UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10K



QANNUAL
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, 2007



COMMISSION FILE NO. 000-24969



mPHASE TECHNOLOGIES, INC.

(Name of issuer in its charter)



|NEW JERSEY
    (State or other jurisdiction of
    incorporation or organization) | 22-2287503
    (I.R.S. Employer
    Identification Number)
|--------------------------------------------------------------------------------- | ----------------------------------------------------------



|587 CONNECTICUT AVE., NORWALK,
    (Address of principal executive offices) | CT 06854-1711
    (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. YesQNo£



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 21, 2007 there were 391,736,000 shares of common stock,.$01 par value,
outstanding and the aggregate market price of shares held by non-affiliates was
approximately $25,498,000 (Based upon a closing common stock price of $..076 on
September 21, 2007) (solely for the purpose of calculating the preceding amount,
all directors and officers of the registrant are deemed to be affiliates.)



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mPHASE TECHNOLOGIES, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED JUNE 30, 2007

TABLE OF CONTENTS

|         |                                                                                                | PAGE
|-------- | ---------------------------------------------------------------------------------------------- | ----
|         | PART I                                                                                         |     
|ITEM 1.  | Business                                                                                       | 5   
|ITEM 2.  | Properties                                                                                     | 20  
|ITEM 3.  | Legal Proceedings                                                                              | 20  
|ITEM 4.  | Submission of Matters to a Vote of Security
    Holders                                        | 20  
|         | PART II                                                                                        |     
|ITEM 5.  | Market for Registrant's Common Equity and Related
    Stockholder Matters                      | 21  
|ITEM 6.  | Selected Consolidated Financial Data                                                           | 28  
|ITEM 7.  | Management's Discussion and Analysis of Financial
    Condition and Results of Operations Data | 33  
|ITEM 7A  | Qualitative and Quantitative Disclosures About Market
    Risks                                | 43  
|ITEM 8.  | Financial Statements and Supplementary Data                                                    | 43  
|ITEM 9.  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure       | 43  
|         | PART III                                                                                       |     
|ITEM 10. | Directors and Executive Officers                                                               | 43  
|ITEM 11. | Executive Compensation                                                                         | 46  
|ITEM 12. | Security Ownership of Certain Beneficial Owners
    and Management                             | 50  
|ITEM 13. | Certain Relationships and Related Transactions                                                 | 51  
|         | PART IV                                                                                        |     
|ITEM 14  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                            | 55  
|         | Report of Independent Public Accountants                                                       |     
|         | Report of Certified Public Accountants                                                         |     
|         | Consolidated Financial Statements                                                              |     
|         | Notes to Consolidated Financial Statements                                                     |     



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.

4

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ITEM 1.  BUSINESS



GENERAL DESCRIPTION OF THE BUSINESS



mPhase Technologies, Inc. ("mPhase" or the "Company"), a New Jersey
corporation,  is a development stage technology company headquartered in
Norwalk, Connecticut with offices in Little Falls, New Jersey and New York, New
York. mPhase shares common office space and common management with Microphase
Corporation, a privately-held company. Microphase is a seller of radio frequency
and filtering technologies to the defense and telecommunication industries.
Microphase has been in operation for over 50 years and supports mPhase with
engineering, administrative and financial resources, as needed. Since our
inception in 1996, mPhase has been a development-stage company.



The
Company is a developer and seller of broadband communications products for
telephone service providers.



mPhase introduced its first TV over DSL platform, the Traverser Digital Video
and Data Delivery System ("DVDDS"), in 1998. The DVDDS is a patented end to end
system that enables a telecommunications service provider to deliver up to
several hundred channels of motion picture experts group two ("MPEG-2") standard
broadcast digital television, high speed internet and voice over copper
telephone lines between a central office facility of the provider and a
customer's premise.  The DVDDS is a proprietary technology developed in
conjunction with Georgia Tech Research Corporation (GTRC) and is one of the
first systems of its kind developed. The Company has not earned any material
revenues to date with respect to the DVDDS and has discontinued further
development of the product and replaced it with its TV+ solution.



The
Company's TV+ solution is an open-standards, carrier class solution of
middleware/software enabling telephone service providers to deliver broadcast TV
using internet protocol (IPTV).  The TV+ platform also is capable of delivering
video on demand, voice and high-speed internet over any type of existing
infrastructure of a telephone service provider including copper, fiber or coax.
The Company's TV+ solution is highly scalable (compared to other middleware
requires less routers and servers) with significant cost savings. The company
also serves as a systems integrator for its IPTV solution. The Company's
TV+ solution is highly scalable and reliable middleware designed to operate with any
IP based network. In addition the Company designs, manufacturers and sells
digital subscriber line (DSL) component products such as Plain Old Telephone
Splitters (POTS) designed to split a telephone signal into separate analog and
digital streams enabling the delivery of voice and data simultaneously over a
single copper telephone line.



The
Company believes that the demand for the TV+ system will be initially the
greatest in markets primarily outside of the United States that do not have a
hybrid fiber coaxial cable ("HFC") infrastructure necessary for cable TV or
fiber to the curb and are therefore have less competitive solutions for the
delivery of broadcast television.  The TV+ solution is highly scalable and
significantly reduces the number of routers and servers a telephone service
provider will need to deploy to upgrade its infrastructure to enable it to
deliver broadcast television. This is especially important outside of the United
States where telephone infrastructure often needs to be significantly upgraded
with routers and servers (hardware) in order to deliver IPTV. The decision to
deploy IPTV by an international service provider is often based upon the cost of
system hardware upgrades that often constitute 95% of the cost of deploying IPTV
on a telephone network.



