | ------ | - | ------- |  | -------- | ------- | -------- | - | ---------- |  | --------------- | ----- |  | - | ------- |  | - | ------- |  | - | --------- | 
|                                           |  | Durando |           | Dotoli |   | Ergul   |  | Biderman |         | Smiley |   | Guerino |  | Lawrence |         | Janifast |   | Microphase |  | TOTAL
  RELATED |      
|                                           |  |         |           |        |   |         |  |          |         |        |   |         |  |          |         |          |   |            |  |                 |      
|                                           |  |         |           |        |   |         |  |          |         |        |   |         |  |          |         |          |   |            |  |                 |       |  |   |         |  |   |         |  |   |           | 
|Consulting /
  Salary                      |  | $       | 393,600   |        | $ | 282,000 |  |          |         |        |   |         |  | $        | 200,000 |          |   |            |  |                 |       |  |   |         |  |   |         |  | $ | 875,600   | 
|Directors Stipend
  and Interest           |  | $       | 7,500     |        | $ | 7,538   |  | $        | 3,750   |        | $ | 3,750   |  | $        | 8,550   |          | $ | 3,750      |  | $               | 3,750 |  |   |         |  |   |         |  | $ | 38,588    | 
|Rent                                       |  |         |           |        |   |         |  |          |         |        |   |         |  |          |         |          |   |            |  |                 |       |  |   |         |  | $ | 60,000  |  | $ | 60,000    | 
|R&D                                        |  |         |           |        |   |         |  |          |         |        |   |         |  |          |         |          |   |            |  |                 |       |  |   |         |  | $ | 236,492 |  | $ | 236,492   | 
|Finders Fees
  (including common shares)   |  |         |           |        |   |         |  |          |         |        | $ | 520,000 |  |          |         |          |   |            |  |                 |       |  |   |         |  |   |         |  | $ | 520,000   | 
|Cost of Sales and
  SG&A                   |  |         |           |        |   |         |  |          |         |        |   |         |  |          |         |          |   |            |  |                 |       |  | $ | 110,912 |  | $ | 36,342  |  | $ | 147,254   | 
|Reparations and
  Stock Based Compensation |  | $       | 1,044,000 |        | $ | 555,000 |  | $        | 201,000 |        | $ | 16,800  |  | $        | 306,250 |          | $ | 14,700     |  |                 |       |  | $ | 138,462 |  |   |         |  | $ | 2,276,212 | 
|                                           |  |         |           |        |   |         |  |          |         |        |   |         |  |          |         |          |   |            |  |                 |       |  |   |         |  |   |         |  |   |           | 
|Totals                                     |  | $       | 1,445,100 |        | $ | 844,538 |  | $        | 204,750 |        | $ | 540,550 |  | $        | 514,800 |          | $ | 18,450     |  | $               | 3,750 |  | $ | 249,374 |  | $ | 332,834 |  | $ | 4,154,146 | 
|PacketPort.com
  legal expense             |  |         |           |        |   |         |  |          |         |        |   |         |  |          |         |          |   |            |  |                 |       |  |   |         |  |   |         |  | $ | 611,807   | 
|Total
  expense to related parties         |  |         |           |        |   |         |  |          |         |        |   |         |  |          |         |          |   |            |  |                 |       |  |   |         |  |   |         |  | $ | 4,765,953 | 

Summary of Transactions with Officers 
Twelve Months Ended June 30, 2009

|                                              | RON        | GUS        | MARTIN     |           
|--------------------------------------------- | ---------- | ---------- | ---------- | ----------
|                                              | DURANDO    | DOTOLI     | SMILEY     | TOTAL     
|NOTES PAYABLE OFFICERS                        |            |            |            |           
|BALANCE 6/30/08                               | $0         | $0         | $204,038   | $204,038  
|July 2008 Advances (Payments)                 | $0         | $0         | $2,500     | $2,500    
|August 2008 Advances (Payments)               | $0         | $0         | $711       | $711      
|Sept 2008 Advances (Payments)                 | $0         | $8,000     | $9,289     | $17,289   
|Oct 2007 Advances (Payments)                  | $0         | ($8,000)   | $478       | ($7,522)  
|Nov 2008 Advances (Payments)                  | $0         | $0         | ($10,000)  | ($10,000) 
|Dec 2008 Advances (Payments)                  | $17,000    | $23,000    | $22,810    | $62,810   
|Jan 2009 Advances (Payments)                  | ($17,000)  | ($23,000)  | ($8,016)   | ($48,016) 
|Feb 2009 Advances (Payments)                  | $0         | $16,000    | $10,000    | $26,000   
|Mar 2009 Advances (Payments)                  | $0         | ($16,000)  | $32,415    | $16,415   
|Apr 2009 Advances (Payments)                  | $0         | $0         | $0         | $0        
|May 2009 Advances (Payments)                  | $55,000    | $30,000    | $0         | $85,000   
|June 2009 Advances (Payments)                 | ($55,000)  | ($30,000)  | $0         | ($85,000) 
|BALANCE Notes Payable Officers                | $0         | $0         | $264,225   | $264,225  
|                                              |            |            |            |           
|Deferred Compensation Converted into Notes    | $278,000   | $323,500   | $0         | $601,500  
|Net Consulting Fees Converted into Notes      | $339,420   | $127,256   | $0         | $466,676  
|Total Notes Due to Officers                   | $617,420   | $450,756   | $264,225   | $1,332,400
|                                              |            |            |            |           
|Due To Officers                               |            |            |            |           
|BALANCE 6/30/08                               | $298,990   | $102,256   | $0         | $401,246  
|Consulting Fees & Expenses Incurred -1st Qtr  | $98,400    | $70,500    | $0         | $168,900  
|Consulting Fees & Expenses Paid - 1st Qtr     | ($101,500) | ($84,000)  | $0         | ($185,500)
|Consulting Fees & Expenses Incurred - 2nd Qtr | $66,817    | $58,000    | $0         | $124,817  
|Consulting Fees & Expenses Paid - 2nd Qtr     | ($35,000)  | ($32,500)  | $0         | ($67,500) 
|Consulting Fees & Expenses Incurred - 3rd Qtr | $60,501    | $55,500    | $0         | $116,001  
|Consulting Fees & Expenses Paid - 3rdt Qtr    | ($31,626)  | ($25,500)  | $0         | ($57,126) 
|Converted into Notes                          | ($339,582) | ($127,256) | $0         | ($466,838)
|Consulting Fees & Expenses Incurred - 4th Qtr | $0         | $0         | $0         | $0        
|Consulting Fees & Expenses Paid - 4th Qtr     | ($17,000)  | ($11,450)  | $0         | ($28,450) 
|Other Adjustment                              | $0         | ($5,550)   | $0         | ($5,550)  
|Balance Due to Officers                       | $0         | $0         | $0         | $0        
|                                              |            |            |            |           
|Total Due to Officers Before Interest         | $617,420   | $450,756   | $264,225   | $1,332,400
|Interest Payable                              | $61,473    | $62,514    | $9,605     | $133,592  
|Total Payable to Officers                     | $678,892   | $513,270   | $273,830   | $1,465,992
|                                              |            |            |            |           
|COMPENSATION                                  |            |            |            |           
|Consulting / Salary Earned                    | $275,718   | $229,000   | $182,292   | $687,010  
|Interest Earned                               | $61,473    | $62,514    | $21,048    | $145,035  
|Stock Based Compensation - Shares             | $1,541,700 | $913,600   | $571,000   | $3,026,300
|Stock Based Compensation - Options            | $1,944,912 | $1,166,947 | $700,168   | $3,812,027
|Total Compensation Officers                   | $3,823,803 | $2,372,061 | $1,474,508 | $7,670,072

66

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During the
twelve months ended June 30, 2007, Mr. Biderman's through his affiliated firm
of Palladium Capital Advisors earned finder's fees of $520,000 in connection
with the raising of approximately $5 million in various equity transactions
during the year.

In addition,
at various points during fiscal year ended June 30, 2007, Messrs, Durando,
Dotoli and Smiley provided $650,000 in bridge loans to the Company which was
evidenced by individual promissory notes. During December 2006, Messrs Durando
and Dotoli agreed to convert their notes, in the amounts of $130,000 and
$200,000 respectively, to a deferred compensation arrangement, the repayment
terms of which have not been specified. Mr. Smiley has extended bridge loans to
the Company of $160,000, evidenced by promissory notes for $101,000 and a
$60,000 note with a 12% rate of interest. In summary as of June 30, 2007,
bridge loans outstanding were $85,000,$75,000 and $161,000 to the Messrs
Durando, Dotoli and Smiley, respectively. All of the foregoing promissory notes
were payable on demand and only the $161,000 payable to Mr. Smiley remained
outstanding in June 2008

During the 12
month period ended June 30, 2007 Eagle Advisers, an investment banking firm
founded by Mr. Abraham Biderman, a member of the Board of Directors of the Company,
earned fees and reimbursement expenses of approximately $782,568 in connection
with services in regard to private placements of the Company's common stock and
warrants and raised a total of $5,820,652 net of such fees for the Company.

During the 12
month period ended June 30, 2005 Eagle Advisers, earned fees and reimbursement
expenses of approximately $633,000 in connection with services in connection
with private placements of the Company's common stock and warrants and raised a
total of $6,117,000 net of such fees for the Company.

Additionally
at June 30, 2004, Mr. Durando was owed $300,000 and Mr. Smiley was owed
$100,000 by the Company as evidenced by a non-interest bearing promissory note
that was repaid in July 2004. As of June 30, 2004 a total of $55,000 in the
aggregate was due to Mr. Durando and Mr. Dotoli for unpaid compensation.

Mr. Durando's
June 30, 2004 note payable balance of $300,000 was repaid by the Company during
fiscal year 2005. During the first and second quarters of fiscal year 2005, Mr.
Durando made additional bridge loans to the Company evidenced by various 12%
demand notes in the aggregate of $525,000. Mr. Durando was repaid a total of
$450,000 of such loans in January of 2005. In addition, Mr. Durando converted
$13,954 of the principal amount of a $75,000 promissory note leaving unpaid
principal of $61,046 outstanding. Mr. Durando converted $13,000 of accrued and
unpaid interest on various promissory notes of the Company into 65,000 shares
of common stock and a 5 year warrant to purchase a like amount of common stock
at $.25 per share.

During the
twelve month period ended June 30, 2005 Mr. Dotoli and Mr. Smiley, the COO, and
CFO and General Counsel of the Company respectively, each lent the Company
$75,000. Mr. Dotoli was repaid, the principal amount of such loan, in cash in
January, 2005 and Mr. Smiley converted his $75,000 loan into 375,000 shares of
common stock of the Company plus a 5 year warrant to purchase a like amount of
shares at $.25 per share. In addition, Mr. Smiley converted $9,975 of accrued
interest into 49,875 shares of common stock plus a 5 year warrant to purchase a
like amount of shares at $.25 per share. Finally Mr. Smiley received 25,000
additional shares of common stock as a market adjustment to his equity
investment of $25,000 on August 30, 2004. Mr. Dotoli cancelled $3,750 of
accrued and unpaid interest from August 15, 2004 through January 15, 2004 into
375,000 shares of common stock pursuant to the terms of a portion of a warrant
that was exercised at $.01 per share previously given by the Company to Mr.
Dotoli in exchange for and cancellation of unpaid compensation. On January 15,
2004, Mr. Smiley was awarded 425,000 shares of common stock as additional
compensation.

During the six
months ending December 31, 2004, accounts payable in the amount of $250,000
owed by mPhase to Microphase Corporation was cancelled in exchange for the
1,250,000 shares of common stock and a 5 year warrant to purchase a like amount
of shares at $.25.In addition for such period, Janifast Ltd. cancelled $200,000
of accounts payable owed by mPhase in exchange for 1,000,000 shares of common
stock and a 5 year warrant to purchase a like amount of shares at $.25 per
share.

In late
February and early March of 2005, the various vendors converted approximately
$173,898 in accounts payable due from the Company into 535,296 shares of Common
stock aggregating $183,310 in full settlement of those obligations.

Mr. Ronald A.
Durando converted $13,000 of accrued and unpaid interest on various demand
notes issued by the Company for loans by Mr. Durando during the six month
period ended December 31, 2004 into 65,000 shares of common stock plus a 5 year
warrant to purchase a like amount of shares at $.25 per share. In addition Mr.
Durando converted $13,954 of principal of a $75,000 promissory note into the
exercise, in full, of a warrant to purchase 1,395,400 shares of common stock at
$.01 previously granted to Mr. Durando in exchange for cancellation of unpaid
compensation.

In June of
2005, Mr. Smiley converted the his 12% $100,000 note converted plus accrued
interest thereon to 520,000 shares of common stock of mPhase at the rate of
$.20 cents per share plus a 5 year warrant for an additional 520,000 shares of
common stock at $.25 per share.

67

---

In addition a
demand note payable to Martin Smiley, CFO and General Counsel of mPhase, in the
amount of $75,000 was converted into 375,000 shares of common stock plus a 5
year warrant to purchase a like amount of shares at $.25 per share and Mr.
Smiley extended from July 25, 2004 to July 25, 2005 a $100,000 promissory note
carrying 12% interest. In addition Mr. Smiley converted accrued and unpaid
interest on his various promissory notes of $ 9,975 through December 31, 2004
into 49,875 shares of common stock plus a 5 year warrant to purchase a like
amount of common stock at $.25 per share. Mr. Smiley's remaining $100,000 note
is convertible into Common Stock of mPhase at the rate of $.25 cents per share
through July 25, 2009. Upon conversion, the note holder will be granted
warrants to purchase an equivalent amount of mPhase Common Stock at $.25 cents
per share for a period of five years from the date of conversion plus a 5 year
warrant for a like amount of shares at $.25 per share. Mr. Ronald A. Durando
converted $13,000 of accrued and unpaid interest on various demand notes issued
by the Company for loans by Mr. Durando during the six month period ended
December 31, 2004 into 65,000 shares of common stock plus a 5 year warrant to
purchase a like amount of shares at $.25 per share. In addition Mr. Durando
converted $13,954 of principal of a $75,000 promissory note into the exercise,
in full, of a warrant to purchase 1,395,400 shares of common stock at $.01
previously granted to Mr. Durando in exchange for cancellation of unpaid
compensation. Finally, Mr. Gustave Dotoli, Chief Operating Officer of the
Company converted $ 3,750 of accrued and unpaid interest on a $75,000
promissory note into 375,000 shares of common stock at $.01 pursuant to a
portion of a warrant previously granted to Mr. Dotoli for unpaid compensation.

During fiscal
year end June 30, 2007, Mr. Edward Suozzo, a consultant of the Company,
converted $50,000 of accounts payable owed by the Company into 331,864 shares
of common stock plus a 5 year warrant to purchase 277,778 shares of common
stock at $.18 per share. During fiscal year end June 30, 2005, Mr. Suozzo
converted $20,000 of accounts payable owed by the Company into 100,000 shares
of common stock plus a 5 year warrant to purchase 100,000 shares of common
stock at $.25 per share.

During fiscal
year end June 30, 2007, Microphase Corporation and Janifast Corp, both related
parties respectively converted $369,000 and $171,000 of accounts payable owed
by the Company into 2,050,000 and 950,000 shares of common stock plus a 5 year
warrant to purchase 2,050,000 and 950,000 shares of common stock at $.18 per
share.

During the
three months ending September 30, 2004, a note payable in the amount of
$180,000 to Microphase Corporation, Such note was extended by Microphase from
July 25, 2004 and now matures on July 25, 2005. Additionally, a note payable to
Martin Smiley, CFO and General Counsel of mPhase, in the amount of $100,000 was
extended from July 25, 2004 to July 25, 2005. Both liabilities carry an interest
rate of 12% payable quarterly in arrears and were extended effective June 30,
2004. Each note is convertible into Common Stock of mPhase at the rate of $.25
cents per share plus a 5 year warrant for a like amount of common stock at $.25
per share through July 25, 2005 and a second 5 year warrant at $.50 per share
convertible into a like amount of shares.

On August 30,
2004, the Company paid $100,000 to Piper&Rudnick, LLP, its outside counsel,
in connection with the renegotiation of a Payment Agreement effective June 30,
2004. Under the terms of the renegotiated Payment Agreement, the Company agreed
to payments of $25,000 each on December 1, 2004, March 1, 2005, June 1, 2005
and September 1, 2005 and a payment of $50,000 on December 1, 2006 plus $25,000
payments on March 1, 2006, June 1, 2006, September 1, 2006 and a final payment
of $75,000 payment on December 1, 2007. In addition, Piper&Rudnick LLP
agreed to convert $150,000 of such payable into a 5 year cashless warrant to
purchase the Company's common stock at $.25 per share.

On August 30,
2004 the Company issued two demand promissory notes each in the principal
amount of $75,000 at 12% interest in consideration of loans of $75,000 to the
Company from each of Mr. Dotoli, its COO and Mr. Smiley, its CFO and General
Counsel. In addition on September 30, 2004, the Company issued a demand
promissory note to Microphase Corporation, a related party, for a loan of
$175,000 to the Company with a 12% interest rate. Finally, the Company issued
demand promissory notes with an interest rate of 12% to Mr. Ronald Durando, CEO
of the Company for loans made to the Company dated August 30, 2004, as well as
demand promissory notes to Mr. Durando, its CEO, for loans to the Company of
$200,000 on August 30, 2004, $75,000 on September 28, 2004 and $175,000 on
September 30, 2004 respectively.

Necdet F.
Ergul, Ronald A. Durando and Gustave T. Dotoli, our Chairman, Chief Executive
Officer and Chief Operating Officer, respectively, are executive officers and
shareholders of Microphase and Ronald Durando and Gustave T. Dotoli are
president and vice- president of PacketPort.com., respectively.

On November
26, 1999, Mr. Durando acquired, via a 100% ownership of PacketPort, Inc., a
controlling interest in Linkon Corporation, now known as PacketPort.com, Inc.
On November 26, 1999, PacketPort, Inc., a company owned 100% by Mr. Durando,
acquired controlling interest in Linkon Corp., which subsequently changed its
name to PacketPort.com, Inc. In connection with this transaction, Mr. Durando
transferred 350,000 shares of our common stock to PacketPort, Inc.

68

---

Transactions
with Microphase Corporation mPhase's President and Chairman of the Board of the
Company are also employees of Microphase. On May 1, 1997, the Company entered
into an agreement with Microphase, whereby it will use office space as well as
the administrative services of Microphase, including the use of accounting
personnel. This agreement for fiscal year 2006 required mPhase to pay Micophase
$10,000 per month. Microphase also charges fees for specific projects on a
project-by-project basis. During the year ended June 30, 2007 and for the
period of time from mPhase's inception (October 2, 1996) to June 30, 2007,
$531,820 and $8,670,776, respectively, have been charged to expense or
inventory under these Agreements and is included in operating expenses in the
accompanying consolidated statements of operations. Management believes that
amounts charged to the Company by Microphase are commensurate to amounts that
would be incurred if outside third parties were used. The Company is obligated
to pay a 3% royalty to Microphase on revenues from its proprietary Traverser
Digital Video and Data Delivery System and DSL component products.

Transactions
with Janifast

Janifast Ltd.,
a Hong Kong corporation manufacturer, which has produced components for our
prototype Traverser_ DVDDS product, and may produce such components for us in
the future. Necdet F. Ergul, Ronald A. Durando and Gustave T. Dotoli are
controlling shareholders of Janifast Ltd. with an aggregate ownership interest
of greater than 75% of Janifast Ltd. Mr. Durando is Chairman of the Board of
Directors and Mr. Ergul is a Director of Janifast.

Transactions
with Other Related Parties

In March 2000,
mPhase acquired a 50% interest in mPhaseTelevision.Net (formerly Telco
Television Network, Inc.), an incorporated joint venture. This percentage was
increased to approximately 57% in fiscal year 2001. Alpha Star International,
Inc currently owns the remaining joint venture interest.

Effective June
30, 2004, the Company was $473,787 in arrears with respect to a Promissory Note
issued to Piper Rudnick LLP plus other legal fees of $118,773.36. It should be
noted that Piper & Rudnick received such Promissory Note plus two warrants received
in March of 2002 in exchange for cancellation of certain payables. Such
warrants have conversion rights into our common stock for a total of 2,233,490
shares that have been registered under a recently effective Form S-1
Registration Statement, and are cashless. On September 3, 2003, the Company
paid $10,000 in cash to Piper in exchange for reducing the total payable to
$550,000 plus the issuance of additional cashless warrant for $150,000 worth of
the Company's common stock valued at $.25 per share. The remaining $300,000
payable had the following future payment schedule:

1. Payments of
$25,000 each on December 1, 2004, March 1, 2005, June 1, 2005, September 1,
2005, March 1, 2006, June 1, 2006 and September 1, 2006.

2. A payment
of $50,000 on December 1, 2005

3. A payment
of $75,000 due on December 1, 2006

The Company
has made all of the above payments except for $65,000 of the $75,000 due
December 1, 2006, that is presently in arrears.

SUBSEQUENT
EVENT

On August 19, 2009, the Company received proceeds of $250,000
in connection with a third agreement with JMJ Financial. This transaction
involves 1) a Convertible Debenture in the amount of $1,870,000, plus a one time
interest factor of 12% ($224,400) and a maturity date of August 10, 2012 and 2)
A Secured Note Receivable in the amount of $1,700,000 plus a one time interest
factor of 13.2% ($224,400) and a maturity date of August 10, 2012 due from the
same parties who are the holders of the Convertible Debenture. Conversion of
outstanding into common shares is at the option of the holder. The number of
shares into which this debenture can be converted is equal to the dollar amount
of the debenture divided by 75% of the lowest trade price during the 20 day
trading period prior to conversion.

On September 30, 2009, the Company expects to receive a total
of $150,000 of proceeds in connection with a fourth agreement with JMJ
Financial. This transaction involves 1) A Convertible Debenture in the amount of
$1,200,000 plus a one time interest factor of 12% ($144,000) and a maturity date
of September 23, 2012 and (2) A Secured Note in the amount of $1,100,000 plus a
one time interest rate factor of 13.2%($144,000 each) and a maturity date of
September 23, 2012 due from the same parties who are the holders of the
Convertible Debentures. Conversion of outstanding into common shares is at the
option of the holder. The number of shares into which this debenture can be
converted is equal to the dollar amount of the debenture divided by 75% of the
lowest trade price during the 20 day trading period prior to conversion. The
Company has received a commitment from JMJ Financial to enter into an identical
financing not later than 60 days from September 23, 2009.

In July of 2009 Microphase Corporation converted $200,000
of Accounts Payable owed by the Company into common stock valued at $.0075 per
share (26,666,667 shares). Such price was determined based upon the price of
private placements of equity by the Company during such period.

On October 7, 2009, the Company paid Messrs. Durando,
Dotoli and Smiley $45,000,$45,000 and $25,000 respectively in reduction of
amounts owed to them by the Company for unpaid compensation and bridge loans.

69

---

ITEM 14A. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8K

(a)(1) The
following is a list of the financial statements, financial statement schedules
and exhibits, which are included in this Annual Report on Form 10-K. Where so
indicated by footnote, exhibits, which were previously filed, are incorporated
by reference.

FINANCIAL STATEMENT SCHEDULES:

EXHIBITS

|          |  |                                                                                                                                                                                                                                                                    
|--------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBITS  |  |                                                                                                                                                                                                                                                                    
|NUMBER    |  |                                                                                                                                                                                                                                                                    
|REFERENCE |  | DESCRIPTION                                                                                                                                                                                                                                                        
|          |  |                                                                                                                                                                                                                                                                    
|          |  |                                                                                                                                                                                                                                                                    
|2.1*      |  | Exchange of
  Stock Agreement and Plan of Reorganization (incorporated by reference to Exhibit
  2(a) to our registration statement on Form 10SB-12G filed on October 16, 1998
  (file no. 000-24969)).                                                            
|          |  |                                                                                                                                                                                                                                                                    
|2.2*      |  | Exchange of
  Stock Agreement and Plan of Reorganization dated June 25, 1998 (incorporated
  by reference to Exhibit 2(b) to our registration statement on Form 10SB-12G
  filed on May 6, 1999 (file no. 000-24969)).                                             
|          |  |                                                                                                                                                                                                                                                                    
|3.1       |  | Certificate of Incorporation of the
Company.                                                                                                                                                                                                                       
|          |  |                                                                                                                                                                                                                                                                    
|3.2       |  | Bylaws of the Company                                                                                                                                                                                                                                              
|          |  |                                                                                                                                                                                                                                                                    
|10.1*     |  | License
  Agreement, dated March 26, 1998, between the Company and Georgia Tech
  Research Corporation (incorporated by reference to Exhibit 10(e) to our
  registration statement on Form 10SB-12G filed on October 16, 1998 (file no.
  000- 24969)).            
|          |  |                                                                                                                                                                                                                                                                    
|10.2*     |  | First
  Amendment to the License Agreement dated January 8, 2001, between the Company
  and Georgia Tech Research Corporation (incorporated by reference to Exhibit 10.2
  to our registration statement on Form S-1 filed on June 18, 2001 (file no.
  33-63262)).
|          |  |                                                                                                                                                                                                                                                                    

70

---

EXHIBITSNUMBERREFERENCE

DESCRIPTION10.9*

Facilities/Services Agreement between the Company
and Microphase Corporation, dated as of July 1, 1998 (incorporated by reference
to Exhibit 10.9 to our registration statement on Form S- 1 filed on June 18,
2001 (file no. 33- 63262).10.10*

Company's 2001 Stock Incentive incorporated by
reference to Exhibit C to Preliminary Proxy on Schedule 14A filed on March 21,
2001 (file no. 000- 30202).10.18

Development Agreement effective February 3, 2004
between Lucent Technologies, Inc. and mPhase Technologies, Inc for development
of micro fuel cell Nano Technology.10.21

Development
  Agreement effective March  1, 2005 between Lucent Technologies Inc and mPhase
  Technologies relating to development of Magnetometers.10.22

Amendment No. 2 to
Development Agreement executed as of March 9, 2005 amending Development
Agreement effective as of February 5, 2004, as amended relating to Micro Power
Source Cells between mPhase Technologies, Inc. and Lucent Technologies, Inc.10.33.

Amendment No. 3 dated May 19, 2006 to
      Development Agreement between Lucent Technologies, Inc. and mPhase
      Technologies, Inc. effective February 3, 2004 for Development of micro
      fuel cell Nanotechnology.10.34.

Amendment No. 4 dated February 3, 2007 to
      Development Agreement between Lucent Technologies, Inc. and mPhase
      Technologies, Inc. effective February 3, 2004 for Development of micro
      fuel cell Nanotechnology.10.35.

Cooperative Research Agreement Rutgers
      University and mPhase Technologies, Inc. executed October 18, 2005.10.36.

Modification No. 1 to Cooperative Research
      Agreement with Rutgers University dated February 22, 2006.10.37.

Modification No. 2 to Cooperative Research
      Agreement with Rutgers University dated September 22, 2006.10.38.

Modification No. 3 to Cooperative Research
      Agreement with Rutgers University dated February 7, 2007.10.40.

CT NanoBusiness Alliance Consulting Agreement
      dated May 10, 2007.10.41.

Amendment No.5 dated April 28, 2007 to
      Development Agreement between Lucent Technologies, Inc. and mPhase
      Technologies, Inc. effective February 3, 2004 for Development of micro
      fuel cell Nanotechnology.10.43*

Cooperative Research and Development Agreement
      between US Army Picatinny Arsenel and mPhase Technologies, Inc. dated
      December 20, 2006. (Exhibit 43 to Form S-1 filed July 12, 2007, File No.
      333-144527).10.44

Small Business Technology Transfer
      Collaboration Agreement between Rutgers University and mPhase
      Technologies, Inc. dated June 25, 2007


71

---

EXHIBITSNUMBERREFERENCE

DESCRIPTION10.46*

Phase I Army Grant dated July 7, 2007
(Form 10-K filed October 7, 2009, Commission
File No. 000-24969)10.47*

Securities Purchase Agreement dated
December 11, 1007 between mPhase Technologies, Inc. and Golden Gate Investors
and Related Documents in connection with $1,500,000 Convertible Debenture
Financing(Form
10-K filed October 7, 2009, Commission File No. 000-24969)10.48*

Securities Purchase Agreement dated
February 29, 2008 between St. George Investments and mPhase Technologies, Inc
and Related Documents in connection with $550,000 Convertible Debenture
Financing.
(Form 10-K filed October 7, 2009, Commission
File No. 000-24969)10.49*

Documentation including $350,000
Convertible Note and $1,000,000 Convertible Note and Secured Note for $1,000,000
Financing between mPhase Technologies, Inc. and JMJ Financial dated March 25,
2008
(Form 10-K filed October 7, 2009, Commission
File No. 000-24969)10.52*

Phase II Army Grant dated August 29, 2008
(Form 10-K filed October 7, 2009, Commission
File No. 000-24969)10.53*

Securities Purchase Agreement dated
September 12, 2008 between mPhase Technologies, Inc. and La Jolla Cove Investors
and Related Documents in connection with $2,000,000 Convertible Debenture
Financing (Form 8K filing dated September 18, 2008)10.54

Design Development Agreement between
mPhase Technologies, Inc. and Porsche Design Studio for Emergency Flashlight
dated November 3, 2008.10.55*

Documentation dated December 31, 2008 for
$1,100,000 Convertible Note and Secured Note Financing between mPhase
Technologies, Inc. and JMJ Financial and Amendment to $350,000 Convertible Note
Financing (Form 8K Filing dated January 21, 2009,
Commission File No. 000-24969)10.56

Eagle Picher Proposal for mPhase
Technologies, Inc. dated January 26, 2009 for design and development of
mechanically-activated Reserve Battery to be used in Emergency Flashlight.10.57*

Termination Agreement with Golden Gate
Investors dated March 17, 2009 with respect to Convertible Debenture Financing
dated December 11, 2007
(Form 10-K filed October 7, 2009, Commission
File No. 000-24969)10.59*

Documentation including $1,870,000
Convertible Note and Secured Note for Financing with JMJ Financial dated August
21, 2009 (Form 8K Filing dated August 21, 2009,
Commission File No. 000-24969)


|     |  |                                                                                                                                                         
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|21*  |  | List of
  Subsidiaries (incorporated by reference to Exhibit 21 to our registration
  statement on Form S-1 filed on June 18, 2001 (file no. 33-63262)).
|     |  |                                                                                                                                                         
|31.1 |  | Certification
  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
  of 2002.                                                 
|     |  |                                                                                                                                                         
|31.2 |  | Certification
  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
  of 2002.                                                 
|     |  |                                                                                                                                                         
|32.1 |  | Certification
  of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act
  of 2002.                                                 
|     |  |                                                                                                                                                         
|32.2 |  | Certification
  of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
  of 2002.                                                 

* Incorporated
by reference.

** All or
portions of such Agreements have been omitted and the Company has requested
that the omitted sections be treated as "Confidential Information" pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended and has been
filed with the Securities and Exchange Commission separately.

72

---

CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                                                                                                                                            |  |     
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                                                                                                                            |  | PAGE
|                                                                                                                                                                                                                            |  |     
|                                                                                                                                                                                                                            |  |     
|Report of
  Rosenberg Rich Baker Berman & Company                                                                                                                                                                           |  | 74  
|                                                                                                                                                                                                                            |  |     
|Report of
  Arthur Andersen LLP                                                                                                                                                                                             |  | 75  
|                                                                                                                                                                                                                            |  |     
|Report of
  Schuhalter, Coughlin & Suozzo, PC                                                                                                                                                                               |  | 76  
|                                                                                                                                                                                                                            |  |     
|Consolidated
  Balance Sheets as of June 30, 2009 and 2008, as restated                                                                                                                                                     |  | 77  
|                                                                                                                                                                                                                            |  |     
|Consolidated Statements of Operations for the
years ended June 30, 2007, 2008 and 2009 and for the period from inception
(October 2, 1996) through June 30, 2009, as restated                                               |  | 78  
|                                                                                                                                                                                                                            |  |     
|Consolidated
  Statements of Changes in Stockholders' Equity (Deficit) for the period from
  inception (October 2, 1996) to June 30, 1997 and for each of the twelve years
  in the period ended June 30, 2009, as restated |  | 79  
|                                                                                                                                                                                                                            |  |     
|Consolidated Statements of Cash Flows for the
years ended June 30, 2007, 2008 and 2009 and for the period from inception
(October 2, 1996) through June 30, 2009, as restated                                               |  | 87  
|                                                                                                                                                                                                                            |  |     
|Notes to
  Consolidated Financial Statements                                                                                                                                                                                |  | 88  

73

---

REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

To the Board
of Directors and Stockholders of mPhase Technologies, Inc.:

We have
audited the accompanying consolidated balance sheets of mPhase Technologies,
Inc. (a New Jersey corporation in the development stage) and subsidiaries as of
June 30, 2009 and June 30, 2008, and the related consolidated statements of
operations, changes in stockholders' equity (deficit) and cash flows for each of the three years
ended June 30, 2009 and for the period from inception (October 2, 1996) to June
30, 2009. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of mPhase Technologies, Inc. for the period from inception to June 30, 2001. Those
statements were audited by other auditors whose report has been furnished to us
and our opinion, insofar as it relates to amounts for the period from inception
to June 30, 2001, included in the cumulative totals, is based solely upon the
report of the other auditors.

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. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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, based on our audits and the report of other auditors, the financial
statements referred to above present fairly, in all material respects, the consolidated
financial position of mPhase Technologies, Inc. and subsidiaries as of June 30,
2009 and 2008 and the results of their operations and their cash flows for each
of the three years in the period ended June 30, 2009 and for the period from
inception to June 30, 2008, in conformity with accounting principles generally
accepted in the United States.

The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2 to the consolidated
financial statements, the Company has suffered recurring losses from operations
and is in a working capital deficit position that raises substantial doubt
about its ability to continue as a going concern. Management's plans concerning
these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

As discussed in the  note 14 to the
consolidated financial
statements, certain errors resulting in the
need for reclassification of certain equity instruments and recognition of fair
value adjustments during 2008 and 2009 were discovered by management of the
Company during the current year. Accordingly, the 2009 and 2008 financial
statements have been restated and adjustments have been made to additional paid
in capital, deficit accumulated during development stage, and net loss as of and
for the years ended June 30, 2008 though June 30, 2009 as a result of these
corrections.

/s/Rosenberg Rich
Baker Berman & Company 
Somerset, New Jersey

September 25, 2009, except as to Note 14 
 as to which date is April 20, 2010

74

---

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board
of Directors and Stockholders of mPhase Technologies, Inc.:

We have
audited the accompanying consolidated balance sheets of mPhase Technologies,
Inc. (a New Jersey corporation in the development stage) and subsidiaries as of
June 30, 2001 and 2000, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for each of the three years in
the period ended June 30, 2001 and for the period from inception (October 2,
1996) to June 30, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of mPhase Technologies, Inc. for the period from inception to June
30, 1998. Such amounts are included in the cumulative from inception to June
30, 2001 totals of the statements of operations, changes in stockholders'
equity and cash flows and reflect total net loss of 6 percent of the related
cumulative totals. Those statements were audited by other auditors whose report
has been furnished to us and our opinion, insofar as it relates to amounts for
the period from inception to June 30, 1998, included in the cumulative totals,
is based solely upon the report of the other auditors.

We conducted
our audits in accordance with auditing standards generally accepted in the
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 and the report of other auditors
provide a reasonable basis for our opinion.

In our
opinion, based on our audits and the report of other auditors, the financial
statements referred to above present fairly, in all material respects, the
financial position of mPhase Technologies, Inc. and subsidiaries as of June 30,
2001 and 2000, and the results of their operations and their cash flows for
each of the three years in the period ended June 30, 2001 and for the period
from inception to June 30, 2001, in conformity with accounting principles
generally accepted in the United States.

The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2 to the consolidated
financial statements, the Company has suffered recurring losses from operations
and is in a working capital deficit position that raises substantial doubt
about its ability to continue as a going concern. Management's plans concerning
these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

Arthur
Andersen LLP 
Stamford, Connecticut

October 12,
2001

PURSUANT TO
SEC RELEASE NO. 33-8070 AND RULE 437A UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, mPHASE TECHNOLOGIES, INC. HAS NOT RECEIVED WRITTEN CONSENT AFTER
REASONABLE EFFORT TO USE THIS REPORT. THIS REPORT IS A COPY OF A PREVIOUSLY
ISSUED ARTHUR ANDERSEN LLP REPORT. THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR
ANDERSEN LLP. WITH RESPECT TO THIS INSTANT 10K/A, YOU WILL NOT BE ABLE TO
RECOVER AGAINST ARTHUR ANDERSEN LLP UNDER SECTION 11 OF THE SECURITIES ACT FOR
ANY UNTRUE STATEMENTS OF A MATERIAL FACT CONTAINED IN THE FINANCIAL STATEMENTS
AUDITED BY ARTHUR ANDERSEN LLP OR ANY OMISSIONS TO STATE A MATERIAL FACT
REQUIRED TO BE STATED THEREIN.

75

---

REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS

To the Board
of Directors and Stockholders of mPhase Technologies, Inc.:

We have
audited the statements of operations, changes in stockholders' equity, and cash
flows for the period October 2, 1996 (date of inception) through June 30, 1998
of mPhase Technologies, Inc. (a development stage company). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on
our audit.

We conducted
our audit in accordance with generally accepted auditing standards. 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 audit provides a reasonable basis for our opinion.

In our
opinion, such financial statements present fairly, in all material respects,
the results of its operations and its cash flows for the period of October 2,
1996 (date of inception) through June 30, 1998 in conformity with generally
accepted accounting principles.