The
Company's IPTV solution utilizes a communications framework based upon Internet
Protocol (IP) instead of Asynchronous Transfer Mode (ATM) that was utilized in
earlier releases of the product. ATM is an industry standard for transportation
of data based upon a packaging of information into a fixed-size cell format for
transportation across networks. Many telecommunications service providers
currently deploy equipment that handles this protocol because it can support
voice, video, data and multimedia applications simultaneously with a high degree
of reliability. IP is another transport protocol that maintains network
information and routes packets across networks. IP packets are larger and can
hold more data than ATM cells. Historically, there have been concerns that
service providers would be unable to provide the same quality of service with IP
because it is not optimized for time-sensitive signals such as broadcast
television and voice. Nevertheless, there is a greater demand by
telecommunication service providers for IP systems for delivery of television,
voice and high-speed data because such systems are significantly more cost
effective to deploy based upon greater scalability. The Company's  TV+ solution
consists of middleware/software that will operate with any IP based network
including DSL, Ethernet, or fiber or any combination thereof. The solution is
transport agnostic and may be deployed with any IP multicast router or DSLAM
transportation method used for the delivery of television and high-speed data
over an IP network.



mPhase also has designed and markets a line of digital subscriber line (DSL)
component products for telecommunications service providers including its new
VDSL (very fast DSL) customer premises POTS Splitter product currently being
used globally by telecommunications service providers that are deploying digital
subscriber to transport data as an additional part of its traditional voice
telephone service. From the inception of the Company, virtually all of its
revenue to date was derived from the sale of ADSL (asymmetric DSL) customer
premises and central office POTS Splitters which have been discontinued as
telephone service providers have migrated to VDSL.

5

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In
February of 2004, mPhase entered the business of developing new products using
the science of  nanotechnology. Such science involves the manipulation of
materials of extremely small size (of a magnitude equal to one fifty thousandth
the size of a human strand of hair) that  as a result exhibit new and different
properties from their ordinary properties found in nature. The science involves
interdisciplinary areas of science including molecular engineering, quantum
physics and electrochemistry.



The
Company commenced 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 super hydrophobic
surfaces to create power cells ( batteries) by controlling wetting behavior of
an electrolyte on nano-structured electrode surfaces. The goal is 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). It is believed that such batteries should have a shelf life of
15-20 years as compared to 5 years for an ordinary battery. In addition such
battery will have a significant advantage in the time it takes to ramp to power
equal to one millisecond to fully active voltage a fraction of the time it
takes for conventional batteries.



The
Company's Development Agreement covering power cell development with Bell Labs
was extended in March of 2005 and April of 2006 respectively each for additional
12 month periods. Upon expiration in March of 2007, Company and Bell Labs
entered into an interim agreement at a cost of $200,000 covered the period from
March 1, 2007 through April 27, 2007. A second interim agreement entered into
covered the period from April 27, 2007 through July 31, 2007 for a total of 
$300,000 and has recently expired. The Company is currently negotiating a
further extension of such product research and development.



In
March of 2005, the Company entered into a second Development Agreement using the
science of nanotechnology for 12 months at a cost of $1.2 million with the Bell
Labs  to develop ultra sensitive magnetic sensor devices through the science of
nanotechnology. Such agreement was renewed in April of 2006 for another 12
months requiring mPhase to pay Bell Labs the sum of $100,000 per month for
exploratory research. The Company is currently negotiating the renewal for an
additional 12 months at a total cost of approximately $1.2 million.



Magnetometers work by sensing changes in the earth's magnetic field caused by
motion of magnetic objects or changes in electrical currents generated by such
objects. The Company believes that magnetic sensors may have significant
applications in the area of military electronics, cell phones, the food industry
and electronic security and detection devices. The family of magnetometers that
mPhase is developing in collaboration with Lucent Bell Labs is based upon Micro
Electrical Mechanical Systems (MEMS). This is a development technique using a
combination of photolithography and etching with extremely small three
dimensional structures, with the capabilities of movement, can be made on a
wafer of Silicon. The processing of such devices is done in a semi-conductor
clean room located at the New Jersey Nanotechnology Consortium facilities in
Murray Hill, New Jersey. The product development has successfully reached an
early milestone having produced a number MEM's based sensor samples from the
clean room facilities. We are currently working on integrating sensor samples
into the surrounding electronic circuitry so that measurement, characterization
and sensitivity testing can be conducted. We are currently able to achieve
sensitivities at room temperature of better than .1 micro gauss per root hertz
squared and with additional development the goal is improvement of at least one
order of magnitude.



The
discipline of developing new products utilizing nanotechnology fabrication is in
its early stages of exploratory development making it difficult to predict the
timing of product releases and future revenues. mPhase believes that batteries
with exceptionally long shelf lives, very small size and high power density as
well as electromagnetic sensors may be some of the first products resulting from
nanotechnology research and development to achieve commercial viability. The
Company believes that such expansion into nanotechnology product development is
consistent with its strategy of being a pioneer of high growth technology
products and potentially diversifies its product mix.

6

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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 exploitation 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 the
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.



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.

7

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On
November 28,2004, mPhase entered 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.



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 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.

8

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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 plans 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



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 17, 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.



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 uses radio frequency identification tags to secure high-end  personnel tracking and monitoring systems. The Company believes that such
patent substantially enhances the Company's smart battery application being
developed through AlwaysReady, Inc. a wholly-owned subsidiary.



Our
revenue, historically, has been derived exclusively from sales of DSL component
telephone equipment parts, the majority of which has come from our sales of POTS
Splitter Shelves. We have derived no material revenue to date with respect to
ouriPOTS   and broadband loop products (which have been discontinued).
We are currently exploring the development of VDSL (very fast DSL) CPE (customer
premises equipment) Splitters as a new DSL component product line. Neither our
TV+ solution or our nanotechnology products have generated to date any material
revenues other than $280,000 of revenue with respect to the sale of 1000 set top
boxes together with software for Release 2.0 (that uses asynchronous transfer
mode protocol) of our TV+ solution in fiscal year 2005 to a major Russian
telecommunications service provider.  Such provider has not continued deploying
our TV+ solution. In our fiscal years ended June 30, 2007 and June 30, 2006 we
generated approximately $154,000 and $975,000 in revenue, respectively, from the
commercial sale of our component products and overall losses for such years of
$16,851,562 and $24,450,650, respectively. These component products, included
filters and ADSL Central Office POTS Splitter Shelves, were marketed to other DSL
equipment vendors. In addition certain minor revenues were recognized for
consulting services provided in connection with the possible application of its
nanotechnology power cell to create an active smart credit card for a leading
credit card company.