Schuhalter,
Coughlin & Suozzo, PC 
Raritan, New Jersey

January 28, 1999

76

---

mPHASE TECHNOLOGIES, INC. 
(A Development Stage Company)Consolidated Balance Sheets

June 30,
        
        June 30,2008
        (As Restated)
        
        2009
        (As Restated)ASSETSCURRENT ASSETSCash
        
        $
        15,533
        
        $
        100,138Accounts receivable
        
        
        4,000
        
        
        46,065Prepaid and other current assets
        
        
        121,882
        
        
        153,636Total Current Assets
        
        
        141,415
        
        
        299,839Property and equipment, net
        
        
        149,418
        
        
        39,648Note receivable
        
        
        1,950,000
        
        
        3,150,000Investment in Sovereign
        
        
        110,000
        
        
        0TOTAL ASSETS
        
        $
        2,350,833
        
        $
        3,489,487LIABILITIES AND STOCKHOLDERS' DEFICITCURRENT LIABILITIESAccounts payable
        
        $
        2,076,965
        
        $
        1,864,956Accrued expenses
        
        
        388,444
        
        
        482,388Due to related parties
        
        
        1,030,167
        
        
        369,920Notes payable, related parties
        
        
        204,038
        
        
        1,332,400Short term notes
        
        
        240,820
        
        
        240,820Convertible debt
        
        
        54,000
        
        
        0TOTAL CURRENT LIABILITIES
        
        $
        3,994,434
        
        $
        4,290,484Convertible debt derivative liability
        
        
        750,151
        
        
        2,380,816Convertible debentures net of discount of $2,953,899 and $1,385,395 atJune 30, 2008& 2009
        respectively
        
        
        411,101
        
        
        2,052,355Contingent Liability-other equity instruments
        
        
        433,300
        
        
        -TOTAL LIABILITIES
        
        $
        5,588,986
        
        $
        8,723,655COMMITMENTS AND CONTINGENCIES
        
        
        -
        
        
        -STOCKHOLDERS' DEFICITCommon stock, par value $.01, 2,000,000,000 shares authorized
        440,395,000 and 870,419,882 shares issued and outstanding at
        June 30, 2008 and 2009 respectively
        
        
        4,403,950
        
        
        8,704,197Additional paid in capital
        
        
        164,061,310
        
        
        172,861,427Deficit accumulated during development stage
        
        
        (171,695,440
        )
        
        (186,791,819
        )Less-Treasury stock, 13,750 shares at cost
        
        
        (7,973
        )
        
        (7,973
        )TOTAL STOCKHOLDERS' DEFICIT
        
        $
        (3,238,153
        )
        $
        (5,234,168
        )TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
        
        $
        2,350,833
        
        $
        3,489,487


The
accompanying notes are an integral part of these consolidated financial
statements.

77

---

mPHASE TECHNOLOGIES, INC. 
(A Development Stage Company)Consolidated Statements of Operations

For the FYE
        June 30,
        
        Date of
        Inception to
        June 30,2007
        
        2008
        
        2009
        
        2009(As Restated)
        
        (As Restated)
        
        (As Restated)REVENUES
        
        $
        153,504
        
        $
        112,928
        
        $
        186,579
        
        $
        22,748,618COSTS AND EXPENSESCost of Sales
        
        
        89,802
        
        
        949
        
        
        0
        
        
        16,424,692Research and Development (including non-cash stock related charges of
        $92,600, $0,  $93,600 and $2,503,719 for FYE 2007,2008 & 2009 and
        inception to date respectively)
        
        
        6,393,215
        
        
        988,091
        
        
        1,255,665
        
        
        60,216,173General and Administrative (including non-cash stock related charges
        of $3,448,785, $564,878, $7,503,367 and $69,836,331 for FYE 2007,2008 &
        2009 and inception to date respectively)
        
        
        8,684,053
        
        
        4,031,618
        
        
        9,554,190
        
        
        119,025,953Depreciation and Amortization
        
        
        93,855
        
        
        145,331
        
        
        33,976
        
        
        3,304,164TOTAL COSTS AND EXPENSES
        
        
        15,260,925
        
        
        5,165,989
        
        
        10,843,831
        
        
        198,970,982LOSS FROM OPERATIONS
        
        $
        (15,107,421
        )
        $
        (5,053,061
        )
        $
        (10,657,252
        )
        $
        (176,222,364
        )OTHER INCOME (EXPENSE)Interest (Expense)
        
        
        (18,310
        )
        
        (214,878
        )
        
        (1,320,511
        )
        
        (1,703,840
        )Net Reparation, Impairment and Other Income (Expense)
        
        
        (1,725,831
        )
        
        (527,530
        )
        
        (352,060
        )
        
        (8,510,707
        )Net Charges related to Convertible Debt
        
        
        0
        
        
        2,411,648
        
        
        (2,766,554
        )
        
        (354,906
        )TOTAL OTHER INCOME (EXPENSE)
        
        $
        (1,744,141
        )
        $
        1,669,240
        
        $
        (4,439,125
        )
        $
        (11,569,453
        )NET LOSS
        
        $
        (16,851,562
        )
        $
        (3,383,821
        )
        $
        (15,096,377
        )
        $
        (186,791,817
        )LOSS PER COMMON SHARE, basic and diluted
        
        $
        (0.05
        )
        $
        (0.01
        )
        $
        (0.03
        )WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, basic and diluted
        
        
        310,395,562
        
        
        405,032,339
        
        
        592,455,950


The accompanying notes are an
integral part of these consolidated financial statements.

78

---

mPHASE TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF CHANGES IN

STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION (OCTOBER 2, 1996) 
TO JUNE 30, 1997 AND FOR EACH OF THE TWELVE YEARS 
IN THE PERIOD ENDED JUNE 30, 2009

|                                                                                        |  |                       |            |                  |   |                  |  |                                |        |                         |   |                       |  |                                           |            |   |   |             |   |   |             |  
|--------------------------------------------------------------------------------------- |  | --------------------- | ---------- | ---------------- | - | ---------------- |  | ------------------------------ | ------ | ----------------------- | - | --------------------- |  | ----------------------------------------- | ---------- | - | - | ----------- | - | - | ----------- | -
|                                                                                        |  | Common
  Stock Shares |            | Par Value
  0.01 |   | Treasury
  Stock |  | Additional
  Paid-In
  Capital |        | Deferred
  Compensation |   | Accumulated
  Deficit |  | Total
  Stockholders
  Equity
  (Deficit) |           
|                                                                                        |  |                       |            |                  |   |                  |  |                                |        |                         |   |                       |  |                                           |            |   |   |             |   |   |             |  
|Balance, June 30, 1998                                                                  |  |                       | 13,579,711 |                  | $ | 135,797          |  | $                              | (7,973 | )                       | $ | 4,079,692             |  | $                                         | 0          |   | $ | (5,122,305  | ) | $ | (914,789    | )
|Issuance of common stock with warrants in private placements, net of
  offering         |  |                       | 3,120,000  |                  |   | 31,200           |  |                                |        |                         |   | 2,981,800             |  |                                           |            |   |   |             |   |   | 3,013,000   |  
|                                                                                       
|Issuance of common stock for services                                                   |  |                       | 1,599,332  |                  |   | 15,993           |  |                                |        |                         |   | 8,744,873             |  |                                           |            |   |   |             |   |   | 8,760,866   |  
|                                                                                       
|Issuance of common stock with warrants in private placement, net of
  offering          |  |                       | 642,000    |                  |   | 6,420            |  |                                |        |                         |   | 1,553,227             |  |                                           |            |   |   |             |   |   | 1,559,647   |  
|                                                                                       
|Issuance of common stock in private placement, net of offering costs
  of $679,311      |  |                       | 4,426,698  |                  |   | 44,267           |  |                                |        |                         |   | 10,343,167            |  |                                           |            |   |   |             |   |   | 10,387,434  |  
|                                                                                        |  |                       |            |                  |   |                  |  |                                |        |                         |   |                       |  |                                           |            |   |   |             |   |   |             |  
|Issuance of stock options for services                                                  |  |                       |            |                  |   |                  |  |                                |        |                         |   | 7,129,890             |  |                                           |            |   |   |             |   |   | 7,129,890   |  
|                                                                                        |  |                       |            |                  |   |                  |  |                                |        |                         |   |                       |  |                                           |            |   |   |             |   |   |             |  
|Issuance of warrants for services                                                       |  |                       |            |                  |   |                  |  |                                |        |                         |   | 16,302                |  |                                           |            |   |   |             |   |   | 16,302      |  
|                                                                                        |  |                       |            |                  |   |                  |  |                                |        |                         |   |                       |  |                                           |            |   |   |             |   |   |             |  
|Deferred employee stock option compensation                                             |  |                       |            |                  |   |                  |  |                                |        |                         |   |                       |  |                                           | (140,000   | ) |   |             |   |   | (140,000    | )
|Net loss                                                                                |  |                       |            |                  |   |                  |  |                                |        |                         |   |                       |  |                                           |            |   |   | (22,838,344 | ) |   | (22,838,344 | )
|                                                                                        |  |                       |            |                  |   |                  |  |                                |        |                         |   |                       |  |                                           |            |   |   |             |   |   |             |  
|Balance, June 30, 1999                                                                  |  |                       | 23,367,741 |                  | $ | 233,677          |  | $                              | (7,973 | )                       | $ | 34,848,951            |  | $                                         | (140,000   | ) | $ | (27,960,649 | ) | $ | 6,974,006   |  
|                                                                                        |  |                       |            |                  |   |                  |  |                                |        |                         |   |                       |  |                                           |            |   |   |             |   |   |             |  
|Issuance of common stock and options in settlement                                      |  |                       | 75,000     |                  |   | 750              |  |                                |        |                         |   | 971,711               |  |                                           |            |   |   |             |   |   | 972,461     |  
|                                                                                       
|Issuance of common stock upon exercise of warrants and
options                          |  |                       | 4,632,084  |                  |   | 46,321           |  |                                |        |                         |   | 5,406,938             |  |                                           |            |   |   |             |   |   | 5,453,259   |  
|                                                                                        |  |                       |            |                  |   |                  |  |                                |        |                         |   |                       |  |                                           |            |   |   |             |   |   |             |  
|Issuance of common stock in private placement, net of cash offering
  costs of $200,000 |  |                       | 1,000,000  |                  |   | 10,000           |  |                                |        |                         |   | 3,790,000             |  |                                           |            |   |   |             |   |   | 3,800,000   |  
|                                                                                        |  |                       |            |                  |   |                  |  |                                |        |                         |   |                       |  |                                           |            |   |   |             |   |   |             |  
|Issuance of common stock in private placement, net of cash offering
  costs of $466,480 |  |                       | 1,165,500  |                  |   | 11,655           |  |                                |        |                         |   | 9,654,951             |  |                                           |            |   |   |             |   |   | 9,666,606   |  
|                                                                                        |  |                       |            |                  |   |                  |  |                                |        |                         |   |                       |  |                                           |            |   |   |             |   |   |             |  
|Issuance of common stock for services                                                   |  |                       | 1,164,215  |                  |   | 11,642           |  |                                |        |                         |   | 8,612,265             |  |                                           |            |   |   |             |   |   | 8,623,907   |  
|                                                                                        |  |                       |            |                  |   |                  |  |                                |        |                         |   |                       |  |                                           |            |   |   |             |   |   |             |  
|Issuance of options for services                                                        |  |                       |            |                  |   |                  |  |                                |        |                         |   | 9,448,100             |  |                                           |            |   |   |             |   |   | 9,448,100   |  
|                                                                                        |  |                       |            |                  |   |                  |  |                                |        |                         |   |                       |  |                                           |            |   |   |             |   |   |             |  
|Deferred employee stock option compensation                                             |  |                       |            |                  |   |                  |  |                                |        |                         |   | 1,637,375             |  |                                           | (1,637,375 | ) |   |             |   |   |            |  
|                                                                                        |  |                       |            |                  |   |                  |  |                                |        |                         |   |                       |  |                                           |            |   |   |             |   |   |             |  
|Amortization of deferred employee stock option
compensation                             |  |                       |            |                  |   |                  |  |                                |        |                         |   |                       |  |                                           | 551,707    |   |   |             |   |   | 551,707     |  
|Net loss                                                                                |  |                       |            |                  |   |                  |  |                                |        |                         |   |                       |  |                                           |            |   |   | (38,161,542 | ) |   | (38,161,542 | )
|Balance, June 30, 2000                                                                  |  |                       | 31,404,540 |                  | $ | 314,045          |  | $                              | (7,973 | )                       | $ | 74,370,291            |  | $                                         | (1,225,668 | ) | $ | (66,122,191 | ) | $ | 7,328,504   |  
|                                                                                        |  |                       |            |                  |   |                  |  |                                |        |                         |   |                       |  |                                           |            |   |   |             |   |   |             |  

The accompanying notes are
an integral part of these Consolidated Financial Statements.

79

---

mPHASE TECHNOLOGIES, INC. 
(A DEVELOPMENT STAGE COMPANY) 
CONSOLIDATED STATEMENTS OF CHANGES IN 
STOCKHOLDERS' EQUITY (DEFICIT) 
FOR THE PERIOD FROM INCEPTION (OCTOBER 2, 1996) 
TO JUNE 30, 1997 AND FOR EACH OF THE TWELVE YEARS 
IN THE PERIOD ENDED JUNE 30, 2009

Common
  Stock
  Shares

Par Value
  0.01

Treasury
  Stock

Additional
  Paid-In
  Capital

Deferred
  Compensation

Accumulated
  Deficit

Total
  Stockholders
  Equity
  (Deficit)Balance, June 30, 2000


31,404,540

$
314,045

$
(7,973
)
$
74,370,291

$
(1,225,668
)
$
(66,122,191
)
$
7,328,504Issuance of common stock upon exercise of options


320,000


3,200





324,300








327,500Issuance of common stock with warrants in private placements, net of
  cash offering costs of $512,195


4,329,850


43,298





7,766,547








7,809,845Issuance of common stock for services


450,000


4,500





1,003,125








1,007,625Issuance of options and warrants for services











5,849,585








5,849,585Deferred employee stock option compensation











607,885


(607,885
)Amortization of deferred employee stock option
compensation














1,120,278





1,120,278Issuance of common stock in settlement of debt to directors and
  related parties


4,840,077


48,402





2,371,637








2,420,039Net Loss

















(23,998,734
)

(23,998,734
)Balance June 30, 2001


41,344,467

$
413,445

$
(7,973
)
$
92,293,370

$
(713,275
)
$
(90,120,925
)
$
1,864,642Issuance of Common stock with warrants in private
placement


6,980,643


69,807





1,903,943








1,973,750Issuance of Common stock for services


2,976,068


29,760





1,169,241








1,199,001Issuance of options and warrants for services











1,877,937








1,877,937Cancellation of unearned options to former employees











(140,802
)

140,802Amortization of deferred employee stock option
compensation














548,550





548,550Issuance of common stock and warrants in settlement of debt to
  related parties and strategic vendors


7,492,996


74,930





2,663,728








2,738,658Sale of Common stock to certain Officers and Directors in private
  placement


2,000,000


20,000





980,000








1,000,000Issuance of Common stock upon exercise of options


13,334


133





3,867


4,000Net Loss

















(11,249,387
)

(11,249,387
)Balance, June 30, 2002


60,807,508

$
608,075

$
(7,973
)
$
100,751,284

$
(23,923
)
$
(101,370,312
)
$
(42,849
)


The accompanying notes are an
integral part of these Consolidated Financial Statements.

80

---

mPHASE TECHNOLOGIES, INC. 
CONSOLIDATED STATEMENT OF CHANGES IN 
SHAREHOLDERS' EQUITY (DEFICIT) 
FOR THE PERIOD FROM INCEPTION (OCTOBER 2, 1996) 
TO JUNE 30, 1997 AND FOR EACH OF THE TWELVE YEARS 
IN THE PERIOD ENDED JUNE 30, 2009

|                                                                                                       |  |                         |            |                    |   |                  |  |                                |        |                         |   |                       |  |                                           |         |   |   |              |   |   |            |  
|------------------------------------------------------------------------------------------------------ |  | ----------------------- | ---------- | ------------------ | - | ---------------- |  | ------------------------------ | ------ | ----------------------- | - | --------------------- |  | ----------------------------------------- | ------- | - | - | ------------ | - | - | ---------- | -
|                                                                                                       |  | Common
  Stock
  Shares |            | Par
  Value
  0.01 |   | Treasury
  Stock |  | Additional
  Paid-In
  Capital |        | Deferred
  Compensation |   | Accumulated
  Deficit |  | Total
  Stockholders
  Equity
  (Deficit) |        
|                                                                                                       |  |                         |            |                    |   |                  |  |                                |        |                         |   |                       |  |                                           |         |   |   |              |   |   |            |  
|Balance,
  June 30, 2002                                                                               |  |                         | 60,807,508 |                    | $ | 608,075          |  | $                              | (7,973 | )                       | $ | 100,751,284           |  | $                                         | (23,923 | ) | $ | (101,370,312 | ) | $ | (42,849    | )
|                                                                                                       |  |                         |            |                    |   |                  |  |                                |        |                         |   |                       |  |                                           |         |   |   |              |   |   |            |  
|                                                                                                       |  |                         |            |                    |   |                  |  |                                |        |                         |   |                       |  |                                           |         |   |   |              |   |   |            |  
|Issuance of Common stock with warrants in private placement, net of
  Cash offering costs of $124,687  |  |                         | 4,296,680  |                    |   | 42,967           |  |                                |        |                         |   | 1,121,351             |  |                                           |         |   |   |              |   |   | 1,164,318  |  
|                                                                                                       |  |                         |            |                    |   |                  |  |                                |        |                         |   |                       |  |                                           |         |   |   |              |   |   |            |  
|Issuance of Common stock for services                                                                  |  |                         | 426,000    |                    |   | 4,260            |  |                                |        |                         |   | 107,985               |  |                                           |         |   |   |              |   |   | 112,245    |  
|                                                                                                       |  |                         |            |                    |   |                  |  |                                |        |                         |   |                       |  |                                           |         |   |   |              |   |   |            |  
|Issuance of options and warrants for services                                                          |  |                         |            |                    |   |                  |  |                                |        |                         |   | 274,100               |  |                                           |         |   |   |              |   |   | 274,100    |  
|                                                                                                       |  |                         |            |                    |   |                  |  |                                |        |                         |   |                       |  |                                           |         |   |   |              |   |   |            |  
|Amortization of deferred employee stock option
compensations                                           |  |                         |            |                    |   |                  |  |                                |        |                         |   |                       |  |                                           | 23,923  |   |   |              |   |   | 23,923     |  
|                                                                                                       |  |                         |            |                    |   |                  |  |                                |        |                         |   |                       |  |                                           |         |   |   |              |   |   |            |  
|Issuance of common stock and warrants in settlement of debt to
related
  parties and strategic vendors |  |                         | 5,923,333  |                    |   | 59,233           |  |                                |        |                         |   | 1,826,329             |  |                                           |         |   |   |              |   |   | 1,885,562  |  
|                                                                                                       |  |                         |            |                    |   |                  |  |                                |        |                         |   |                       |  |                                           |         |   |   |              |   |   |            |  
|Net Loss                                                                                               |  |                         |            |                    |   |                  |  |                                |        |                         |   |                       |  |                                           |         |   |   | (6,,646,185  | ) |   | (6,646,185 | )
|                                                                                                       |  |                         |            |                    |   |                  |  |                                |        |                         |   |                       |  |                                           |         |   |   |              |   |   |            |  
|Balance, June 30, 2003                                                                                 |  |                         | 71,453,521 |                    | $ | 714,535          |  | $                              | (7,973 | )                       | $ | 104,081,049           |  | $                                         | 0       |   | $ | (108,016,497 | ) | $ | (3,228,886 | )
|                                                                                                       |  |                         |            |                    |   |                  |  |                                |        |                         |   |                       |  |                                           |         |   |   |              |   |   |            |  
|                                                                                                       |  |                         |            |                    |   |                  |  |                                |        |                         |   |                       |  |                                           |         |   |   |              |   |   |            |  
|Issuance of common stock with warrants in private placement, net of
  cash offering costs of $313,200  |  |                         | 15,177,973 |                    |   | 151,779          |  |                                |        |                         |   | 4,322,934             |  |                                           |         |   |   |              |   |   | 4,474,713  |  
|                                                                                                       |  |                         |            |                    |   |                  |  |                                |        |                         |   |                       |  |                                           |         |   |   |              |   |   |            |  
|Issuance of common stock for services                                                                  |  |                         | 924,667    |                    |   | 9,247            |  |                                |        |                         |   | 238,153               |  |                                           |         |   |   |              |   |   | 247,400    |  
|                                                                                                       |  |                         |            |                    |   |                  |  |                                |        |                         |   |                       |  |                                           |         |   |   |              |   |   |            |  
|Issuance of options and warrants for services                                                          |  |                         |            |                    |   |                  |  |                                |        |                         |   | 1,067,393             |  |                                           |         |   |   |              |   |   | 1,067,393  |  
|                                                                                                       |  |                         |            |                    |   |                  |  |                                |        |                         |   |                       |  |                                           |         |   |   |              |   |   |            |  
|Issuance of common stock pursuant to exercise of warrants                                              |  |                         | 1,233,334  |                    |   | 12,333           |  |                                |        |                         |   | 304,467               |  |                                           |         |   |   |              |   |   | 316,800    |  
|                                                                                                       |  |                         |            |                    |   |                  |  |                                |        |                         |   |                       |  |                                           |         |   |   |              |   |   |            |  
|Issuance of common stock and warrants in settlement of debt to
related
  parties and strategic vendors |  |                         | 110,467    |                    |   | 1,105            |  |                                |        |                         |   | 1,962,099             |  |                                           |         |   |   |              |   |   | 1,963,204  |  
|                                                                                                       |  |                         |            |                    |   |                  |  |                                |        |                         |   |                       |  |                                           |         |   |   |              |   |   |            |  
|Net Loss                                                                                               |  |                         |            |                    |   |                  |  |                                |        |                         |   |                       |  |                                           |         |   |   | (7,758,586   | ) |   | (7,758,586 | )
|                                                                                                       |  |                         |            |                    |   |                  |  |                                |        |                         |   |                       |  |                                           |         |   |   |              |   |   |            |  
|Balance, June 30, 2004                                                                                 |  |                         | 88,899,962 |                    | $ | 888,999          |  | $                              | (7,973 | )                       | $ | 111,976,095           |  | $                                         | 0       |   | $ | (115,775,083 | ) | $ | (2,917,962 | )
|                                                                                                       |  |                         |            |                    |   |                  |  |                                |        |                         |   |                       |  |                                           |         |   |   |              |   |   |            |  

The
accompanying notes are an integral part of these Consolidated Financial
Statements.

81

---

mPHASE TECHNOLOGIES, INC. 
CONSOLIDATED STATEMENT OF CHANGES IN 
SHAREHOLDERS' EQUITY (DEFICIT) 
FOR THE PERIOD FROM INCEPTION (OCTOBER 2, 1996)
TO JUNE 30, 1997 AND FOR EACH OF THE TWELVE YEARS IN THE PERIOD ENDED JUNE 30,
2009

Common
  Stock Shares

Par Value
  0.01

Treasury
  Stock

Additional
  Paid-In
  Capital

Accumulated
  Deficit

Total
  Stockholders
  Equity (Deficit)Balance,
June 30, 2004


88,899,962

$
888,999

$
(7,973
)
$
111,976,095

$
(115,775,083
)
$
(2,917,962
)Issuance of
Shares in Private Placement


39,853,661


398,535





6,888,553





7,287,088Issuance of in
connection with exercise of warrants


3,637,954


36,380





644,229





680,609Conversion of
Debt to Common stock and warrants


3,895,171


38,952





1,174,134





1,213,086Options Awarded
to Consultants











2,191,043





2,191,043Options Awarded
to Officers











625,290





625,290Issuance of
shares to Officers and consultants for services


1,151,000


11,510





322,500





334,010Exercise of
cashless warrants


4,949,684


49,499





(49,499
)Exercise of
warrants by officers


1,770,400


17,704











17,704Reparation of
Private Placement Offering


891,000


8,910





176,811





185,721Net Loss














(11,234,324
)

(11,234,324
)Balance June
30, 2005


145,048,832

$
1,450,489

$
(7,973
)
$
123.949,156

$
(127,009,407
)
$
(1,617,735
)Issuance of
common stock pursuant to the exercise of warrants, net of cash expenses of
$108,000


15,720,120


157,201





2,850,523





3,007,724Issuance of
common stock with warrants in private placements, net of cash expenses of
$674,567


72,786,897


727,868





9,329,781





10,057,649Issuance of
common stock for services


11,500,000


115,000





2,324,000





2,439,000Conversion of
related party and strategic vendor debts to common stock and warrants


3,331,864


33,319





556,681





590,000Stock options
awarded to consultants, employees and officers











3,837,423





3,837,423Issuance of
additional shares and warrants to effect revised pricing on previous private
offering charged to expense


29,848,271


298,483





5,232,021





5,530,504Net loss















(24,450,650
)

(24,450,650
)Balance,
June 30, 2006


278,235,984

$
2,782,360

$
(7,973
)
$
148,079,585

$
(151,460,057
)
$
(606,085
)


The
accompanying notes are an integral part of these Consolidated Financial
Statements.

82

---

|                                                       
|-------------------------------------------------------
|mPHASE
      TECHNOLOGIES, INC.                        
|(A DEVELOPMENT
      STAGE COMPANY)                    
|CONSOLIDATED
      STATEMENTS OF CHANGES IN            
|STOCKHOLDERS'
      EQUITY (DEFICIT)                   
|FOR THE PERIOD
      FROM INCEPTION (OCTOBER 2, 1996)  
|TO JUNE 30,
      1997 AND FOR EACH OF THE TWELVE YEARS
|IN THE PERIOD
      ENDED JUNE 30, 2009                
|                                                       

|                                                                                                       |  | Shares      |  | $ | .01 StatedValue |  |  | TreasuryStock |   |   | Additional Paid in Capital |  |   | Deferred Compensation |   |  | AccumulatedDeficit |   |   | TotalShareholders(Deficit)Equity |  
|------------------------------------------------------------------------------------------------------ |  | ----------- |  | - | --------------- |  |  | ------------- | - | - | -------------------------- |  | - | --------------------- | - |  | ------------------ | - | - | -------------------------------- | -
|                                                                                                       |  |             |  |   |                 |  |  |               |   |   |                            |  |   |                       |   |  |                    |   |   |                                  |  
|Balance June 30, 2006                                                                                  |  | 278,235,984 |  | $ | 2,782,360       |  |  | ($7,973       | ) | $ | 148,079,585                |  |   |                       |   |  | ($151,460,057      | ) |   | ($606,085                        | )
|Issuance of common stock pursuant to the exercise of
      warrants (net of cash expenses of $150,000) |  | 14,740,669  |  | $ | 147,406         |  |  |               |   | $ | 1,922,261                  |  |   |                       |   |  |                    |   | $ | 2,069,667                        |  
|Issuance of common stock in private
      placements, (net of cash expenses of $216,134)               |  | 47,958,060  |  | $ | 479,581         |  |  |               |   | $ | 5,711,788                  |  |   |                       |   |  |                    |   | $ | 6,191,369                        |  
|Issuance of common stock for services                                                                  |  | 18,172,983  |  | $ | 181,730         |  |  |               |   | $ | 2,486,885                  |  |   | ($627,250             | ) |  |                    |   | $ | 2,041,365                        |  
|Conversion of related party and strategic
      vendor debt to common stock                            |  | 6,073,728   |  | $ | 60,737          |  |  |               |   | $ | 930,972                    |  |   |                       |   |  |                    |   | $ | 991,709                          |  
|Issuance of additional shares and warrants to effect
      repricing                                   |  | 22,664,580  |  | $ | 226,646         |  |  |               |   | $ | 1,647,374                  |  |   |                       |   |  |                    |   | $ | 1,874,020                        |  
|Stock options awarded to employees and
      officers                                                  |  |             |  |   |                 |  |  |               |   | $ | 1,321,853                  |  |   |                       |   |  |                    |   | $ | 1,321,853                        |  
|Deferred stock compensation                                                                            |  |             |  |   |                 |  |  |               |   |   |                            |  | $ | 213,166               |   |  |                    |   | $ | 213,166                          |  
|Net Loss                                                                                               |  |             |  |   |                 |  |  |               |   |   |                            |  |   |                       |   |  | ($16,851,562       | ) |   | ($16,851,562                     | )
|Balance June 30, 2007                                                                                  |  | 387,846,004 |  | $ | 3,878,460       |  |  | ($7,973       | ) | $ | 162,100,718                |  |   | ($414,084             | ) |  | ($168,311,619      | ) |   | ($2,754,498                      | )

83

---



mPHASE TECHNOLOGIES, INC. 
CONSOLIDATED STATEMENT OF CHANGES IN 
SHAREHOLDERS' EQUITY (DEFICIT) 
FOR THE PERIOD FROM INCEPTION (OCTOBER 2, 1996)
TO JUNE 30, 1997 AND FOR EACH OF THE TWELVE YEARS IN THE PERIOD ENDED JUNE 30,
2009AS RESTATED

|                                                                                   |             |            |          |                 |              |                | Total       
|---------------------------------------------------------------------------------- | ----------- | ---------- | -------- | --------------- | ------------ | -------------- | ------------
|                                                                                   |             |            |          | Additional Paid |              |                | Shareholders
|                                                                                   |             | $.01 Par   | Treasury | in              | Deferred     | Accumulated    | (Deficit)   
|                                                                                   | Shares      | Value      | Stock    | Capital         | Compensation | Deficit        | Equity      
|Balance June 30, 2007                                                              | 387,846,004 | $3,878,460 | ($7,973) | $162,100,718    | ($414,084)   | ($168,311,619) | ($2,754,498)
|Issuance of common
      stock in private placements net of $116,253 offering cost | 24,600,000  | $246,000   |          | $898,247        |              |                | $1,144,247  
|Exercise of Warrants
      net of Offering Cost $72,222                            | 11,111,113  | $111,111   |          | $538,889        |              |                | $650,000    
|Contingent liability
      recorded on warrant exercise above                      |             |            |          | (1,006,200)     |              |                | (1,006,200) 
|Common shares in
      settlement of accrued expenses                              | 1,019,200   | $10,192    |          | $89,808         |              |                | $100,000    
|Issuance of additional
      shares effect repricing                               | 4,663,741   | $46,637    |          | $345,401        |              |                | $392,038    
|Stock options/
      warrants awarded to employees and investors                   |             |            |          | $85,682         |              |                | $85,682     
|Stock based
      compensation                                                     | 1,000,000   | 10,000     |          | $90,192         |              |                | $100,192    
|Amortization of
      deferred stock compensation                                  |             |            |          |                 | 414,084      |                | $414,084    
|Investment in Granita                                                              |             |            |          | $514,000        |              |                | $514,000    
|Conversion of debt                                                                 | 4,904,942   | $49,050    |          | $192,073        |              |                | $241,123    
|Cost related to
      convertible debt financing                                   | 5,250,000   | $52,500    |          | $212,500        |              |                | $265,000    
|Net Loss                                                                           |             |            |          |                 |              | ($3,383,821)   | ($3,383,821)
|Balance June,30, 2008                                                              | 440,395,000 | $4,403,950 | ($7,973) | $164,061,310    | 0            | ($171,695,440) | ($3,238,153)

The
accompanying notes are an integral part of these Consolidated Financial
Statements.

84

---

mPHASE TECHNOLOGIES, INC. 
CONSOLIDATED STATEMENT OF CHANGES IN 
SHAREHOLDERS' EQUITY (DEFICIT) 
FOR THE PERIOD FROM INCEPTION (OCTOBER 2, 1996)
TO JUNE 30, 1997 AND FOR EACH OF THE TWELVE YEARS IN THE PERIOD ENDED JUNE 30,
2009AS RESTATED

|                                                 |             |            |          |              |                | Total        
|------------------------------------------------ | ----------- | ---------- | -------- | ------------ | -------------- | -------------
|                                                 |             |            |          | Additional   |                | Shareholders 
|                                                 |             | $.01 Par   | Treasury | Paid in      | Accumulated    | (Deficit)    
|                                                 | Shares      | Value      | Stock    | Capital      | Deficit        | Equity       
|Balance June 30, 2008                            | 440,395,000 | $4,403,950 | ($7,973) | $164,061,310 | ($171,695,440) | ($3,238,153) 
|Issuance of common
      stock in private        |             |            |          |              |                |              
|placements net of
      offering cost ($80,000)  | 72,333,333  | $723,333   |          | ($3,333)     |                | $720,000     
|Issuance of additional
      shares effect       |             |            |          |              |                |              
|repricing                                        | 19,522,000  | $195,220   |          | $236,952     |                | $432,172     
|Stock options/
      warrants awarded to         |             |            |          |              |                |              
|employees and
      investors                    |             |            |          | $4,071,348   |                | $4,071,348   
|Stock based
      compensation                   | 61,750,000  | $617,500   |          | $2,908,115   |                | $3,525,615   
|Vendor settlements                               | (1,926,470) | ($19,265)  |          | $19,265      |                | $0           
|Beneficial Conversion
      feature of Notes     |             |            |          |              |                |              
|Payable, including
      $914,060 on Officers'   |             |            |          |              |                |              
|Notes Payable                                    |             |            |          | $1,028,560   |                | $1,028,560   
|Forgiveness of related
      party debt          |             |            |          | $19,336      |                | $19,336      
|                                                 |             |            |          |              |                |              
|Conversion of debt
      securities and interest | 278,346,019 | $2,783,459 |          | $519,874     |                | $3,303,333   
|Net Loss                                         |             |            |          |              | ($15,096,379)  | ($15,096,379)
|                                                 |             |            |          |              |                |              
|Balance June 30, 2009                            | 870,419,882 | $8,704,197 | ($7,973) | $172,861,427 | ($186,791,817) | ($5,234,168) 

The
accompanying notes are an integral part of these consolidated financial
statements.

85

---

mPHASE TECHNOLOGIES, INC.(A Development Stage Company)Consolidated Statements of Cash Flows

|                                                                                                  |               |                   |               | October 2, 1996    
|------------------------------------------------------------------------------------------------- | ------------- | ----------------- | ------------- | -------------------
|                                                                                                  |               | Fiscal Year Ended |               | (Date of Inception)
|                                                                                                  | June 30,      | June 30,          | June 30,      | To June 30,        
|                                                                                                  | 2007          | 2008              | 2009          | 2009               
|                                                                                                  |               | (As Restated)     | (As Restated) | (As Restated)      
|Cash Flow From
      Operating Activities:                                                        |               |                   |               |                    
|Net Loss                                                                                          | ($16,851,562) | ($3,383,821)      | ($15,096,377) | ($186,791,817)     
|Adjustments to
      reconcile net loss to net cash used in                                       |               |                   |               |                    
|operating activities:                                                                             |               |                   |               |                    
|Depreciation and
      amortization                                                               | 218,237       | 246,355           | 117,943       | 7,400,300          
|(Gain) loss on debt
      extinguishments                                                         |               |                   | (165,154)     | (937,370)          
|Non-cash charges
      relating to issuance of common stock,                                      |               |                   |               |                    
|common stock options
      and warrants                                                           | 3,363,218     | 185,874           | 7,596,963     | 70,217,431         
|Reparation charges                                                                                | 1,874,020     | 392,038           | 432,172       | 8,228,734          
|Derivative Value and
      Debt Discount charges                                                  |               | (1,761,497)       | 2,766,554     | 1,005,057          
|                                                                                                  |               |                   |               |                    
|Write off of Granita
      Inventory/ Sovereign Investment                                        |               | 505,910           | 110,000       | 615,910            
|Other non cash charges
      including amortization of                                            |               |                   |               |                    
|deferred compensation
      and beneficial conversion interest                                    |               |                   |               |                    
|expense                                                                                           | 213,166       | 414,084           | 1,028,560     | 2,043,625          
|Changes in assets and
      liabilities:                                                          |               |                   |               |                    
|Accounts receivable                                                                               | 104,276       | (2,039)           | (42,065)      | 381,811            
|Inventories                                                                                       | (344,640)     | 0                 |               | (510,471)          
|Prepaid expenses and
      Other current assets                                                   | (325,808)     | 320,703           | (31,754)      | (72,575)           
|Other                                                                                             |               |                   |               | 906,535            
|                                                                                                  |               |                   |               |                    
|Accounts payable,
      Accrued expenses, Deferred revenue                                        | 2,084,440     | (746,694)         | 275,321       | 8,309,881          
|Due to/from related
      parties                                                                 |               |                   |               |                    
|Microphase / Janifast//Lintel                                                                     | 73,742        | (249,835)         | 131,824       | 5,509,887          
|Officers and Other                                                                                | 528,100       | 427,597           | 276,104       | 1,711,357          
|Net cash used in
      operating activities                                                       | ($9,062,811)  | ($3,651,325)      | ($2,599,909)  | ($81,981,704)      
|                                                                                                  |               |                   |               |                    
|Cash Flow from
      Investing Activities:                                                        |               |                   |               |                    
|Payments related to
      patents and licensing rights                                            |               | -                 |               | (450,780)          
|Purchase of fixed
      assets                                                                    | (114,480)     | (61,832)          | (8,173)       | (3,287,560)        
|Investment in
      Sovereign                                                                     |               | (110,000)         |               | (110,000)          
|Net Cash (used) in
      investing activities                                                     | ($114,480)    | ($171,832)        | ($8,173)      | ($3,848,340)       
|                                                                                                  |               |                   |               |                    
|Cash Flow from
      Financing Activities:                                                        |               |                   |               |                    
|Proceeds from issuance
      of common stock,                                                     |               |                   |               |                    
|exercises warrants and
      finders fees, net                                                    | 7,761,037     | 2,294,247         | 720,000       | 82,698,879         
|Payments of short term
      notes                                                                | (241,418)     | (379,848)         |               | (1,281,552)        
|Advances from
      Microphase                                                                    |               |                   |               | 347,840            
|Issuance of Other Debt                                                                            |               | 154,000           | 112,500       | 266,500            
|Net Proceeds
      (Repayment) from notes payable relatedparties                                  | 321,000       | (116,962)         | 60,187        | 234,516            
|Proceeds
      from the collection of Notes Receivable under
      securities purchase agreements |               | 1,350,000         | 1,800,000     | 3,150,000          
|Sale of minority
      interest in Granita subsidiary                                             |               | 514,000           |               | 514,000            
|Net cash provided
      by financing activities                                                   | $7,840,619    | $3,815,437        | $2,692,687    | $85,930,183        
|                                                                                                  |               |                   |               |                    
|Net increase
      (decrease) in cash                                                             | ($1,336,672)  | ($7,720)          | $84,605       | $100,138           
|CASH
      AND CASHEQUIVALENTS, beginning of period                                               | $1,359,925    | $23,253           | $15,533       | 0                  
|                                                                                                  |               |                   |               |                    
|CASH AND CASH
      EQUIVALENTS, end of period                                                    | $23,253       | $15,533           | $100,138      | $100,138           

The
accompanying notes are an integral part of these consolidated financial
statements.

86

---

mPHASE TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009

1. ORGANIZATION AND NATURE OF BUSINESS

mPhase, a New Jersey corporation founded in
1996, is a publicly-held company with over 19,000 shareholders and
approximately 870 million shares of common stock outstanding. The Company's
common stock is traded on the Over the Counter Bulletin Board under the ticker
symbol XDSL.

The Company is
in the development stage and historically has focused much of its' efforts in
the commercial deployment of its TV+ products for delivery of broadcast IPTV,
and DSL component products which include POTS splitters. Beginning in 2004, the
Company added a new line of power cell batteries and electronic sensors
(magnetometers) being developed through the use of Nanotechnology. Since mPhase
is in the development stage, the accompanying consolidated financial statements
should not be regarded as typical for normal operating periods.

The Company
has recently shifted its primary business focus to the development of battery
technology and using the science of nanotechnology has developed a battery that
has a significantly longer shelf life prior to activation than conventional
batteries. In addition, such battery product, unlike conventional batteries, is
capable of being disposed of after use without harm to the environment.