9

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Products & Services



IPTV Solution



mPhase is a developer and seller of broadband communications products for
telephone service providers.  The Company's TV+ solution is the
middleware/software necessary for the delivery by telephone service providers of
broadcast quality television, video on demand, high speed internet and voice
utilizing internet protocol (IPTV). mPhase believes that its IPTV solution  is
the most cost-effective, standards based, scalable solution with carrier class
quality and security available for telecommunications service providers around
the world. mPhase believes that telecommunication service providers will find
the cost-effective, scalable architecture of the TV+ middleware will result in
significant cost savings in the number of servers and routers necessary  to
deploy IPTV to its customers on a significant scale. This is especially true for
telephone service providers outside of the United States that face substantial
hardware costs to upgrade their existing backbone and infrastructure necessary
for the delivery of broadcast television.  Since such hardware costs constitute
up to 95% of the capital expenditures in deploying IPTV, the savings are often a
key financial ingredient enabling a telecommunications service provider to
deploy IPTV. Thus the Company believes its software can be a compelling solution
for such deployments. The deployment of a full range of converged broadband
services is critical for many telecommunications service providers to retain
traditional telephone customers by offering a full package of services.  Our TV+
solution enables a telephone service provider to provided a triple play of
voice, broadcast television and high speed internet over any existing
infrastructure including copper, fiber or coax. Our current release of the TV+
solution is a culmination of years of development of a world-class television
delivery solution for telecommunication service providers.



Our
TV+ solution is currently part of a test deployment of IPTV by Comstar/Odessa, a
major telecommunications service provider in the Ukraine. The Company faces
significant technical and financial challenges in order to achieve the
successful completion of acceptance testing criteria. However, upon  the TV+
solution successfully meeting the technical and features criteria of the
acceptance test.  Comstar/Odessa has indicated that it will  commence deployment
of IPTV to 6,000 customers. Such a deployment would constitute the first major deployment of its TV+
solution and could constitute a
significant breakthrough for additional deployments of its IPTV solution in the
Ukraine and Russia. The Company has also recently established a significant
reseller relationship with Net Dialogue, a major integrator and reseller of
telecommunications products and services for several large telephone service
providers in Russia.



Since our inception in 1996, we have been a development-stage company. During the
past three years, mPhase has transformed itself from a developer of closed end
proprietary technology for the delivery of broadcast television over DSL to a
Company that has developed a carrier class middleware/software solution for the
delivery of IPTV. mPhase's IPTV solution is designed for operation with any
transport mechanism using IP protocol including multicast routers, digital
subscriber line access multiplexers and set top boxes of all major vendors.



Our
goal is to achieve wide acceptance of our TV+ solution in developing markets
outside of the United States for multi-channel digital broadcast IP television
at significant gross margins by creating an extremely cost-effective product.
Our TV+ solution consists of highly scalable system management
middleware/software designed to deliver IP television, video on demand, high
speed internet and voice over any IP based network.  The solution is carrier
class and standards based designed to work with hardware of many different
vendors that manufacture DSLAM's, Multicasters, set top boxes, as well as any
backbone of hardware servers or topology that are key components that form part
of a system for the delivery of IPTV. It is important to note that the Company
has shifted its focus from a proprietary end to end hardware and software
platform for the delivery of broadcast television over DSL to the development of
middleware/software for carrier class delivery of IPTV over any IP network
infrastructure of a telecommunications service provider. This shift has taken
place over the past three years in response to advancements in IP deliver of
television and the current requirements of telecommunications service providers
for IPTV solutions.



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 plans 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

10

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Other DSL Products



POTS Splitter Shelves



Although the Company has repositioned itself mainly as a software/middleware
provider of IPTV solutions, mPhase also designs and markets a line of DSL
component products including POTS Splitters which has generated almost all of
the Company's revenue from inception to date. A Plain Old Telephone Service
("POTS") Splitter Shelf is a low pass/high pass filter that separates voice and
data transmissions. POTS Splitter Shelves are necessary to permit simultaneous
voice and data transmissions over the same twisted copper wire pair. POTS
splitter shelves and the individual cards that populate the shelf separate and
combine traffic traveling along each twisted pair of wires into the analog voice
portion of a transmission and the digital data portion, so that each signal can
travel independent of the other.



The
Company's new VDSL customer premises splitter designed to facilitate the
roll-out of broadband services by telecommunications service providers such as
AT&T that are using a combination of fiber to the curb and VDSL over existing
copper lines to the home to solve the last mile for delivery of such
services.  The Company is using the combination of capabilities of its own prior
experience with respect to central office and customer premises POTS Splitters
for ADSL with those of Microphase Corporation and Janifast Ltd. to develop a new
line of VDSL customer premises splitters in what appears to be a new and
evolving market. As telephone service providers have migrated to VDSL, the
Company has discontinued its traditional POTS Splitter product



Nanotechnology Products



As
noted above, the Company is in the process of negotiating an extension of each
of its Nanotechnology Development Agreements covering the Battery and
Magnetometer products respectively and will assign such contracts to Always
Ready, Inc.





Highly Sensitive Magnetometers



The
enhanced sensitivity of these devices results from two scientific advances
recently made researchers at Lucent Bell Labs. Presently, the highest
sensitivity magnetometers commercially available require cooling to cryogenic
temperatures. Called SQUIDs (for Superconducting Quantum Interference Devices)
these devices only work at the temperature where liquid helium boils, -455
degrees below zero Fahrenheit, making such magnetometers expensive and bulky and
therefore ill-suited for remote-sensing applications. Room temperature
magnetometers, on the other hand, are less sensitive, and use technology that
was developed in World War II for detecting submarines.





The
new technology being developed by Bell Labs and mPhase employs a number of
different designs based on Micro-Mechanical Systems (MEMS). These designs use
the very high "Quality Factor (Q)" of the mechanical resonance in single
crystals of silicon. A resonance is similar to the fundamental frequency of a
tuning fork. When tapped, a tuning fork will vibrate for a length of time
inversely proportional to the internal friction of vibration within the metal of
the tuning fork. A comparable tuning fork made from single crystal silicon,
which has less internal friction than the hardest metal, will vibrate almost a
thousand times longer. Based on this principal, a device employing a high Q
resonator will have enhanced amplitude of vibration at the resonance frequency,
and hence will display a greater sensitivity to external perturbations that
affect its resonance frequency. By coupling the mechanical motion of a bar or a
paddle constructed from silicon to the ambient magnetic field, this high
mechanical sensitivity can be converted to high magnetic field sensitivity. The
technical approach that the team is developing can be achieved either statically
with an integrated magnetic film, or dynamically through motion of the silicon
bar or paddle.