On April 17,
2007, the Company announced that it had formed AlwaysReady, Inc., a New Jersey
Corporation, as a new wholly-owned subsidiary. The Company plans to transfer
all of its nanotechnology assets and appropriate liabilities to such company so
as to separate its nanotechnology product line from its IPTV product.
Management and staff of AlwaysReady Inc have been hired, however, during the
fiscal years ended June 30, 2008 and 2009 the Company funded all the operations
of Always Ready, Inc and no assets or liabilities have been transferred.

On June 20,
2007, the Company announced the formation of a new subsidiary, Granita Media,
Inc. ("Granita"), a Delaware corporation, to promote and develop its IPTV
product line including targeted advertising, and middleware solution.
Capitalization of Granita amounted to $514,000 of equity, provided by employees
and independent investors. During FYE June 30, 2008, related assets and
liabilities were transferred to Granita and its results consolidated into the
these financial statements. Additional funding was to have been arranged from
outside institutional financing and potentially involve the sale of up to 10%
of the common stock of Granita with mPhase retaining 90% of the stock of
Granita. Owing to very challenging conditions in the capital markets, Granita
was unable to raise funds necessary to operate as a self sufficient enterprise
and fund the additional software development necessary for a targeted
advertising enhancement capability of its TV+ solution. In order to conserve
financial resources, all employees of Granita were either terminated or had
resigned by December 31, 2007. (see also footnote #6)

We are
headquartered in Norwalk, Connecticut with offices in Little Falls, and Newark
NJ. mPhase shares common office space with Microphase Corporation, a privately
held company in which the CEO of the company owns a minority interest. Microphase is a leader in the field of radio frequency and
filtering technologies within the defense and telecommunications industry. It
has been in operation for over 50 years and has supported mPhase with
engineering, administrative and financial resources.

87

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|mPHASE TECHNOLOGIES, INC.                 
|------------------------------------------
|(A DEVELOPMENT STAGE COMPANY)             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2009                             

2. LOSSES DURING THE DEVELOPMENT STAGE AND MANAGEMENT'S PLANS

Through June 30, 2009, the Company incurred development stage losses totaling approximately $187 million and at June 30, 2009 had a working capital deficit of $3,990,645. Funding in our tradition capital markets was difficult during FYE
2008.and 2009.

Alternatively the Company was able to enter into Convertible Debt arrangements with independent investors to provide liquidity and capital resources during the year. Such arrangements have provided the Company with cash in the amount of
$1,350,000 and $1,800,000 during FYE 2008 and 2009 respectively. These arrangements will likely provide much of the working capital anticipated to be needed during the next FYE (See Footnote #8). In addition and from time to time during FYE
2008 and 2009, the Company raised necessary working capital via bridge loans from officers and private placements of equity. Such loans have subsequently been repaid (see notes payable to officers).

The Company is currently focused upon development and commercialization of its "Always Ready" battery product developed using the science of nanotechnology. The Company believes that such battery has a much longer shelf life than conventional
batteries and will have significant commercial and military applications. To conserve financial resources, the Company has suspended development of its magnetometer sensor devices and all activities all activity related to its IPTV business. It is
unsure whether any intellectual property related to those operations will have significant value.

The Company's ability to continue as a going concern and its future success is dependent upon its ability to raise capital in the near term to: (1) satisfy its current obligations, (2) continue its research and development efforts, and (3)
successfully develop, market and sell its products. The Company believes that it will be able to complete the necessary steps in order to meet its cash flow requirements throughout fiscal 2010 and continue its development and commercialization
efforts.

However, there can be no assurance that mPhase will generate sufficient revenues to provide positive cash flows from operations or that sufficient capital will be available, when required, to permit the Company to realize its plans. The accompanying
consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of mPhase, it's wholly-owned and majority owned subsidiaries. Significant inter-company accounts and transactions have been eliminated in consolidation.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted accounting principles 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. Actual results could differ from those estimates.

RECLASSIFICATIONS

Certain reclassifications have been made in the prior period
consolidated financial statements to conform to the current period
presentation.

88

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|mPHASE TECHNOLOGIES, INC.                 
|------------------------------------------
|(A DEVELOPMENT STAGE COMPANY)             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2009                             

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
(Continued)

STOCK BASED COMPENSATION

On July 1, 2005, the Company adopted the provisions of
Financial Accounting Standards Board Statement No. 123R, "Share-Based
Payment"(SFAS 123R). SFAS 123R revised SFAS 123, "Accounting for Stock
Based Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock
Issued to Employees." SFAS 123R requires companies to measure and recognize
compensation expense for all employee stock-based payments at fair value over
the service period underlying the arrangement. Therefore, the Company is now
required to record the grant-date fair value of its stock-based payments (i.e.,
stock options and other equity-based compensation) in the statement of
operations. Effective, July 1,2005, the Company adopted FAS 123R using the
"modified prospective" method, and has recorded as an expense the fair value of
all stock based grants to employees after such date. The Company has not
restated its operating results for any prior fiscal year end or quarter.

PROPERTY AND EQUIPMENT

Property and equipment is recorded at cost. Depreciation is
provided on the straight-line method over the estimated useful lives of three to
five years.

REVENUE RECOGNITION

As required, mPhase has adopted the Securities and Exchange
Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 104, "Revenue
Recognition in Financial Statements," which provides guidelines on applying
generally accepted accounting principles to revenue recognition based on the
interpretations and practices of the SEC. The Company recognizes revenue on its
research grant contract upon delivery of milestones defined in the contract, at
the fixed predetermined price under the contract in which payment is reasonably
expected as enumerated in SAB104.

RESEARCH AND DEVELOPMENT

Research and Development cost are charged to operations when
incurred. The amounts charged to expense for the years ended 2007, 2008, 2009
and inception to date were, $6,393,215, $988,091, $1,255,665 and $60,216,173
respectively.

PATENTS AND LICENSES

Patents and licenses are capitalized when mPhase determines
there will be a future benefit derived from such assets, and are stated at cost.
Amortization is computed using the straight-line method over the estimated
useful life of the asset, generally five years. Amortization expense was,
$36,439, $51,140 and $0 for the years ended June 30, 2007, 2008, and 2009,
respectively. As of June 30, 2008, the book value of such assets has been fully
amortized.

INVENTORIES

The Company uses the First In First Out method (FIFO) to
account for inventory which is carried at cost. As of June 30, 2007, inventory
consisted primarily of component parts being assembled on location in
anticipation of deployment of specific IPTV systems. Appropriate reserves have
been taken to assure that the cost of such inventory does not exceed the value
of the underlying contract. During the year ended June 30, 2008, the Company
determined that the value of inventory related to IPTV had been impaired and
charged to earnings all associated amounts ($505,910).

89

---



|mPHASE TECHNOLOGIES, INC.                 
|------------------------------------------
|(A DEVELOPMENT STAGE COMPANY)             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2009                             

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
(Continued)

LONG-LIVED ASSETS

In August 2001, the FASB issued Statement No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets," which became effective for
the Company July 1, 2002 for the fiscal years ended June 30, 2005, June 30, 2006
thru June 30, 2009. The Company assesses long-term assets for impairment under
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
Under SFAS No. 144, the Company reviews long-term assets for impairment whenever
events or circumstances indicate that the carrying amount of those assets may
not be recoverable. The Company also assesses these assets for impairment based
on their estimated future cash flows. During the fiscal year ended June 30,
2009, the Company wrote-down the value of its investment of a 10% interest in
Soverign Corporation from $110,000 to $0.

REPARATION EXPENSE

As an incentive for additional equity contributions, the
Company will from time to time, adjust the cost of past private purchases of
common stock through the issuance of additional shares in such magnitude as to
reduce an investors cost to an average price that more closely approximates
current market value. The market value of additional shares issued without cash
investment is charged to Reparation Expense, which is included in Other
Expenses. Reparations expenses have amounted to, $1,874,020, $392,038, $432,172
and $8,167,734 for the years ended 2007, 2008, 2009 and inception to date,
respectively.

LOSS PER COMMON SHARE, BASIC AND DILUTED

mPhase accounts for net loss per common share in accordance
with the provisions of SFAS No. 128, "Earnings per Share" ("EPS"). SFAS No. 128
requires the disclosure of the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity. Common equivalent shares have been excluded from the
computation of diluted EPS since their effect is anti-dilutive. In accordance
with SFAS No. 128, "Earnings Per Share," Basic loss per share is computed by
dividing net loss by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share is computed by
dividing net loss adjusted for income or loss that would result from the assumed
conversion of potential common shares from contracts that may be settled in
stock or cash by the weighted average number of shares of common stock, common
stock equivalents and potentially dilutive securities outstanding during each
period. The Company had 141,081,646 warrants and 145,293,000 options outstanding
at June 30, 2009 and convertible debentures convertible into approximately the
Company's common stock based upon the conversion terms at June 30, 2009. The
inclusion of the warrants and potential common shares to be issued in connection
with convertible debt have anti-dilutive effect on diluted loss per share and
have been omitted in such computation.

BUSINESS CONCENTRATIONS AND CREDIT RISK

To date the Company's products have been sold to a limited
number of customers, primarily in the telecommunications and defense industry.
The Company had revenue from two customers of 48% and 22% during the fiscal year
ended June 30, 2007. During the years ended June 30, 2008 and 2009 all revenue
is attributable to research contracts with the US Army. Throughout the year,
cash may exceed FDIC insured limits. The Company maintains cash balances at
financial institutions. The balances are insured by the Federal Deposit
Insurance Corporation up to $250,000. Cash balances exceeded FDIC insured limits
at times throughout the years ended June 30, 2008 and 2009.

90

---



|mPHASE TECHNOLOGIES, INC.                 
|------------------------------------------
|(A DEVELOPMENT STAGE COMPANY)             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2009                             

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)

MATERIAL EQUITY INSTRUMENTS

The Company has material equity instruments including Convertible Debentures and Convertible Notes that are accounted for as Derivative liabilities (SEE BELOW) and options and warrants that are evaluated quarterly for potential reclassification as
liabilities pursuant to EITF 00-19 (SEE ALSO NOTE 8 "Stockholders Equity" under the caption "Other Equity").

DEBT DISCOUNTS

Costs incurred with parties who are providing the actual long-term financing, which generally may include the value of warrants, fair value of the derivative conversion feature, or the intrinsic value of conversion features associated
with the underlying debt, are reflected as a debt discount. These costs and discounts are generally amortized over the life of the related debt.

DERIVATIVE FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended and EITF Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in,
a Company's Own Stock" require all derivatives to be recorded on the balance sheet at fair value. The conversion features of the convertible debentures are embedded derivatives and are separately valued and accounted for on our balance
sheet with changes in fair value recognized during the period of change as a separate component of other income/expense. Fair values for exchange-traded securities and derivatives are based on quoted market prices. The pricing model we use for
determining fair value of our derivatives is the Black-Scholes Pricing Model. Valuations derived from this model are subject to ongoing internal and external verification and review. The model uses market-sourced inputs such as interest rates and
stock price volatilities. Selection of these inputs involves management's judgment and may impact net income.

INCOME TAXES

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and
tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. At June 30, 2009, the Company had a full valuation allowance against its deferred tax assets.

ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments include cash, accounts payable, long term debt, line of credit, convertible debt and due to related parties. Management believes the estimated fair value of cash, accounts payable and debt instruments at June 30,
2009 approximate their carrying value as reflected in the balance sheets due to the short-term nature of these instruments or the use of market interest rates for debt instruments. Fair value of due to related parties cannot be determined due to
lack of similar instruments available to the Company.

91

---



|mPHASE TECHNOLOGIES, INC.                 
|------------------------------------------
|(A DEVELOPMENT STAGE COMPANY)             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2009                             

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      - (Continued)

SUPPLEMENTAL CASH FLOW INFORMATION

|For the FYE June 30,                                                                              |   | 2007    |  |   | 2008      |  |   | 2009      |  
|------------------------------------------------------------------------------------------------- | - | ------- |  | - | --------- |  | - | --------- | -
|                                                                                                  |   |         |  |   |           |  |   |           |  
|                                                                                                  |   |         |  |   |           |  |   |           |  
|Non Cash Investing and Financing Activities:                                                      |   |         |  |   |           |  |   |           |  
|Interest Paid (net interest
      income)                                                         | $ | 18,310  |  | $ | 214,878   |  | $ | 20,054    |  
|Assumption of Sovereign Debt                                                                      |   |         |  | $ | 110,000   |  | $ | 0         |  
|Stock issued (canceled) in
      settlement of accrued expenses                                   |   |         |  | $ | 100,000   |  | $ | (175,000  | )
|Vendor debt into equity                                                                           | $ | 991,709 |  | $ | 0         |  | $ | 0         |  
|Conversion of related party
      obligations to notes payable                                    |   |         |  |   |           |  | $ | 1,068,338 |  
|Convertible Debt issued for Notes Receivable                                                      |   |         |  | $ | 3,300,000 |  | $ | 3,000,000 |  
|Conversion of Convertible Debt
      and Related Expenses                                         |   |         |  | $ | 241,123   |  | $ | 3,303,333 |  
|Forgiveness of related party debt.                                                                | $ | -       |  | $ | -         |  | $ | 19,336    |  
|Reversal of accrued expenses in
      settlement of litigation with Magpie Telecom Insiders, Inc. |   |         |  |   |           |  | $ | 175,000   |  

During the year ended June 30, 2009, the Company wrote down the
value of its investment in a 10% interest in Sovereign Corporation from $110,000
to $0.

4. PROPERTY AND EQUIPMENT

Property and equipment, at cost, consist of the
      following:

|                                 |   | 2008     |   |   | 2009    |  
|-------------------------------- | - | -------- | - | - | ------- | -
|Research Equipment               | $ | 505,905  |   | $ | 36,452  |  
|Office and Marketing             |   | 224,998  |   |   | 87,352  |  
|Gross Cost                       |   | 730,903  |   |   | 123,804 |  
|Less
      Accumulated           |   |          |   |   |         |  
|Depreciation                     |   | (581,485 | ) |   | (84,156 | )
|Net
      Property and Equipment | $ | 149,418  |   | $ | 39,648  |  

5. ACCRUED EXPENSES

Accrued expenses consist of the following:

|               |   | 2008    |  |   | 2009    | 
|-------------- | - | ------- |  | - | ------- | 
|Finders Fees   | $ | 160,000 |  | $ | 160,000 | 
|Other Expenses | $ | 228,444 |  | $ | 322,388 | 
|Total          | $ | 388,444 |  | $ | 482,388 | 

92

---



|mPHASE TECHNOLOGIES, INC.                 
|------------------------------------------
|(A DEVELOPMENT STAGE COMPANY)             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2009                             

6. GRANITA MEDIA

Effective July 1, 2007, the Company formed Granita Media, Inc.
to separate its IPTV business and facilitate the raising of capital. Pursuant to
an arrangement with 4 employees of mPhase, such employees were terminated from
mPhase as of July 1, 2007 and became employees of Granita Media Inc and invested
solely in the common stock of Granita Media Inc. Under the arrangement, each of
the 4 employees were required to invest $125,000 in exchange for an aggregate 2%
equity interest in Granitia Media, Inc with mPhase continuing to own 98% of the
Company. The 4 employees contributed a total of $339,000 of the total $500,000
equity investment required from them and raised from third party investors
another $175,000 for a total of $514,000 Granita Media has 19,000,000 shares of
common stock outstanding of which 18,000,000 was owned by mPhase Technology and
1,000,000 is being held for issuance the 4 employees and the third party
investors pending an agreement among such persons of the allocation of such
shares. Under the terms of the arrangement between mPhase and the 4 employees,
such employees were authorized to sell up to 7.99% of additional equity in the
Company for a total of not less than $2,000,000 of additional capital by
December 31, 2007. As noted above, the employees raised a total of $175,000 of
outside capital only and pursuant to the arrangement, such employees either
resigned or were terminated by mPhase together with several lower level
employees of Granita. A dispute has arisen between Granita Media and one of the
former employees with respect to a sum of approximately $176,000 included in
short term loans. It is the Company's position that such sums were voluntarily
advanced to fund operating expenses after July 1, 2007. Since the 4 employee /
officers of Granita Media were required to cover operating expenses of Granita
Media after July 1, 2007 through equity investments either directly or from
third parties, the Company has taken the position that such amount nor any
related interest and fees are not owed to the employee. In addition, the Company
has substantial rights of offset for unpaid rent with respect to the portion of
its Little Falls office occupied by Granita Media after July 1, 2007. Granita
Meida, Inc. ceased operations in December of 2007.

7. SHORT TERM NOTES PAYABLE

Short term debt is comprised of the following:

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | June 30, 2008 |  |   | June 30, 2009 | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | - | ------------- |  | - | ------------- | 
|Note payable to Granita Employee (See note
      #6)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | $ | 175,820       |  | $ | 175,820       | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |               |  |   |               | 
|Note payable to law firm bearing 8%
      interest, originally monthly installments of $5,000 per month commencing
      in June 2002 and continuing through December 1, 2003 with a final payment
      of principal plus accrued interest due at maturity on December 31, 2003,
      this note was in arrears as of June 30, 2004 and the company negotiated a
      new settlement arrangement as of August 31, 2004. Under such settlement
      agreement, the Company made a $100,000 cash payment and gave a cashless
      warrant to purchase $150,000 worth of common stock valued at $.25 per
      share. In addition, the Company agreed to pay $25,000 on each of December
      1, 2004, March 1, 2005, June 1, 2005, September 1, 2005 and $50,000 on
      December 1, 2005. Thereafter, the Company was obligated to pay $25,000 on
      each of March 1, 2006, June 1, 2006, September 1, 2006 with a final
      payment of $75,000 on December 1, 2006 ($10,000 paid in 2008). The Company
      is currently in default. | $ | 65,000        |  | $ | 65,000        | 
|Total Short Term Notes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | $ | 240,820       |  | $ | 240,820       | 

93

---

|mPHASE TECHNOLOGIES, INC.                 
|------------------------------------------
|(A DEVELOPMENT STAGE COMPANY)             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2009                             

8. STOCKHOLDERS' EQUITY

mPhase initially authorized capital of 50,000,000 shares of
common stock with no par value. On February 23, 2000, the Board of Directors
proposed and on May 22, 2000 the shareholders approved an increase in the
authorized capital to 150,000,000 shares of common stock. On June 15, 2004, a
Special Meeting of Shareholders of the Company approved a proposal by the
Company to amend the Company's Certificate of Incorporation under New Jersey law
to increase the authorized shares of common stock from 150 million to 250
million shares and change the par value of all shares of common stock from no
par to $0.01 par stock.. Effective, June, 2005 and June 2006, and June 2008, the
Company received authorization to increase the number of authorized shares to
500 million, 900 million and 2 billion, respectively. On April 25, 2009 The
Board of Directors, subject to shareholder approval, approved an increase in
shares of common stock to 3 billion shares.

During the Fiscal Year Ending June 30, 2009 the following
transactions impacted stockholders equity

Private Placements

During the quarter ended September 30, 2008, the Company issued
4,000,000 shares of its common stock at $.05 per share in private placements
generating net proceeds of $180,000. Related to this transaction was the
issuance of 3,862,000 shares as reparations shares to effect repricing, costing
an estimated $216,689.

During the quarter ended December 31, 2009 there were no
private placements.

During the quarter ended March 31, 2009, the Company issued
35,000,000 shares of its common stock at $.01 per share in private placements
generating net proceeds of $315,000. Related to this transaction was the
issuance of 7,660,000 shares as reparations shares to effect repricing, costing
an estimated $99,483.