The Benefits of MEMS



Commercial magnetometers using purely electronic detection, such as Hall,
magneto-resistance or flux-gate devices, have sensitivities limited by theirelectronic   Q-factor. This Q-factor depends on the natural electrical
resistance, or electronic friction, of the metal in the circuit. For
room-temperature operations it is therefore difficult to reduce the electrical
Q-factor. Mechanical resonators made from semiconductor-grade silicon, on the
other hand, exhibit mechanical Q-factors, approaching 100,000 at room
temperature. In all, these new, smaller and less costly magnetometers should be
100-1000 times more sensitive than existing commercial devices, thus enabling a
new class of sensor systems that mPhase plans on commercializing.



The
mPhase and Lucent magnetometer team has successfully reached an early milestone
and have produced a number MEM based sensor samples from the clean room
facilities and are working on integrating them into the surrounding electronic
circuitry so that measurement, characterization and sensitivity testing can be
conducted.



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.

11

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On July 17, 2007 mPhase
announced that it had been awarded 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 mPhase 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 than can be supplied by more common alkaline
batteries. The Phase I grant, valued at $100,000, will enable mPhase to
competitively compete for a Phase II grant for up to $800,000 to continue future
advancements in the design. Successful completion of the Phase II award is an
avenue used by U.S. government defense agencies to adopt advanced technology for
commercialization and use. Rutgers University will support mPhase, and its newly
formed subsidiary AlwaysReady, Inc., during the award period as a subcontractor
under the award guidelines.



Target Markets



mPhase's initial target market for its IPTV+ solution  is primarily large
international telephone service providers and rural U.S. telephone service
providers in areas in which an extensive fiber infrastructure has not been
developed. We believe our IPTV solution is most competitive in markets that
currently have limited access to multi-channel television services such as many
parts of Eastern Europe, Russia, the Ukraine, Turkey and other countries in the
Middle East. We believe that our IPTV solution will also be competitive in the
United States as we continue to add features required by large American
telecommunications service providers and will become especially attractive in
the U.S. upon the addition of targeted advertising capabilities to the TV+
middleware.



Our
nanotechnology products have potential military and commercial applications. Our
micro power cell has potential application for usage on credit cards as well as
potential military applications as a power source with a much longer shelf life
prior to activation, than conventional batteries. Our magnetometer has potential
military and commercial applications including cell phones and the food industry
for detection of needles used for injection of hormones in cattle and other
animals consumed grown for meat products. Potential military applications could
include electronic security devices and detection devices of enemy mines and
soldiers.



Competitive Business Conditions



During the past 5 years, the market for the delivery of TV by telephone service
providers has been marked by significant technological change.  During the
robust spending period in the late 1990's into the year 2000, the theme of
convergence focused strictly on the last mile to the home in the United
States. Telephone service providers were beginning to deliver high-speed
internet over digital subscriber lines (DSL) using their copper infrastructure
and examining methods to deliver broadcast television together with voice as a
triple play to increase revenues and margins as traditional revenues and
margins from wire line telephone services declined with the advent of wireless
and voice over IP competition from cable providers. The industry has evolved
from an initial focus on proprietary end to end systems such as the Traverser
DVDDS developed by mPhase to the need for standards-based open architecture with
carrier class quality and security which are features of mPhase's TV+ solution
for the delivery of IP television. During such period, telephone service
providers concluded that in order to achieve minimum cost of delivery and
maximum scalability, any solution for delivery of broadcast television and video
on demand would need to be based upon a transport mode utilizing the new
Internet Protocol as opposed to the services provider's traditional asynchronous
transfer mode (ATM protocol). The evolution of mPhase's TV+ solution is targeted
to meet the new market realities and requirements of major telecommunications
service providers for the delivery of a triple play of converged services.



Despite significant market noise and fanfare about IPTV, major deployments of
true broadcast television by telecommunications service providers are relatively
few, but have increased during the past 12 months. The complexity of designing
the software/middleware solution of low cost, high reliability, scalability,
security and open architecture to allow service providers to custom tailor and
grow into a system based upon such provider's network topology, take rate among
customers and specific feature requirements has proved to be a significant
challenge for all of the major players in such market place including Microsoft,
Alcatel, Minerva, Myrio and Motorola. In addition, the delivery of IPTV by
telephone service providers with robust features may require a simultaneous
investment in routers and servers to upgrade a system's backbone which may
entail significant additional cost. It is estimated that the cost of the IPTV
middleware sold by mPhase may constitute only 5% of the overall investment a
telecommunications service provider will need to upgrade its overall system for
IPTV delivery. The story is still being played out in the market with
considerable uncertainty as to who the final dominant players will be on the
middleware/software market which is the driving focus of mPhase's of its TV+
solution. In 2007, the telecommunications sector has continued its slow recovery
that
began in 2004 from the significant downturn and weakness in capital spending by
service providers globally that began at the end of calendar year 2000. The
dramatic pull back in equipment purchased by service providers from its peak
commencing at the end of calendar year 2000, has significantly reduced earnings
and resulted in dramatically reduced stock prices of telecommunications
equipment vendors. This, together with the tremendous correction of stock prices
in general during the past four years, has halted the growth of the sector. The
Company remains optimistic about the future of the industry and the potential of
its IPTV platform and solutions since we believe that it offers the most
scalable solution requiring less routers and servers to upgrade a
telecommunications service provider's existing infrastructure for delivery of
broadcast television. Since hardware for deployment of IPTV consists of 95% of
the cost to a service provider of upgrading its backbone, we believe our
middleware can be a key factor in the decision of  a company to add IPTV to its
existing telephone voice services. This is especially true outside of the United
States where the existing networks of many service providers will need
substantial upgrades to be able to deliver broadcast television with robust
features.

12

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The
Company has responded to the market challenges in the past several years to
reconfigure its video product line from a narrow, proprietary, DSL platform
solution to an open systems standard for the delivery of Broadcast Television,
high speed internet and voice over a medium agnostic and delivery agnostic
solution. The Company's IPTV solution enables telephone service providers to
deliver a triple play of services over both a fiber, coaxial or copper transport
medium with a transport mode not tied to any particular DSLAM, multiplexer or
other transport vendor of Broadcast TV, but rather based upon an open standards
system delivery and management system software. We anticipate an eventual upturn
in capital spending by telephone service providers seeking to provide a triple
play of voice, data and video delivery even though such upturn may be
constrained by the fact that service providers still face significant challenges
of overcapacity and declining margins for traditional services globally. The
worldwide rollout of VDSL data delivery services should also provide a market
for the Company's component products such as its newly designed VDSL   Splitters
necessary in customer premises of service providers.



As
has been seen during the past several years, in addition to the very volatile
economic climate, the telecommunications software and hardware equipment market
is also characterized by swift technological change. Currently, communications
service providers have the option to offer several broadband solutions for the
last mile to the home, including the existing ISDN or T-1 technologies, fiber
optics or hybrid coaxial cable and wireless and satellite delivery methods.
Communications service providers may use these other technologies instead of DSL
to offer their subscribers broadband access. Based upon current
telecommunications industry standards and deployment methodologies, mPhase
believes that it has broadened its competitive capabilities beyond the
traditional DSL and copper market with the development of its IPTV product in
its TV+ solution that operates over any form of IP network.



Where DLSAM (digital subscriber line access multiplexes) continue to be a key
transport instrument for the delivery by telephone service providers of
converged services, it should be noted that Alcatel is the leading supplier of
DSLAMS (digital subscriber line access multiplexers) around the globe having
deployed several video over DSL installations with telephone service providers. 
Historically, Alcatel has worked with multiple equipment vendors to create a
complete, end-to-end video solution, including middleware (i.e., software) and
has announced a major joint venture with Microsoft to develop middleware for
IPTV deliver by telecommunications service providers. The recent merger of
Alcatel and Lucent Technologies, Inc. reflects the continuing industry trend of
consolidation of telecommunications equipment vendors.



There are a number of middleware providers competing in the IPTV solutions
market including a number of competitors that are much larger, better known and
with far greater financial resources than mPhase. Such competitors include
Minverva, Orca Interactive, Siemens Corporation, VBrick Systems, Alcatel and
Microsoft Corporation.



Bell
South has recently awarded a major contract to the Alcatel/ Microphase joint
venture to develop an IP network capable of delivering an IP TV solution with
robust features.



To
date, there are several deployments of IPTV worldwide including a deployment in
Italy by Fastweb an Italian corporation. In Spain, Imagenio, operated by
Telefonica has completed a significant deployment. Other major deployments of
IPTV worldwide also include Yahoo BB/Softbank in Japan, Supersun in Hong Kong
and Media on Demand in the Republic of China operated by Chunghwa Telecom.
Other vendors that offer complete platforms for delivery of  IPTV  hardware or
software portions of such platforms that incorporate broadband solutions
include: ADC, Advanced Fiber Communications, Innovia, NEC, Motorola, Huawei
Technologies Corporation Limited, Paradyne Networks, Samsung, 2Wire, Siemens,
TUT Systems, Motorola, UTSTARCOM and Westell. In addition, we also compete with
Minerva and Myrio Corporation, which provide infrastructure software products to
deliver multi-channel digital television over telephone networks.



Cable television providers are also competing in the space for converged
services using analog and digital cable connections that have been upgraded for
digital two-way services. In the United States, the majority of cable
connections have already been upgraded and can support the delivery of
television and high-speed Internet, and in many cases, cable telephony. In fact,
the imposing threat that cable companies present has created a catalyst among
telephone companies to expand their service offering to include advanced
services such as digital television.



While satellite delivered television services in the U.S. have experienced
significant growth over the past several years, the ability for satellite
providers to offer reliable, consistent and cost- effective high speed data is
still in its infancy and too expensive to commercially deploy. Furthermore,
satellite providers are not typically equipped to offer telephony services,
unless they were to partner with a telephony provider. Beyond that, particularly
outside of the U.S., the direct-to-home satellite options are limited due to
either low channel counts or unreliable quality. Satellite signals are often
affected by weather events such as severe snow or rain, unlike DSL-delivered
services which remain unaffected by weather patterns.

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Manufacturing



mPhase subcontracts all of the manufacturing of its products to outside sources
including related parties such as Janifast Ltd. and Microphase Corporation. We
currently have no contracts in place for the manufacturing of our products with
either Microphase Corporation or Janifast Ltd. or any other non-affiliated third
party manufacturers. We periodically execute purchase orders for the manufacture
of quantities of component DSL products that are produced by Janifast Ltd. By
using contract manufacturers, mPhase will avoid the substantial capital
investments required for internal production.



Outsourcing



The
Company practices an outsourcing model whereby it contracts with third party
vendors to perform certain functions rather than performing those functions
internally. For instance, mPhase outsourced the digital engineering development
for the legacy Traverser DVDDS to GTARC. It also out sources analog engineering
development and certain administrative functions to Microphase Corporation.
mPhase  currently  outsources its hardware integration and  different components
of its middleware development for its TV+ solution  to Bitband Technologies Inc
 to Latens Systems Ltd.,  as well as Magpie Telecom Insiders, Inc., Velankani
Communications Technology, Inc. and Espial Group, Inc. The agreement with
respect to development of  portion of the TV+ system management being performed
by Bell Labs expired in May of 2006 and has not been renewed. The Company has
transferred the portions of software being developed by Bell Labs and systems
integration to Velankani.



mPhase has also outsourced to the Bell Laboratories Division of Lucent
Technologies its research and development efforts in the nanotechnology area
aimed at developing power cells and batteries with enhanced shelf lives and
other features not currently available in batteries. Such focus is initially
upon the development of batteries for military applications using nanotextured
materials. In addition, as noted above, mPhase expanded its efforts in product
development using the science of nanotechnology  extensions of its original
Development Agreement with Bell Labs for power cell and battery development for
another 12 months as well as extending its Development Agreement with Bell Labs
originally entered into in March of 2005 to develop electronic magnetic sensors
(the Magnetometer) product line.



Patents and Licenses



We
have filed and intend to file United States patent 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. 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:



In
June of 2007, the Company filed a provisional patent for certain unique delivery
aspects of its IPTV middleware.

The
Company has recently decided not to incur the cost of maintaining patents
originally obtained by Georgia Tech Research Corporation in connection with its
Traverser DVDDS legacy product in which the Company was the exclusive worldwide
licensee for a 5 % royalty. As previously noted, the TV+ solution has replaced
the legacy product.