During the quarter ended June 30, 2009, the Company issued
33,333,333 shares of its common stock at $.075 per share in private placements
generating net proceeds of $225,000 net of $25,000 of finders fees. Related to
this transaction was the issuance of 8,000,000 shares as reparations shares to
effect repricing, costing an estimated $116,000.

Stock Based Compensation

During the three months ended September 30, 2008, the Company
issued 5 year options to purchase 104,675,000 shares of common stock at $.05 per
share. The value of such options was estimated to be $4,071,613 using the Black
Scholes method, a volatility of 80% and an interest free rate of 3%. In
addition, 61,750,000 shares of common stock valued at $3,520,215 were issued to
employees and consultants. (See note 3).

Conversion of debt securities

During the FYE June 30, 2009, $3,303,333 of debt and accrued
interest was converted into 278,346,019 shares of common stock. Included in this
amount is $112,500 of notes payable to a related party which were sold to an
investor for $112,500 cash and subsequently converted into 15,000,000 shares of
the Company's common stock valued at 1.6 cents per share resulting in beneficial
conversion of $114,500. Also included is the conversion of short term investor
debt (face value $54,000), related interest and settlement expenses in the
aggregate amount of 57,375.

94

---

|mPHASE TECHNOLOGIES, INC.                 
|------------------------------------------
|(A DEVELOPMENT STAGE COMPANY)             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2009                             

8. STOCKHOLDERS' EQUITY- (continued)

All other debt converted involved long term convertible
debentures which are discussed below.:

Long Term Convertible Debentures / Note Receivable / Debt
Discount and related Interest

The Company has entered into five separate convertible debt
arrangements with independent investors.

General

The economic substance of convertible debt arrangements entered
into beginning December 2007 was to provide the Company with needed liquidity to
supplement the private equity markets.

The form of the transaction may involve the following:

- The receipt of cash
- The issuance of a note payable from mPhase.
- The issuance of a note receivable due to mPhase
- A Securities Purchase Agreement
- The note payable contains conversion features which permit the holder to
  convert debt into equity. Such debt is eligible to be converted into the
  Company's common stock immediately, thus requiring the recording of the entire
  liability upfront. Finally, to encourage conversion, a discount from market
  value was offered.
- The aggregate amount of notes payable exceeded the amount of cash
  received. As "Consideration" for this difference the Company took back a
  secured Note Receivable. Security is generally liquid investments of the
  investor.
- The note receivable provides a commitment to fund mPhase. The notes are
  secured and collateralized and carry terms which are different from the
  related note payable and no right of offset exist.

A summary of our arrangements is as follows:

Arrangement #1 (Golden Gate Investors)

In December, 2007, the Company received proceeds of $500,000
under a Securities Purchase Agreement. This transaction involves three related
agreements: 1) A Securities Purchase Agreement, dated as of December 11, 2007,
which may under certain circumstances permitted the Company to draw up to $1.5
million of funds; 2) A Convertible Debenture in the amount of $1.5 million, with
an interest rate of 7 1⁄4% and a maturity date of December 11, 2010 and 3) A
Secured Note Receivable in the amount of $1.0 million, with an interest rate of
8 1⁄4 % and a maturity date of February 1, 2011 due from the same parties who are
the holders of the Convertible Debentures. In March of 2009, by mutual consent
of the parties, the Securities Purchase Agreement was terminated. Total draws
under this facility were $1.5 million.

As of June 30, 2008 $950,000 was included in notes receivable
under this arrangement. During FYE 2009, $1,365,000 of such debt was converted
into 74,368,943 shares of common stock and the Company received a total of $950,000 under the provisions of the related note receivable. As of June 30, 2009 all notes receivable had been paid and all debt converted. No further obligations exist by either party.

95

---

|mPHASE TECHNOLOGIES, INC.                 
|------------------------------------------
|(A DEVELOPMENT STAGE COMPANY)             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2009                             

8. STOCKHOLDERS' EQUITY- (continued)

Arrangement #2 ( St.George Investments, LLC)

In February 2008, the Company entered into a Convertible Debenture transaction which involved the receipt of $500,000 cash, a note payable of $550,000 and the issuance of 3,250,000 shares of stock. The relative fair value of the shares was
$105,000. The terms of the debenture provide for a 7.5% interest rate, a due date of February 2012 and conversion privileges equal to 75% of the three lowest trading price over the 20 day period prior to conversion.

During FYE 2009, $614,209 of such debt and related interest was converted into 60,536,482 shares of common stock. As of June 30, 2009 all debt had been converted and no further obligation exists by either party.

Arrangement #3 (JMJ Financial, Inc.)

In April, 2008, the Company received proceeds of $300,000 under a Securities Purchase Agreement. This transaction involves three related agreements: 1) A Securities Purchase Agreement which may under certain circumstances permit the Company to
draw up to $1,000,000 of funds; 2) Two Convertible Debentures totaling $1,450,000, with a one time interest factor of 12% ($132,000) and a maturity date of March 25, 2011 and 3) A Secured Note Receivable in the amount of $1.0
million, with a one time interest factor of 13.2 % and maturity dates of March 25, 2012 due from the same parties who are the holders of the Convertible Debentures. The Note Receivable is collateralized by $1 million of Blue Chip Stocks.
Conversion of outstanding debentures into common shares is at the option of the holder. The number of shares into which this debenture can be converted is equal to the dollar amount of the debenture divided by 75% of the lowest trade price during
the 20 day trading period prior to conversion.

As of June 30, 2008 $1,000,000 was included in notes receivable under this arrangement. During FYE 2009, $964,250 of such debt and related interest was converted into 100,951,309 shares of common stock. In addition, the Company received
$650,000 cash payments of the note receivable. As of June 30, 2009 the face value of the note receivable was $350,000 plus interest of $132,000 included in other current assets and the note payable was $527,750 plus interest of
$132,000 included in accrued expenses and an FMV adjustment of $115,801.

Arrangement #4 (JMJ Financial, Inc.)

On December 31, 2008, the Company entered into a second agreement with JMJ Financial. This transaction involves; 1) A Convertible Debenture in the amount of $1.1 million, plus a one time interest factor of 12% ($132,000) and a maturity date
of December 31, 2011 and 2) A Secured Note Receivable in the amount of $1.0 million, plus a one time interest factor of 13.2 % ($132,000) and maturity date of December 31, 2012 due from the same parties who are the holders of the Convertible
Debentures. Conversion of outstanding debentures into common shares is at the option of the holder. The number of shares into which this debenture can be converted is equal to the dollar amount of the debenture divided by 75% of the lowest trade
price during the 20 day trading period prior to conversion.

As of June 30, 2009 $1,000,000 was included in notes receivable under this arrangement. During FYE 2009 no cash was exchanged nor was any debt converted relative to this agreement. (See Subsequent Events). The FMV addition to this debt as of FYE
2009 was $307,899.

96

---

|mPHASE TECHNOLOGIES, INC.                 
|------------------------------------------
|(A DEVELOPMENT STAGE COMPANY)             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2009                             

8. STOCKHOLDERS' EQUITY- (continued)

Arrangement #5 (LaJolla Cove Investors, Inc.)

On Sept 11, 2008, the Company received proceeds of $200,000 under a Securities Purchase Agreement. This transaction involves three related agreements: 1) A Securities Purchase Agreement which may under certain circumstances permit the Company to
draw up to $2,000,000 of funds; 2) A Convertible Debenture totaling $2,000,000, with an interest rate of 7 1/4% and a maturity date of September 30, 2011 and 3) A Secured Note Receivable in the amount of $1,800,000, with an interest rate
of 8 1/4% and maturity dates of September 30, 2011 due from the same parties who are the holders of the Convertible Debentures. In addition, the holder of the debenture is related to the holder in Arrangement #1.Conversion of outstanding debentures
into common shares is similar to the terms of Arrangement #1. As of FYE 2009, $190,000 of debt was converted into 21,714,285 shares of common stock. On June 30, 2009 the note receivable balance was $1,800,000, the note payable was
$1,810,000 and the FMV addition $387,228.

Arrangement # 6 (JMJ Financial, Inc.-See Subsequent Events)

On August 19, 2009, the Company received proceeds of $250,000 in connection with a third agreement with JMJ Financial. This transaction involves 1) a Convertible Debenture in the amount of $1,870,000, plus a one time interest factor of 12%
($224,400) and a maturity date of August 10, 2012 and 2) A Secured Note Receivable in the amount of $1,700,000 plus a one time interest factor of 13.2% ($224,400) and a maturity date of August 10, 2012 due from the same parties who are
the holders of the Convertible Debenture. Conversion of outstanding into common shares is at the option of the holder. The number of shares into which this debenture can be converted is equal to the dollar amount of the debenture divided by 75% of
the lowest trade price during the 20 day trading period prior to conversion..

Arrangement # 7 (JMJ Financial, Inc.-See Subsequent Events)

On September 30, 2009, the Company received a total of $150,000 of proceeds in connection with a fourth agreement with JMJ Financial. This transaction involves 1) One Convertible Debentures in the amount of $1,200,000 plus a one time
interest factor of 12% ($144,100) and a maturity date of September 23,2012 and (2) A Secured Note in the amount of $1,100,000 plus a one time interest rate factor of 13.1%( $144,100 each) and a maturity date of September, 2012 due from
the same parties who are the holders of the Convertible Debenture. Conversion of outstanding into common shares is at the option of the holder. The number of shares into which this debenture can be converted is equal to the dollar amount of the
debenture divided by 75% of the lowest trade price during the 20 day trading period prior to conversion. The Company has also received a commitment from JMJ Financial to enter into a second convertible debenture on identical terms not later than 60
days from September 23, 2009.

97

---

|mPHASE TECHNOLOGIES, INC.                 
|------------------------------------------
|(A DEVELOPMENT STAGE COMPANY)             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2009                             

8. STOCKHOLDERS' EQUITY- (continued)

During the Fiscal Year Ended June 30, 2008 the following
transactions impacted stockholders equity

Private Placements

During the quarter ended September 30, 2007, the Company issued
500,000 shares of its common stock in private placements generating net proceeds
of $50,000.During the quarter ended December 31, 2007, the Company issued
850,000 shares of its common stock in private placements generating net proceeds
of $48,000. During the quarter ended June 30, 2008, the Company issued
23,250,000 shares of its common stock in private placements generating net
proceeds of $1,162,500.

Exercise of Warrants

During the quarter ended June 30, 2008, 11,111,112 warrants to
purchase common stock were exercised and additional warrants of 11,111,112
issued. Such transaction generated net proceeds of $650,000.

Reparations

During the Year ended June 30, 2008 the Company issued certain
shares to effect re-pricing of prior private placements and to induce new
investments as summarized of the following table:

|DATE     |  |            |  |  | REPARATION SHARES |  |  | VALUE SHARES |  |  | PRIOR INVESTMENT  |  |  | NEW INVESTMENT |  |  | NEW INVESTMENT SHARES |  |  | ISSUANCE OF REPLACEMENT WARRANT |  |   | REPRICED WARRANT VALUE |  |  | TOTAL   | 
|-------- |  | ---------- |  |  | ----------------- |  |  | ------------ |  |  | ----------------- |  |  | -------------- |  |  | --------------------- |  |  | ------------------------------- |  | - | ---------------------- |  |  | ------- | 
|         |  |            |  |  |                   |  |  |              |  |  |                   |  |  |                |  |  |                       |  |  |                                 |  |   |                        |  |  |         | 
|9/30/07  |  | INVESTOR 1 |  |  | 1,349,842
      $ |  |  | 146,204 $    |  |  | 1,026,723
      $ |  |  | 100,000        |  |  | 1,000,000             |  |  |                                 |  | $ |                        |  |  | 146,204 | 
|9/30/07  |  | INVESTOR 2 |  |  | 444,444 $         |  |  | 22,222 $     |  |  | 100,000 $         |  |  | 50,000         |  |  | 500,000               |  |  |                                 |  | $ |                        |  |  | 22,222  | 
|12/31/07 |  | INVESTOR 3 |  |  | 792,857 $         |  |  | 30,778 $     |  |  | 55,000 $          |  |  | 24,500         |  |  | 350,000               |  |  |                                 |  | $ |                        |  |  | 30,778  | 
|4/8/08   |  | INVESTOR 4 |  |  | 576,598 $         |  |  | 31,719 $     |  |  | 288,000 $         |  |  | 85,000         |  |  | 1,700,000             |  |  |                                 |  | $ |                        |  |  | 31,719  | 
|4/1/08   |  |            |  |  | 0                 |  |  |              |  |  |                   |  |  |                |  |  |                       |  |  | 11,111,112
      $              |  |   | 161,115 $              |  |  | 161,115 | 
|         |  | TOTALS     |  |  | 3,163,741 $       |  |  | 230,923 $    |  |  | 1,489,723 $       |  |  | 369,500        |  |  | 3,550,000             |  |  | 11,111,112 $                    |  |   | 161,115 $              |  |  | 392,038 | 

During the Fiscal Year Ending June 30, 2009 the reparation
expense consisted of the following:

|DATE       |  |              |  |  | REPARATIONSHARES |  |  | VALUESHARES |  |  | PRIORINVESTMENT                                     |  |  | NEWINVESTMENT |  |  | NEWINVESTMENT SHARES |  |  | ISSUANCE OFREPLACEMENT WARRANTS |  |  | REPRICEDWARRANT VALUE |  |  | TOTAL   | 
|---------- |  | ------------ |  |  | ---------------- |  |  | ----------- |  |  | --------------------------------------------------- |  |  | ------------- |  |  | -------------------- |  |  | ------------------------------- |  |  | --------------------- |  |  | ------- | 
|           |  |              |  |  |                  |  |  |             |  |  |                                                     |  |  |               |  |  |                      |  |  |                                 |  |  |                       |  |  |         | 
|9/30/08    |  | INVESTOR 1   |  |  | 3,862,000 $      |  |  | 216,689 $   |  |  | 1,000,000                                           |  |  | 200,000       |  |  | 4,000,000            |  |  | 0                               |  |  | 0 $                   |  |  | 216,689 | 
|3/25/09    |  | INVESTOR 2   |  |  | 7,660,000 $      |  |  | 99,483 $    |  |  | 520,000                                             |  |  | 150,000       |  |  | 15,000,000           |  |  | 0                               |  |  | 0
      $             |  |  | 99,483  | 
|4/15/09    |  | INVESTOR 3** |  |  | 1,000,000 $      |  |  | 12,000 $    |  |  | 1,126,723                                           |  |  | 0             |  |  | 0                    |  |  | 0                               |  |  | 0 $                   |  |  | 12,000  | 
|5/15/09    |  | INVESTOR 3** |  |  | 1,000,000 $      |  |  | 20,000 $    |  |  | -                                                   |  |  | 0             |  |  | 0                    |  |  | 0                               |  |  | 0
      $             |  |  | 20,000  | 
|6/15/09    |  | INVESTOR 3** |  |  | 1,000,000 $      |  |  | 20,000 $    |  |  | -                                                   |  |  | 0             |  |  | 0                    |  |  | 0                               |  |  | 0 $                   |  |  | 20,000  | 
|6/29/09    |  | INVESTOR 4   |  |  | 5,000,000 $      |  |  | 64,000 $    |  |  | 250,000                                             |  |  | 50,000        |  |  | 5,000,000            |  |  | 0                               |  |  | 0
      $             |  |  | 64,000  | 
|           |  | TOTALS       |  |  | 19,522,000 $     |  |  | 432,172 $   |  |  | 2,896,723 $                                         |  |  | 400,000       |  |  | 24,000,000           |  |  | 0                               |  |  | 0 $                   |  |  | 432,172 | 
|**INVESTOR |  | 3,000,000    |  |  | 52,000           |  |  |             |  |  | REPARATION of INVESTOR 3 was for conversion of debt |  |  |               |  |  |                      | 

98

---

|mPHASE TECHNOLOGIES, INC.                 
|------------------------------------------
|(A DEVELOPMENT STAGE COMPANY)             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2009                             

8. STOCKHOLDERS' EQUITY-(continued)

BENEFICIAL CONVERSION FEATURE

In April 2009, the Board of Directors authorized the right for
the Officers' to convert into shares of the Company's common stock Officers'
loans discussed in Note 9, plus accrued interest thereon, at any time for the
next five years providing such shares are issued, outstanding and available, at
a conversion price of $.0075. The officers' notes plus accrued interest is
convertible into approximately 195,465,654 shares of the Company's common stock
based upon the conversion terms at June 30, 2009.

Other Equity

During the year months ended, June 30, 2008, the Company issued
1,000,000 shares of stock, 110,000 of options to purchase common stock valued at
$100,192 to individuals. In addition, it issued 4,663,741 shares of common stock
valued at $392,038 to reflect re-pricing agreements, 1,109,200 shares were
issued to pay for finders fees valued at $100,000 and issued 5,250,000 shares of
common stock valued at $265,000 in connection with debt financing arrangement
(see convertible debt below) The fair value of shares issued was estimated as of
the date of grant using the Black-Scholes pricing model, based on the following
weighted average assumptions: annual expected return of 0%, annual volatility of
ranging between 70 -79 %, based on a risk-free interest rate of 2.25% and
expected option life of 5 years.

During the years ended June 30, 2008 and 2009 the Company
reevaluated warrants contracts to purchase 13,104,168 shares at fixed prices
ranging from $.05 to $.15 per share originally issued during Fiscal Year Ended
June 30, 2008 pursuant to EITF 00-19 , such reevaluation was to review if the
Company should record an additional Derivative Liability which would be
recordable if the other convertible instruments the Company has outstanding;
primarily the Convertible Debentures discussed above; would limit or prevent the
Company from honoring the conversion of these fixed price warrants during their
contract term. The evaluation was performed on a contract by contract basis to
equity instruments subject to EITF 00-19 ; namely warrants discussed above and
the Convertible Debenture agreements. The Company utilized a sequencing method
prescribed by EITF 00-19, based upon applying shares available to contracts with
the earliest inception date first.

During the fiscal year ended June 30,
2008 the Company reclassified contracts for warrants to purchase 12,604,168
shares at fixed prices ranging from $.13 to $.15 per share to contingent
liabilities.Contracts for warrants
to purchase 11,111,112 shares of the Companys common stock at $.14 per share
were reclassified to permanent equity in May of 2009, and contracts for warrants
to purchase 1,604,168 shares of the Companys common stock at fixed prices
ranging from $.13 to $.15 per share were reclassified to permanent equity in
September, 2009.

The liability was recorded at the fair market value,
such estimated value, as restated, was based upon the contractual life of the
free standing warrants, using the Black Sholes pricing model, based on the
following weighted average assumptions: annual expected return of 0%, an average
life of 5 years, annual volatility 81% and a risk-free interest rate 2.25% . At
the issuance date of the free standing warrants, such warrants were issued
during the fourth quarter of fiscal June 30, 2008; the estimated value
approximated $1,006,200 and as recalculated on the quarterly measurement dates,
at June 30, 2008 the estimated value approximated $433,300. During the fiscal
year ended 2009, the estimated value was determined to no longer be material. The net
change in the contingent liability was credited to the change in derivative
value in the Consolidated Statement of Operations for the Fiscal years ended
June 30, 2008 and 2009 for $572,900 and $433,300, respectively, for each of
these periods in accordance FASB Standards Codification Topic 815 (previously
known EITF 00-19).

Subsequent to September 30, 2009 the Company has not
  entered into, and presently the Company does not have, any have contracts for
  warrants or other equity instruments subject to reclassification to
  liabilities as prescribed by FASB Standards Codification Topic 815 (previously
  known EITF 00-19).

99

---

mPHASE TECHNOLOGIES, INC(A DEVELOPMENT STAGE
COMPANY)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2009

8. STOCKHOLDERS' EQUITY- (continued)

STOCK
INCENTIVE PLANS

A summary of the stock option activity for the years ended June
30, 2007, 2008 and 2009 pursuant to the terms of both plans, which include
incentive stock options and non-qualified stock options, is set forth on the
below:

|                             |  | Number of Options |   |   | Weighed Average Exercise
      Price |  
|---------------------------- |  | ----------------- | - | - | ------------------------------------ | -
|Outstanding at June 30, 2007 |  | 45,893,000        |   | $ | 0.25                                 |  
|Granted                      |  | 85,000            |   | $ | 0.15                                 |  
|Exercised                    |  | 0                 |   |   | 0                                    |  
|Cancelled/Expired            |  | 0                 |   |   | 0                                    |  
|Outstanding at June 30, 2008 |  | 45,978,000        |   | $ | 0.25                                 |  
|Granted                      |  | 104,675,000       |   |   | 0.05                                 |  
|Exercised                    |  | 0                 |   |   | 0                                    |  
|Cancelled/Expired            |  | (5,360,000        | ) |   | (0.25                                | )
|Outstanding at June 30, 2009 |  | 145,293,000       |   | $ | 0.11                                 |  

The fair value of options granted in fiscal year ended June 30,
2008 and 2009 was estimated as of the date of grant using the Black-Scholes
stock option pricing model, based on the following weighted average assumptions:
annual expected return of 0%, an average life of 5 years, annual volatility of
71% and 80.3% and a risk-free interest rate 2.25% and 3.0%in the years 2008 and
2009 respectively.

The following summarizes information about stock options
outstanding at June 30, 2009:

|RANGE OF EXERCISE PRICE |  | NUMBER OUTSTANDING |  |  | WEIGHTED AVERAGE
      REMAINING CONTRACTUAL LIFE |  |   | WEIGHTED AVERAGE
      EXERCISE PRICE |  |  | NUMBER EXERCISABLE |  |   | WEIGHTED AVERAGE
      EXERCISE PRICE | 
|----------------------- |  | ------------------ |  |  | ------------------------------------------------- |  | - | ------------------------------------- |  |  | ------------------ |  | - | ------------------------------------- | 
|$.13 - $.45             |  | 40,618,000         |  |  | 1.4 years                                         |  | $ | .25                                   |  |  | 40,618,000         |  | $ | .25                                   | 
|$.05                    |  | 104,675,000        |  |  | 4.3 years                                         |  | $ | .05                                   |  |  | 104,675,000        |  | $ | .05                                   | 
|Totals                  |  |                    |  |  |                                                   |  |   |                                       |  |  | 145,293,000        |  | $ | .11                                   | 

During The fiscal year ended June 30, 2009 the Company issued no warrants and
5,064,859 warrants expired. During The fiscal year ended June 30, 2008 the
Company issued 13,104,168 of warrants at exercises prices ranging from $.05 to
$0.15 and 5,271,740 warrants expired. In addition the Company received a total
of $650,000 (net of fees) through the exercise of 11,111,113 warrants. As of
June 30, 2009 and 2008 warrants covering 141,081,646 and 146,146,505 shares
remain outstanding with a weighted average exercise price of $ 0.23 and $0.21
respectively.

The following summarizes information about warrants outstanding at June 30,
2009:

|RANGE OF EXERCISE PRICE |  | NUMBER OUTSTANDING |  |  | WEIGHTED AVERAGE
      REMAINING CONTRACTUAL LIFE |  |   | WEIGHTED AVERAGE
      EXERCISE PRICE |  |  | NUMBER EXERCISABLE |  |   | WEIGHTED AVERAGE
      EXERCISE PRICE | 
|----------------------- |  | ------------------ |  |  | ------------------------------------------------- |  | - | ------------------------------------- |  |  | ------------------ |  | - | ------------------------------------- | 
|$.21 - $.50             |  | 89,633,400         |  |  | 1.5 years                                         |  | $ | .27                                   |  |  | 89,633,400         |  | $ | .27                                   | 
|$.05-20                 |  | 51,488,246         |  |  | 3.8 years                                         |  | $ | .17                                   |  |  | 51,488,246         |  | $ | .17                                   | 
|Totals                  |  |                    |  |  |                                                   |  |   |                                       |  |  | 141,081,646        |  | $ | .23                                   | 

100

---

|mPHASE TECHNOLOGIES, INC.                 
|------------------------------------------
|(A DEVELOPMENT STAGE COMPANY)             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2009                             

9. RELATED PARTY TRANSACTIONS

Mr. Durando, the President and CEO of mPhase together with Mr.
Ergul own a controlling interest and are officers of Janifast Limited. Mr.
Durando and Mr. Dotoli are officers of Microphase Corporation. Mr. Ergul,
retired as the chairman of the board of mPhase in Nov 2007, owns a controlling
interest and is a director of Microphase Corporation,

Mr. Abraham Biderman was employed until September 30, 2003 by
our former investment-banking firm Lipper & Company. During the fiscal year
ended June 30 2007, Mr. Biderman's current firm Eagle Advisers, Inc. has acted
as a finder of money in connection with finder's fees of $520,000, as well as
addition administrative and occupancy charges of $43,400. In 2008, Mr Biderman
was paid $188,472 of finders fees.

In addition, at various points during fiscal year ended June
30, 2009, Messrs. Durando, Dotoli and Smiley provided no additional net bridge
loans to the Company.

As of June 30, 2009, bridge loans outstanding including accrued
interest thereon from Mr. Smiley, equaled $1,332,400. Additionally, accrued
interest totaling $133,592 was owed to the Officers and is included in accrued
expenses at June 30, 2009. All of the foregoing promissory notes are payable on
demand. As of June 30, 2009 Mr. Durando and Mr. Dotoli are owed unpaid
compensation plus accrued interest thereon at 12% per annum equal to $617,420
and $ 450,756 respectively.

In April 2009 the Board of Directors authorized the right for
the officers' to convert such loans plus accrued interest thereon, at any time
for the next five years providing such shares are issued, outstanding and
available, at a conversion price of $.0075; such price comparable to private
placements during the period. The Company recorded beneficial conversion
interest expense of $914,060 during the year ended June 30, 2009 on the
conversion feature based upon principle at the commitment date and accrued
interest through June 30, 2009. The officers' notes plus accrued interest is
convertible into approximately 195,465,654 shares of the Company's common stock
based upon the conversion terms at June 30, 2009.

As of June 30, 2004, Mr. Smiley and Microphase each agreed to
extend to July 25, 2005, the maturity on their 12% convertible promissory notes
in the principal amount of $100,000 and $180,000 respectively. Additionally at
June 30, 2004, Mr. Durando was owed $300,000 by the Company as evidenced by a
non-interest bearing promissory note that was repaid in July 2004. As of June
30, 2004 a total of $55,000 in the aggregate was due to Mr. Durando and Mr.
Dotoli for unpaid compensation.

Mr. Durando's June 30, 2004 note payable balance of $300,000
was repaid by the Company during the nine month period ended March 31, 2005.
During the first and second quarters of fiscal year 2005, Mr. Durando made
additional bridge loans to the Company evidenced by various 12% demand notes in
the aggregate of $525,000. Mr. Durando was repaid a total of $450,000 of such
loans in January of 2005. In addition, Mr. Durando converted $13,954 of the
principal amount of a $75,000 promissory note leaving unpaid principal of
$61,046 outstanding. Mr. Durando converted $13,000 of accrued and unpaid
interest on various promissory notes of the Company into 65,000 shares of common
stock and a 5 year warrant to purchase a like amount of common stock at $.25 per
share.

101

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|mPHASE TECHNOLOGIES, INC                  
|------------------------------------------
|(A DEVELOPMENT STAGE COMPANY)             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2009                             

9. RELATED PARTY TRANSACTIONS -(continued)

During the fiscal year ended June 30, 2005, Mr. Dotoli and Mr. Smiley, the COO, and CFO and General Counsel of the Company respectively, each lent the Company $75,000. Mr. Dotoli was repaid, the principal amount of such loan, in cash in January,
2005 and Mr. Smiley converted his $75,000 loan into 375,000 shares of common stock of the Company plus a 5 year warrant to purchase a like amount of shares at $.25 per share. In addition, Mr. Smiley converted $9,975 of accrued interest
into 49,875 shares of common stock plus a 5 year warrant to purchase a like amount of shares at $.25 per share. Finally Mr. Smiley received 25,000 additional shares of common stock as a market adjustment to his equity investment of $25,000
on August 30, 2004. Mr. Dotoli cancelled $3,750 of accrued and unpaid interest from August 15, 2004 through January 15, 2004 into 375,000 shares of common stock pursuant to the terms of a portion of a warrant that was exercised at $.01 per
share previously given by the Company to Mr. Dotoli in exchange for and cancellation of unpaid compensation. On January 15, 2004, Mr. Smiley was awarded 425,000 shares of common stock as additional compensation. In July of 2005, Mr. Smiley was
repaid a loan of $35,000, without interest made to the Company in June of 2005. In the three month period ended September 30, 2005, Mr. Durando and Mr. Smiley lent the Company $50,000 and $100,000, respectively, which was repaid by the
Company, without interest in October of 2005.

MICROPHASE

The Company leases office space from Microphase at both its Norwalk and Little Falls location. Current rental expense is $3,000 and $2,245 per month at Norwalk and Little Falls respectively. In addition, Microphase provides certain research
and development services and shares administrative personnel from time to time. During the year ended June 30, 2009, Microphase Corporation charged the Company $150,000 for project management fees, $36,000 for rent and $16,773 for
administrative expenses.

Additionally, in July 2009 Microphase Corporation converted $200,000 of accounts payable into 26,666,667 shares of the Company's common stock at $.0075 per share. Such price was determined based upon the price of private placements of equity
by the Company during such period.

JANIFAST

During the year ended June 30, 2000, mPhase advanced money to Janifast Limited, which is owned by U.S. Janifast Holdings, Ltd, a related party of which three directors of mPhase are significant shareholders, in connection with the manufacturing of
POTS Splitter shelves and DSL component products. As of June 30, 2000 the amount advanced to Janifast was approximately $1,106,000, which is included in production advances-related parties on the accompanying balance sheet. There were no such
advances during the years ended June 30, 2002 and 2003. Pursuant to debt conversion agreements between the Company and Janifast, for the year ended June 30, 2001 Janifast received 1,200,000 shares of mPhase common stock canceling liabilities of
$600,000, and for the year ended June 30, 2002 Janifast received 3,450,000 shares of mPhase common stock and 1,200,000 warrants to purchase mPhase common stock for the cancellation of $720,000 of liabilities, as discussed in Note 10. During
the year ended June 30, 2003 Janifast was issued 1,500,000 shares of mPhase common stock in connection with the cancellation of $360,000 of outstanding liabilities of mPhase, the value of which was based upon the price of the Company's common
stock on the effective date of settlement. No gain or loss was recognized in connection with conversions by Janifast for fiscal 2003. During the years ended June 30, 2003, 2004 and 2005 and the period from inception (October 2, 1996) to June 30,
2005, there has been $174,959, $2,771,925, 1,536,494 and $15,001,105, respectively, of invoices for products and services have been charged to
inventory or expense and is included in operating expenses in the accompanying
statements of operations. Effective December 30, 2004, Janifast Ltd. Agreed to
convert $200,000 of accounts payable into common stock of the Company at $.20
per share plus a 5 year warrant for a like amount of shares at $.25 per
share.

102

---

|mPHASE TECHNOLOGIES, INC                  
|------------------------------------------
|(A DEVELOPMENT STAGE COMPANY)             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2009                             

9. RELATED PARTY TRANSACTIONS - (continued)

During the year ended June 30, 2007, Janifast agreed to
converted $108,000 of debt into 830,000 shares of common stock and received
769,231 additional shares of stock as reparations.

In March of 2009, Janifast Ltd. ceased operations owing to its
financial condition and the global downturn in the capital markets.

STRATEGIC VENDORS

On August 30, 2004, the Company paid $100,000 in cash to Piper
Rudnick LLP, outside legal counsel in the Company as part of a renegotiated
settlement agreement that was originally effective as of March 31, 2002. The
Company was in arrears with respect to payments due under the original
settlement agreement and as part of the renegotiated agreement agreed to make
the following payments:

|a. | $25,000 on each of December 1, 2004, March 2005, June 1,
      2005, September 1, 2005 and a $50,000 payment on December 1, 2005.
      Thereafter the Company is obligated to pay $25,000 on each of March 1,
      2006, June 1 2006, and September 1, 2006 with a final payment of $75,000
      of December 1, 2006.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                         
|b. | The Company also delivered a 5 year cashless warrant to
      purchase $150,000 worth of common stock at $.25 per
  share.                                                                                                                                                                                              

The warrant was valued pursuant to EITF 96-18, the ascribed
value of the warrant minus the debt cancelled resulting loss of $40,500.

Equity Conversions of Debt and Other Financial Instruments
with Related Parties

|                                |   | 2007      |  |  | 2008 |  |  | 2009 | 
|------------------------------- | - | --------- |  |  | ---- |  |  | ---- | 
|Janifast:                       |   |           |  |  |      |  |  |      | 
|Number of shares                |   | 830,769   |  |  |      |  |  |      | 
|Number of warrants              |   | 0         |  |  |      |  |  |      | 
|Amount converted to equity      | $ | 108,000   |  |  |      |  |  |      | 
|Strategic Vendor Conversions:   |   |           |  |  |      |  |  |      | 
|Number of shares                |   | 5,242,959 |  |  |      |  |  |      | 
|Number of warrants              |   | 0         |  |  |      |  |  |      | 
|Amount converted to equity      | $ | 1,996,561 |  |  |      |  |  |      | 
|Total Related Party Conversions |   |           |  |  |      |  |  |      | 
|Number of shares                |   | 6,073,728 |  |  | NONE |  |  | NONE | 
|Number of warrants              |   | 0         |  |  |      |  |  |      | 
|Amount converted to equity      | $ | 2,104,561 |  |  |      |  |  |      | 

103

---

|mPHASE TECHNOLOGIES, INC                  
|------------------------------------------
|(A DEVELOPMENT STAGE COMPANY)             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2009                             

9. RELATED PARTY TRANSACTIONS - (continued)

The Following Summaries Compensation to Related Parties for
the Fiscal Year Ended June 30, 2007

|                                         |   | Durando   |  |   | Dotoli  |  |   | Ergul   |  |   | Biderman |  |   | Smiley  |  |   | Guerino |  |   | Lawrence |  |   | Janifast |  |   | Microphase |  |   | TOTAL     | 
|---------------------------------------- | - | --------- |  | - | ------- |  | - | ------- |  | - | -------- |  | - | ------- |  | - | ------- |  | - | -------- |  | - | -------- |  | - | ---------- |  | - | --------- | 
|Consulting / Salary                      | $ | 393,600   |  | $ | 282,000 |  |   |         |  |   |          |  | $ | 200,000 |  |   |         |  |   |          |  |   |          |  |   |            |  | $ | 875,600   | 
|Directors Stipend and Interest           | $ | 7,500     |  | $ | 7,538   |  | $ | 3,750   |  | $ | 3,750    |  | $ | 8,550   |  | $ | 3,750   |  | $ | 3,750    |  |   |          |  |   |            |  | $ | 38,588    | 
|Rent                                     |   |           |  |   |         |  |   |         |  |   |          |  |   |         |  |   |         |  |   |          |  |   |          |  | $ | 60,000     |  | $ | 60,000    | 
|R&D                                      |   |           |  |   |         |  |   |         |  |   |          |  |   |         |  |   |         |  |   |          |  |   |          |  | $ | 236,492    |  | $ | 236,492   | 
|Finders Fees (including common shares)   |   |           |  |   |         |  |   |         |  | $ | 520,000  |  |   |         |  |   |         |  |   |          |  |   |          |  |   |            |  | $ | 520,000   | 
|Cost of Sales and SG&A                   |   |           |  |   |         |  |   |         |  |   |          |  |   |         |  |   |         |  |   |          |  | $ | 110,912  |  | $ | 36,342     |  | $ | 147,254   | 
|Reparations and Stock Based Compensation | $ | 1,044,000 |  | $ | 555,000 |  | $ | 201,000 |  | $ | 16,800   |  | $ | 306,250 |  | $ | 14,700  |  |   |          |  | $ | 138,462  |  |   |            |  | $ | 2,276,212 | 
|Totals                                   | $ | 1,445,100 |  | $ | 844,538 |  | $ | 204,750 |  | $ | 540,550  |  | $ | 514,800 |  | $ | 18,450  |  | $ | 3,750    |  | $ | 249,374  |  | $ | 332,834    |  | $ | 4,154,146 | 
|PacketPort.com legal expense             |   |           |  |   |         |  |   |         |  |   |          |  |   |         |  |   |         |  |   |          |  |   |          |  |   |            |  | $ | 611,807   | 
|Total expense to related parties         |   |           |  |   |         |  |   |         |  |   |          |  |   |         |  |   |         |  |   |          |  |   |          |  |   |            |  | $ | 4,765,953 | 

The Following Summaries Compensation to Related Parties for
the Fiscal Year Ended June 30, 2008

|                       |   | Durando |  |   | Dotoli  |  |   | Biderman |  |   | Smiley  |  |   | Microphase |  |   | TOTAL     | 
|---------------------- | - | ------- |  | - | ------- |  | - | -------- |  | - | ------- |  | - | ---------- |  | - | --------- | 
|Consulting / Salary    | $ | 393,600 |  | $ | 282,000 |  |   |          |  | $ | 200,000 |  |   |            |  | $ | 875,600   | 
|Interest               | $ | 19,490  |  | $ | 4,156   |  |   |          |  | $ | 18,752  |  |   |            |  | $ | 42,398    | 
|Rent                   |   |         |  |   |         |  |   |          |  |   |         |  | $ | 60,000     |  | $ | 60,000    | 
|R&D                    |   |         |  |   |         |  |   |          |  |   |         |  | $ | 28,151     |  | $ | 28,151    | 
|Finders Fees           |   |         |  |   |         |  | $ | 188,472  |  |   |         |  |   |            |  | $ | 188,472   | 
|Cost of Sales and SG&A |   |         |  |   |         |  |   |          |  |   |         |  | $ | 30,089     |  | $ | 30,089    | 
|Totals                 | $ | 413,090 |  | $ | 286,156 |  | $ | 188,472  |  | $ | 218,752 |  | $ | 118,240    |  | $ | 1,224,710 | 