The
Company had filed seven (7) additional patents that consist of a combination of
(a) patents granted to mPhase from the Bell Labs division of Lucent
Technologies, Inc. and (b) joint patents development by mPhase and employees of
Bell Labs relating to the micro power cells and magnetometers currently under
development by the Company. mPhase has obtained the licensing rights from Bell
Labs to use the prior art patents after expiration of the development period for
each of the nanotechnology products.



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.



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.

14

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Government Regulation



The
Federal Communication Commission, or FCC, and various state public utility and
service commissions, regulate most of mPhase's potential domestic customers for
our IPTV solution and DSL component products. Changes to FCC regulatory policies
may affect the accessibility of communications services, and otherwise affect
how telecommunications providers conduct their business. These regulations may
adversely affect the Company's potential penetration into certain markets. In
addition, its business and results of operations may also be adversely affected
by the imposition of certain tariffs, duties and other import restrictions on
components, which mPhase obtains from non-domestic component suppliers. Changes
in current or future laws or regulations, in the U.S. or elsewhere, could
materially adversely affect the Company's business.



To
the best of our knowledge, there is no state or local laws to which we are
subject that are relevant to our system from a regulation and certification
standpoint. At the Federal level, we are subject to Federal Communications
Commission (FCC) Regulations Under the Code of Federal Regulations, Title 47,
Chapter 1, Part 15-RADIO FREQUENCY DEVICES, and Part 68-CONNECTION OF TERMINAL
EQUIPMENT TO THE TELEPHONE NETWORK. Part 15 sets out the requirements to obtain
a license for operating a radiator of electromagnetic energy, and the technical
and administrative specifications relating to the marketing of such radiators.
Part 68 sets out the rules and regulations to provide for uniform standards for
the protection of the telephone network from harms caused by the connection of
terminal equipment and associated wiring thereto, and for the compatibility of
hearing aids and telephones so as to ensure that persons with hearing aids have
reasonable access to the telephone network.



Our
products and equipment were designed to comply with the aforementioned rules and
regulations. The POTS splitter and filter products were already certified with
FCC Part 68. The TV+ is FCC Part 15 compliant.



Compliance with FCC rules and regulations allows our equipment to be marketed
and sold in the United States. While the certification process and costs
associated have no material effect on mPhase's financial condition, failure to
comply with FCC rules and regulations would result in loss of revenue and
additional costs on product revision and/or redesign.



Research and Development



mPhase has designed the legacy Traverser DVDDS and its ancillary component parts
in conjunction with multiple research and development partners. As of June 30,
2007, we had been billed a cumulative total of approximately $13,563,000 for
research and development conducted by GTARC.



mPhase originally contracted with Lucent in fiscal year 2002 to reduce the cost
of its INI set top box used with the Traverser 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 replaces 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,
for an aggregate cost of approximately $1.6 million. We have not renewed our
contract for software development of our TV+ product with Bell Labs. We have
engaged and expect to continue to engage Velankani Communications, Magpie Telecom
Insiders, Inc, Espial Telecommunications, Inc and other software vendors
and developments for future assistance with our development including  product
refinements and enhancements. As of June 30, 2007 we have been billed and paid a
cumulative total of approximately $4,882,345 for research and development
conducted by Lucent for our TV+. During the period from July 1, 2006 through
June 30, 2007 we have incurred approximately $3.1 million for research and
development of our IPTV product from major vendors such as Velankani, Espial and
Magpie.



In
addition, our advanced battery and power cell technology research and
development is being performed by the Bell Labs division of Alcatel/Lucent under
the terms of a Development Agreement for a cost of approximately $300,000
covering the period from April 27, 2007 through July 30,2007. Previously mPhase
had paid Lucent the sum of $200,000 from the period of expiration of the prior
12 month Development Agreement that occurred at the end of February of 2007 to
cover the period through April 27, 2007. From February of 2004 through February
of 2006, the Company had paid a total of $3.6 million to Bell Labs  at the
rate of $100,000 under its initial contract for development of
advanced battery power cell technology.  In
March of 2005, the Company further engaged Bell Labs in a separate Development
Agreement for the development of a new generation of ultra magnetic sensors
using the science of nanotechnology with a total cost of $1.2 million also
payable in monthly installments of $100,000 for a period of 12 months which was
extended through March of 2007 at the cost of $100,000 per month. We are
currently negotiating with Bell Labs an extension of such contract upon the
same similar
terms for an additional 12 months.



Employees



mPhase and its subsidiary companies presently have a total of  19 full-time
employees, two of whom are also employed by Microphase Corporation. See the
description in the section entitled "Certain Relationships and Related
Transactions."  Subsequently to June 30, 2007, 3 of our employees have been
transferred to work full time at Always Ready, Inc and 7 employees have been
transferred to work full time at Granita Media, Inc.

15

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In addition to the Risk Factors set forth herein it is important for you to
consider the following:



mPhase was advised in April 2002 that following an investigation by the staff of
the Securities and Exchange Commission, the staff intended to recommend that the
Commission file a civil injunctive action against Packetport.com, Inc. ("Packetport")
and its Officers and Directors. Such recommendation related to alleged civil
violations by Packetport and such Officers and Directors of various sections of
the Federal Securities Laws. The staff has alleged civil violations of Sections
5 and 17(a) of the Securities Act of 1933 and Sections 10(b) and 13(d) of the
Securities Exchanges Act of 1934. As noted in other public filings of mPhase,
the Chief Executive Officer and Chief Operating Officer of mPhase also serve as
Directors and Officers of Packetport. At that time these persons advised mPhase
that they deny any violation of law on their part and intend to vigorously
contest such recommendation or action, if any.



On November 15, 2005, the Commission filed a civil enforcement action 3:05 CV
1747 against 6 individuals and 4 companies as a result of its investigation in
federal district court in the State of Connecticut alleging various violations
of the Securities Act of 1933 including Sections 5, Section 17(a) and the
Securities Exchange Act of 1934 including Sections 10b, Rule 10b-5, Sections,
12,Section 13, Section 16 in connection with the purchase and sale of stock of
Packetport.com in the period on or about December 14, 1999 into February of
2000. The defendants include the Chief Executive Officer and Chief Operating
Officer of mPase as well as Microphase Corporation, a privately held Connecticut
corporation that shares common management with mPhase. mPhase Technologies,
Inc. is not named as a party in the enforcement action. The Chief Executive
Officer and Chief Operating Officer of mPhase, and Microphase Corporation, each
deny any violation of the law by each or any of them and intend to vigorously
contest all charges set forth in such enforcement action by the Commission.