Summary of compensation to related parties for the Fiscal
Year Ended June 30, 2009

|                                                  |   | Durando    |  |   | Dotoli     |  |   | Smiley     |  |   | Biderman  |  |   | Microphase |  |   | Total       | 
|------------------------------------------------- | - | ---------- |  | - | ---------- |  | - | ---------- |  | - | --------- |  | - | ---------- |  | - | ----------- | 
|Consulting / Salary                               | $ | 275,718    |  | $ | 229,000    |  | $ | 182,292    |  |   |           |  |   |            |  | $ | 687,010     | 
|Interest                                          | $ | 61,473     |  | $ | 62,514     |  | $ | 21,048     |  |   |           |  |   |            |  | $ | 145,035     | 
|Rent                                              |   |            |  |   |            |  |   |            |  |   |           |  | $ | 36,000     |  | $ | 36,000      | 
|G&A                                               |   |            |  |   |            |  |   |            |  |   |           |  | $ | 16,773     |  | $ | 16,773      | 
|R&D                                               |   |            |  |   |            |  |   |            |  |   |           |  | $ | 150,000    |  | $ | 150,000     | 
|Finders Fees                                      |   |            |  |   |            |  |   |            |  | $ | 80,000    |  |   |            |  | $ | 80,000      | 
|Stock based compensation (shares issued)*         | $ | 1,541,700  |  | $ | 913,600    |  | $ | 571,000    |  | $ | 228,400   |  |   |            |  | $ | 3,254,700   | 
|Stock
      based compensation (options issued)** | $ | 1,944,912  |  | $ | 1,166,747  |  | $ | 700,168    |  | $ | 77,746    |  |   |            |  | $ | 3,889,823   | 
|Total compensation                                | $ | 3,823,803  |  | $ | 2,372,061  |  | $ | 1,474,508  |  | $ | 386,196   |  | $ | 202,773    |  | $ | 8,259,341   | 
|Common stock issued*                              |   | 27,000,000 |  |   | 16,000,000 |  |   | 10,000,000 |  |   | 4,000,000 |  |   |            |  |   | 57,000,000  | 
|Options issued (5 years @ 5 cents)**              |   | 50,000,000 |  |   | 30,000,000 |  |   | 18,000,000 |  |   | 2,000,000 |  |   |            |  |   | 100,000,000 | 

104

---

|mPHASE TECHNOLOGIES, INC                  
|------------------------------------------
|(A DEVELOPMENT STAGE COMPANY)             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2009                             

9. RELATED PARTY TRANSACTIONS -(continued)

Amounts due to Officers For the year ended June 30,
2008

|                                            |   | RONDURANDO |   |   | GUSDOTOLI |   |   | MARTINSMILEY |   |   | TOTAL     |  
|------------------------------------------- | - | ---------- | - | - | --------- | - | - | ------------ | - | - | --------- | -
|NOTES PAYABLE OFFICERS                      |   |            |   |   |           |   |   |              |   |   |           |  
|BALANCE 6/30/07                             | $ | 85,000     |   | $ | 75,000    |   | $ | 161,000      |   | $ | 321,000   |  
|July 2007 Advances (Payments)               | $ | (30,000    | ) | $ | (75,000   | ) |   |              |   | $ | (105,000  | )
|August 2007 Advances
      (Payments)       | $ | 35,000     |   | $ | 75,100    |   | $ | 35,000       |   | $ | 145,100   |  
|Sept 2007 Advances (Payments)               | $ | 110,000    |   |   |           |   |   |              |   | $ | 110,000   |  
|Assumption of Note Payable-
      Sovereign | $ | 110,000    |   |   |           |   |   |              |   | $ | 110,000   |  
|Oct 2007 Advances (Payments)                | $ | 25,000     |   | $ | 25,000    |   | $ | 25,000       |   | $ | 75,000    |  
|Nov 2007 Advances (Payments)                | $ | 76,000     |   | $ | 36,000    |   | $ | 11,000       |   | $ | 123,000   |  
|Dec 2007 Advances (Payments)                | $ | 25,000     |   | $ | 0         |   | $ | 0            |   | $ | 25,000    |  
|Transferred to Deferred Comp                | $ | (148,000   | ) | $ | (123,500  | ) |   |              |   | $ | (271,500  | )
|Jan 2008 Advances (Payments)                | $ | 2,000      |   | $ | 32,000    |   |   |              |   | $ | 34,000    |  
|Feb 2008 Advances (Payments)                | $ | 0          |   | $ | 55,000    |   | $ | 72,038       |   | $ | 127,038   |  
|Mar 2008 Advances (Payments)                | $ | (180,000   | ) | $ | (47,500   | ) | $ | (40,000      | ) | $ | (267,500  | )
|April 2008 Advances (Payments)              | $ | (110,000   | ) | $ | (52,100   | ) | $ | (45,000      | ) | $ | (207,100  | )
|May 2008 Advances (Payments)                |   |            |   |   |           |   | $ | (15,000      | ) | $ | (15,000   | )
|June 2008 Advances (Payments)               |   |            |   |   |           |   |   |              |   |   |           |  
|BALANCE Notes Payable Officers              | $ | 0          |   | $ | 0         |   | $ | 204,038      |   | $ | 204,038   |  
|                                            |   |            |   |   |           |   |   |              |   |   |           |  
|Deferred Compensation                       | $ | 278,000    |   | $ | 323,500   |   |   |              |   | $ | 601,500   |  
|                                            |   |            |   |   |           |   |   |              |   |   |           |  
|Due To Officers                             |   |            |   |   |           |   |   |              |   |   |           |  
|BALANCE 6/30/07                             | $ | 188,400    |   | $ | 75,500    |   |   |              |   | $ | 263,900   |  
|Consulting Fee Earned -1st Qtr              | $ | 98,400     |   | $ | 70,500    |   |   |              |   | $ | 168,900   |  
|Consulting Fees Paid - 1st Qtr              | $ | (39,500    | ) | $ | (32,500   | ) |   |              |   | $ | (72,000   | )
|Consulting Fee Earned - 2nd Qtr             | $ | 98,400     |   | $ | 70,500    |   |   |              |   | $ | 168,900   |  
|Consulting Fees Paid - 2nd Qtr              | $ | (10,000    | ) | $ | (10,000   | ) |   |              |   | $ | (20,000   | )
|Consulting Fee Earned - 3rd Qtr             | $ | 98,400     |   | $ | 70,500    |   |   |              |   | $ | 168,900   |  
|Consulting Fees Paid - 3rd Qtr              | $ | (12,000    | ) | $ | (8,500    | ) |   |              |   | $ | (20,500   | )
|Consulting Fee Earned - 4th Qtr             | $ | 98,400     |   | $ | 70,500    |   |   |              |   | $ | 168,900   |  
|Consulting Fees Paid - 4th Qtr              | $ | (221,510   | ) | $ | (204,244  | ) |   |              |   | $ | (425,754  | )
|Balance Due to Officers                     | $ | 298,990    |   | $ | 102,256   |   |   |              |   | $ | 401,246   |  
|                                            |   |            |   |   |           |   |   |              |   |   |           |  
|Interest Payable                            | $ | 0          |   | $ | 0         |   | $ | 18,751       |   | $ | 18,751    |  
|Totals Payable to
      Officers            | $ | 576,990    |   | $ | 425,756   |   | $ | 222,789      |   | $ | 1,225,535 |  

Summary of amounts due to Officers For the year ended June
30, 2009

|                                |   | RONDURANDO |  |   | GUSDOTOLI |  |   | MARTINSMILEY |  |   | TOTAL     | 
|------------------------------- | - | ---------- |  | - | --------- |  | - | ------------ |  | - | --------- | 
|Notes Payable                   | $ | 617,420    |  | $ | 450,756   |  | $ | 264,224      |  | $ | 1,332,400 | 
|Due to Officers / Affiliates    | $ | 0          |  | $ | 5,550     |  | $ |              |  | $ | 5,550     | 
|Interest Payable                | $ | 61,473     |  | $ | 62,514    |  | $ | 9,605        |  | $ | 133,592   | 
|                                |   |            |  |   |           |  |   |              |  |   |           | 
|Total Payable to
      Officers | $ | 678,893    |  | $ | 518,820   |  | $ | 273,829      |  | $ | 1,471,542 | 

105

---

|mPHASE TECHNOLOGIES, INC.                 
|------------------------------------------
|(A DEVELOPMENT STAGE COMPANY)             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2009                             

NOTE 10 - INCOME TAXES

The accompanying consolidated balance sheet includes the
following components of deferred taxes under the liability method:

|                                |   | 2008        |   |   | 2009        |  
|------------------------------- | - | ----------- | - | - | ----------- | -
|Deferred Tax Liabilities        |   |             |   |   |             |  
|Property and equipment          |   | -           |   |   | -           |  
|Accrued expenses                |   | -           |   |   | -           |  
|Deferred Tax Assets             |   |             |   |   |             |  
|Net operating loss carryforward | $ | 35,081,500  |   | $ | 38,223,650  |  
|Accrued expenses                |   | -           |   |   | -           |  
|                                |   | 35,081,500  |   |   | 38,223,650  |  
|Net Deferred Tax Asset          |   | 35,081,500  |   |   | 38,223,650  |  
|Valuation allowance             |   | (35,081,500 | ) |   | (38,223,650 | )
|                                | $ | -           |   | $ | -           |  

At June 30, 2009 the Company has federal net operating loss
carryforwards of approximately $96.5 million and $93.4 million to offset future
federal and state income taxes respectively, which expire at various times from
2016 through 2029. The federal net operating loss carryforwards may be subject
to the separate return loss limitation rules and IRC section 382 limitations due
to changes in ownership. The Company has assessed the evidence of its forecasted
future operations against the potential likelihood of the realization of the
deferred tax assets to make the determination that the Company will not utilize
these carryforwards and has recorded a valuation allowance against the net
deferred tax asset.

The Company has a loss of $3,956,721 in 2008 and $15,529,677 in
2009. Deferred income taxes relate principally to the use of net operating loss
carryforwards, these can differ from computations based upon book losses for the
use for tax purposes of accelerated depreciation methods and the difference in
the book and tax basis of certain stock based compensation.

The provision for income taxes from continuing operations
differs from taxes that would result from applying Federal statutory rates
because of the following:

|                                                                                              |   | Year ended June 30, |  
|--------------------------------------------------------------------------------------------- | - | ------------------- | -
|                                                                                              |   | 2008                |  
|                                                                                              |   | Amount              |  
|Taxes at Federal Statutory Rate                                                               | $ | (1,345,285          | )
|State Taxes Net of Federal Tax                                                                |   | (221,970            | )
|Benefit Utilization of NOL                                                                    |   | -                   |  
|Tax Credits                                                                                   |   | -                   |  
|Valuation Allowance                                                                           |   | 1,493,785           |  
|Other-non deductible stock
      based compensation-restricted shares and unexercised options |   | 73,470              |  
|                                                                                              | $ | -                   |  

106

---

|mPHASE TECHNOLOGIES, INC.                 
|------------------------------------------
|(A DEVELOPMENT STAGE COMPANY)             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2009                             

11. COMMITMENTS AND CONTINGENCIES

COMMITMENTS

The Company has a lease obligation for the rental of office
space in Little Falls New Jersey until May 1, 2010. The annual obligation under
such lease requires rent of $2,245 per month ($21,600 annually) for the year
beginning June 1, 2009 and ending May 1, 2010.

mPhase has entered into various agreements with Georgia Tech
Research ("GTRC") and its affiliate, Georgia Tech Applied Research Corporation,
("GTARC"), pursuant to which the Company receives technical assistance in
developing the commercialization of its Digital Video and Data Delivery System.
The amount incurred by the Company for GTRC technical assistance with respect to
its research and development activities during the years ended, 2007, 2008 and
2009 totaled $0, $0 and $0 respectively, and $13,539,952 from the period from
inception through June 30, 2009.

12. FAIR VALUE MEASUREMENTS

Effective July 1, 2008, we adopted Statement of Financial
Accounting Standards No. 157, Fair Value Measurements(SFAS 157), which
provides a framework for measuring fair value under GAAP. SFAS 157 defines fair
value as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants on the measurement date. SFAS 157 requires that valuation
techniques maximize the use of observable inputs and minimize the use of
unobservable inputs. SFAS 157 also establishes a fair value hierarchy, which
prioritizes the valuation inputs into three broad levels.

Financial assets and liabilities valued using level 1 inputs
are based on unadjusted quoted market prices within active markets. Financial
assets and liabilities valued using level 2 inputs are based primarily on quoted
prices for similar assets or liabilities in active or inactive markets. For
certain long-term debt, the fair value was based on present value techniques
using inputs derived principally or corroborated from market data. Financial
assets and liabilities using level 3 inputs were primarily valued using
management's assumptions about the assumptions market participants would utilize
in pricing the asset or liability. Valuation techniques utilized to determine
fair value are consistently applied.

The table below presents a reconciliation for liabilities
measured at fair value on a recurring basis at June 30, 2009 and 2008:

|                                                             |   | Fair Value Measurements Using
      Significant |  
|------------------------------------------------------------ | - | ----------------------------------------------- | -
|                                                             |   | Unobservable Inputs (Level 3)                   |  
|                                                             |   | Derivative Liability                            |  
|                                                             |   | June
      30, 2009                             |  
|Balance at July 1, 2008 and 2007                             | $ | 1,183,451 $                                     |  
|Increase (Decrease) in Derivative and associated liabilities |   | (249,058                                        | )
|Debt discounts                                               |   | 1,446,423                                       |  
|Balance at June 30, 2009 and 2008                            | $ | 2,380,816 $                                     |  

Financial instruments are considered Level 3 when their values
are determined using pricing models, discounted cash flow methodologies or
similar techniques and at least one significant model assumption or input is
input is unobservable. Level 3 financial instruments also include those for
which the determination of fair value requires significant management judgment
or estimation.

107

---

|mPHASE TECHNOLOGIES, INC.                 
|------------------------------------------
|(A DEVELOPMENT STAGE COMPANY)             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2009                             

13. SUBSEQUENT EVENTS:

On August 19, 2009, the Company received proceeds of $250,000 in connection with a third agreement with JMJ Financial. This transaction involves 1) a Convertible Debenture in the amount of $1,870,000, plus a one time interest factor of 12%
($224,400) and a maturity date of August 10, 2012 and 2) A Secured Note Receivable in the amount of $1,700,000 plus a one time interest factor of 13.2% ($224,400) and a maturity date of August 10, 2012 due from the same parties who are
the holders of the Convertible Debenture. Conversion of outstanding into common shares is at the option of the holder. The number of shares into which this debenture can be converted is equal to the dollar amount of the debenture divided by 75% of
the lowest trade price during the 20 day trading period prior to conversion.

In July of 2009 Microphase Corporation converted $200,000 of Accounts Payable into 26,666,667 shares of the Company's common stock at $.0075 per share. The price was the same price and common stock offered in equity private placements during
such period.

On September 30, 2009, the Company received a total of $150,000 of proceeds in connection with a fourth agreement with JMJ Financial. This transaction involves 1) A Convertible Debenture in the amount of $1,200,000 plus a one time interest
factor of 12% ($144,000) and a maturity date of September 23, 2012 and (2) A Secured Note in the amount of $1,100,000 plus a one time interest rate factor of 13.2 % ($144,000 each) and a maturity date of September 23, 2012 due from the
same parties who are the holders of the Convertible Debentures. Conversion of outstanding into common shares is at the option of the holder. The number of shares into which this debenture can be converted is equal to the dollar amount of the
debenture divided by 75% of the lowest trade price during the 20 day trading period prior to conversion. The Company has received a commitment from JMJ Financial to enter into an identical financing not later than 60 days from September 23,
2009.

On October 7, 2009, the Company paid Messrs. Durando, Dotoli and Smiley $45,000, $45,000 and $25,000 respectively in reduction of amounts owed to them by the Company for unpaid compensation and bridge loans.

108

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|mPHASE TECHNOLOGIES, INC                  
|------------------------------------------
|(A DEVELOPMENT STAGE COMPANY)             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2009                             

NOTE 14. RESTATEMENT OF RESULTS

The restatement involves reclassifying certain equity
instruments out of additional paid in capital into other contingent liabilities
for free standing warrants to issue shares at a fixed price as such warrants
were issued subsequent to the Company entering into Convertible Debenture
agreements which have features that may result in the obligation to issue shares
in excess of authorized shares available. The liability was recorded
at the fair market value, such estimated value, as restated, was based upon the
contractual life of free standing warrants. At the issuance date of the free
standing warrants the estimated value approximated $1,006,200 and as
recalculated on the quarterly measurement dates, at June 30, 2008 the estimated
value approximated $433,300 and during the fiscal year ended June 30, 2009, the estimated value
was determined to no longer be material, with the net change in the
liability credited to the change in derivative value in the Consolidated
Statement of Operations for each period in accordance FASB Standards
Codification Topic 815 (previously known EITF 00-19).

The restatements decrease the Net Loss for the fourth quarter
and for the fiscal year ended June 30, 2008 by $572,900, as well as increase
total liabilities and Total Stockholders Deficit at June, 30 2008 by $433,300.
The restatements decrease the Net Loss for  the fiscal
year ended June 30, 2009 by $433,300.The contingent liability was recorded at
the fair market value at the issuance date of the free standing warrants and
recalculated on the quarterly measurement date, with the net change in the
liability credited to the change in derivative value in the
Consolidated Statement of Operations for each period in accordance with FASB
Standards Codification Topic 815 (previously known EITF 00-19) resulting in the
following restatement to the financial captions listed below:

|Consolidated Balance
      Sheets            |   | June 30, 2008 as originallyreported |   |   | June 30,2008 as restated |   |   | June 30, 2009 as originally reported |   |   | June 30,2009 as restated |  
|-------------------------------------------- | - | ----------------------------------- | - | - | ------------------------ | - | - | ------------------------------------ | - | - | ------------------------ | -
|Other derivativeliabilities                  | $ | -                                   |   | $ | 433,300                  |   | $ | -                                    |   | $ | -                        |  
|Total Liabilities                            | $ | 5,155,686                           |   | $ | 5,588,986                |   | $ | 8,723,655                            |   | $ | 8,723,655                |  
|Additional paid in capital                   | $ | 165,067,510                         |   | $ | 164,061,310              |   | $ | 173,867,627                          |   | $ | 172,861,427              |  
|Deficit accumulated during development stage | $ | (172,268,340                        | ) | $ | (171,695,440             | ) | $ | (187,798,019                         | ) | $ | (186,791,819             | )
|TOTAL STOCKHOLDERS DEFICIT                  | $ | (2,804,853                          | ) | $ | (3,238,153               | ) | $ | (5,234,168                           | ) | $ | (5,234,168               | )
|                                             |   |                                     |   |   |                          |   |   |                                      |   |   |                          |  
|Consolidated Statements of
      Operations  |   |                                     |   |   |                          |   |   |                                      |   |   |                          |  
|Other Income (Expense)                       | $ | 1,096,340                           |   | $ | 1,669,240                |   | $ | (4,872,425                           | ) | $ | (4,439,125               | )
|Net (Loss)                                   | $ | (3,956,721                          | ) | $ | (3,383,821               | ) | $ | (15,529,677                          | ) | $ | (15,096,377              | )
|Loss per Share                               | $ | (0.01                               | ) | $ | (0.01                    | ) | $ | (0.03                                | ) | $ | (0.03                    | )

In addition, the Company expanded its disclosure with respect
to Converted Debentures, Certain equity instruments and Notes Receivable.

SCHEDULE II

ITEM 14B. VALUATION AND QUALIFYING ACCOUNTS

No material Accounts exists.

109

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SIGNATURES

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

|                    | mPHASE TECHNOLOGIES, INC. |                            
|------------------- | ------------------------- | ---------------------------
|Dated: June 4, 2010 | By:                       | /s/
      RONALD A. DURANDO
|                    |                           | Ronald A. Durando          
|                    |                           | President, CEO             

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

|Ronald A. Durando, Chief Executive Officer, Director                                | June 4, 2010
|----------------------------------------------------------------------------------- | ------------
|                                                                                    |             
|Gustave T. Dotoli, Chief Operating Officer, Director                                | June 4, 2010
|                                                                                    |             
|Martin S. Smiley, EVP, Chief Financial Officer, and General
      Counsel, Director | June 4, 2010
|                                                                                    |             
|Anthony Guerino, Director                                                           | June 4, 2010
|                                                                                    |             
|Abraham Biderman, Director                                                          | June 4, 2010
|                                                                                    |             
|Victor Lawrence, Director                                                           | June 4, 2010

110

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