In a ruling (3:05 CV 1747 (PCD)), dated March 21, 2007, the Honorable Peter C.
Dorsey, Senior U.S. District Court Judge for the United States District Court 
For The District Of Connecticut, granted a motion by defendants, Ronald A.
Durando and Packetport Inc. joined by defendants Gustave T. Dotoli , Microphase
Corporation and Packetport.com, Inc. to dismiss under Federal Rule 41(b) of the
Federal Rules of Civil Procedure the civil lawsuit filed on November 15, 2005 by
the Securities and Exchange Commission against Packetport.com, Inc. et. al for
lack of prosecution.



On April 4, 2007, the Securities and Exchange Commission filed a motion with the
United States District Court requesting a reconsideration of the motion to
dismiss granted by the Court  in favor of the defendants.



In a ruling dated May 23, 2007, the Judge Peter C. Dorsey granted the motion for
reconsideration filed by the Securities and Exchange Commission and reversed his
earlier ruling of March 21, 2007 and reinstated the case on the judicial
calendar to proceed to trial.On August 17, 2007, such
action was dismissed with prejudice against Durando with the approval by the
SEC.

16

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RISK FACTORS



RISKS RELATED TO FINANCIAL ASPECTS OF OUR
BUSINESS



The Company has entered into the new and emerging business of nanotechnology,
which entails significant exploratory development and commercial risk.



The
Company has expended approximately $4 million from February of 2004 through the
date hereof pursuant to 12 month contracts with the Bell Labs division of Lucent
Technologies, Inc. during such period to develop longer life battery cells for
military applications as well as commercial applications such as RFID (Radio
Frequency Identification) tags. The Company expects to continue exploratory
research with Lucent Technologies, Inc. and is currently in negotiations for an
extension of such contract for an additional 12 months at the rate of $100,000
per month. Even though a feasibility prototype product has been successfully
developed, pure research involves a high degree of risk with significant
uncertainty as to whether a commercially viable product will result



From
March 10, 2005 through the date hereof, the Company has spent over $2.4 million
with the Bell Labs division of Lucent Technologies, Inc for new research and
development of uncooled magnetic ultra sensors using the science of
Nanotechnology.  The Company is currently negotiating to extend its Development
Agreement with Bell Labs for the Magnetometer research for another 12

months through June of 2008 at $100,000 per month each. The Company does not
expect significant revenues from either product for at least 2 years.



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



The
market price of our common stock closed at $7.88 on July 26, 2000 and closed at
$.095 on June 29, 2007. During such period the number of shares outstanding of
the Company increased from approximately 30 million shares to 388 million
shares. Such increase was the result of periodic private placements by the
Company in order to finance company operations. Stocks in telecommunications
equipment providers of DSL products have 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 have reported net losses for each of our fiscal years from our inception in
1996 through the fiscal year ended June 30, 2007 and may not be able to operate
profitability in the future.



We
have had net losses of  $168,311,619 since our inception in 1996 including
$16,851,562 and $24,450,650 for the fiscal year ended June 30, 2007 and June 30,
2006, 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 $5-10 million in additional cash in the next 12
months through further offerings to continue operations.  As of June 30, 2007 we
have negative working capital of $3,088,439 and a stockholders deficit of
$2,754,498. Cumulative cash flow from operations since inception has amounted to
a negative $75,730,471.

17

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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 with respect to its latest audited 10K for the fiscal years ended June
30, 2007, June 30, 2006,  June 30, 2005,  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, 2007, we have warrants and options outstanding convertible into
approximately 196 million shares of mPhase common stock, which, upon conversion,
may adversely affect the future price of our common stock. As of June 30, 2007
we have warrants and options convertible into approximately 112 million shares
of our common stock at $.20 per share or less that, upon exercise may result in
significant 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 solutions
for the delivery of broadcast television, high-speed internet and voice by a
major telephone service provider.



We
have had to date no material revenues derived from sales of our TV+ solution.
There has been to date only one sale of our IPTV solution for 1000 customers of
a telecommunications service provider in Russia which has discontinued
deployment of our TV+ solution. In addition a lab test trial by a major
telecommunications service provider in the Ukraine currently faces significant
financial and technical challenges in order to pass a technical acceptance test
that requires many product features currently  still in development by the
Company. There are no other deployments of  our TV+ Solution by telephone
service providers globally and there currently is uncertainty as to the extent,
if at all, that deployments of IPTV will occur in the future



We depend upon outsourcing of our research and product development of our TV+
Solution and Nanotechnology products to Lucent Technologies Inc.



We
depend upon Lucent Technologies Inc. for the successful development of our

Nanotechnology products and our business would be materially adversely affected
if Lucent Technologies Inc. were to terminate our relationship or fail to renew
our Development Agreement for the Magnetometer that is currently being
negotiated.



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 been granted stock options that are
intended to represent a key component of their compensation. Such options may
not provide the intended incentives to such officers if our stock price declines
or experiences significant volatility.



###### RISKS RELATED TO OUR TARGETED MAKETS



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. 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.

18

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



We
have recently filed a provisional patent with respect to our TV+ solution in
order to protect our product, however a final patent has not yet been applied
for or granted. Even if a U.S. patent is ultimately granted there are
significant risks regarding enforcement of patents in international markets. The
telecommunications industry  are characterized by a large number of patents and
frequent patent litigation based upon claims of patent infringement when
compared to other industries.



Historically the sale of infrastructure products to telecommunication providers
in the international markets has a long lead-time and a multiplicity of risks.



We
expect initially that revenues from our TV+ solution to be derived from
international emerging markets and our success depends upon our ability to sell
our flagship television platform outside of the United States where political,
currency and regulatory risks are significantly greater. As a result of their
distance from the United States, different time zones, culture, management and
language differences, these operations pose greater risk than selling in the
United States. Our sales cycle for our TV+ solution is lengthy (since it
involves a major strategic decision by an international telecommunications
service provider) and we may incur significant marketing expenses with no
guarantee of future sales. A significant market for our legacy Traverser DVDDS
never developed and may never develop for our TV+ solution if international
telephone service providers fail to successfully deploy broadband services
including high speed data and television.  Increased consolidation of telephone
service providers worldwide have significantly limited  the current recovery of
capital expenditures for broadband and other deployment from the economic
downturn that began in 2001in the industry. Future market demand that will cause
telephone service providers to aggressively roll out IPTV, in general, is highly
unpredictable especially in markets outside of the United States. Certain
telephone companies (especially in developing international economies) may have
infrastructure that is not of sufficient quality to accommodate the mPhaseTV+ solution. Changes in foreign taxes and import duties and economic and political
instability in international markets pose a greater risk to our operations than
U.S. markets.



Our television platform may not achieve compliance with regulatory requirements
in foreign countries.



Our
mPhaseTV+ solution may fail to meet foreign regulatory standards. Since
initially we are  targeting markets for our television platform involves
countries outside of the United States, such product is subject to greater
regulatory risks since it must comply with different standards of different
countries than can vary widely in the telecommunications industry. The failure
to meet such regulatory standards would result in potential customers in
countries outside of the United States not deploying of our TV+ solution.



The telecommunications industry is subject to intense competition characterized
by swift changes in technology.



The
telecommunications equipment industry is subject to swift and continuing
innovation and technological changes that could render our TV+ solution obsolete
and intense competition in the industry could prevent our ever becoming
profitable. Our competitors that sell IPTV solutions that compete with and
mPhase TV+ middleware include much larger and better known and capitalized
companies with significantly greater selling and marketing experience and
financial resources. Such competitors include for middleware a joint venture
between Microsoft and Alcatel, as well as Minverva, Orca Interactive, Siemens,
VBrick Systems and Video Furnance. End to end solutions competitors for IPTV
include UTStarcom, mxWare and Industrial. Telephone service providers that are
our targeted customers face competition from cable-based technologies, fixed
wireless technologies and satellite technologies that may cause them not to
deploy our TV+ product.



Deployment of our television platform requires significant additional
investments by telecommunications service providers.



Our
Customers may need to build a digital head-end to download television content
from satellites involving a significant additional capital expenditure to
utilize the digital Television capabilities of our TV+ solution. For customers
desiring feature rich solutions such as video on demand, the installation of
additional routers and servers may be required to upgrade the internet backbone
capabilities of such customer. Such additional capital costs may cause a number
of potential customers not to deploy our TV+ solution.



We may not be able to evolve our technology, products and services or develop
new technology, products and services that are acceptable to our customers.



The market for our IPTV middleware is characterized
by:

Rapid technology change;

New
and improved product introductions;

Changing customer demands; and

Evolving industry standards and product obsolescence.



Our
future success will depend upon our ability to continually enhance our IPTV
solution to deliver feature rich, open standards, carrier class television on
the most scaleable cost efficient platform custom tailored to the rigorous and
varied demands of telecommunications service providers. The development of
enhanced and 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.

19

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Telecommunications service providers outside of the United States must be able
to access sources for broadcast television content in order to deploy our TV+
Solution.



In
order to have an incentive to deploy the IPTV solution, an international
telecommunications service provider must have access, to multiple channels of
Television programming from content providers at prices that enable such
provider to earn a profit from the deployment of television programming. In
certain of our key target markets, such as Brazil, only cable companies are
permitted under current law to provide such content and therefore a local
service provider must establish a working relationship with such a cable
provider to have an incentive to utilize our products.

20

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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 $10,000/month. The Company
also maintains an office in Little Falls, New Jersey and New York, New York with
monthly rents of $20,963 and $3,000 per month respectively.



ITEM 3. LEGAL PROCEEDINGS



mPhase was advised in April 2002 that following an investigation by the staff of
the Securities and Exchange Commission, the staff intended to recommend that the
Commission file a civil injunctive action against Packetport.com, Inc. (Packetport)
and its Officer's and Directors. Such recommendation related to alleged civil
violations by Packetport and such Officers and Directors of various sections of
the Federal Securities Laws. The staff has alleged civil violations of Sections
5 and 17(a) of the Securities Act of 1933 and Sections 10(b) and 13(d) of the
Securities Exchanges Act of 1934. As noted in other public filings of mPhase,
the Chief Executive Officer and Chief Operating Officer of mPhase also serve as
Directors and Officers of Packetport. At that time these persons advised mPhase
that they deny any violation of law on their part and intend to vigorously
contest such recommendation or action, if any.



On November 15, 2005, the Commission filed a civil enforcement action against 6
individuals and 4 companies as a result of its investigation in federal district
court in the State of Connecticut alleging various violations of the Securities
Act of 1933 including Sections 5, Section 17(a) and the Securities Exchange Act
of 1934 including Sections 10b, Rule 10b-5, Sections, 12,Section 13, Section 16
in connection with the purchase and sale of stock of Packetport in the period on
or about December 14, 1999 into February of 2000. The defendants include the
Chief Executive Officer and Chief Operating Officer of mPhase as well as
Microphase Corporation, a privately held Connecticut corporation that shares
common management with mPhase. mPhase Technologies, Inc. is not named as a party
in the enforcement action. The Chief Executive Officer and Chief Operating
Officer of mPhase, and Microphase Corporation, each deny any violation of the
law by each or any of them and intend to vigorously contest all charges set
forth in such enforcement action by the Commission.



In a ruling (3:05 CV 1747 (PCD)), dated March 21, 2007, the Honorable Peter C.
Dorsey, Senior U.S. District Court Judge for the United States District Court 
For The District Of Connecticut, granted a motion by defendants, Ronald A.
Durando and Packetport Inc. joined by defendants Gustave T. Dotoli , Microphase
Corporation and Packetport.com, Inc. to dismiss under Federal Rule 41(b) of the
Federal Rules of Civil Procedure the civil lawsuit filed on November 15, 2005 by
the Securities and Exchange Commission against Packetport.com, Inc. et. al for
lack of prosecution.



On April 4, 2007, the Securities and Exchange Commission filed a motion with the
United States District Court requesting a reconsideration of the motion to
dismiss granted by the Court  in favor of the defendants.



In a ruling dated May 23, 2007, the Judge Peter C. Dorsey granted the motion for
reconsideration filed by the Securities and Exchange Commission and reversed his
earlier ruling of March 21, 2007 and reinstated the case on the judicial
calendar to proceed to trial.





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

21

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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, 2001 |       |  |      
|First Quarter                   | $9.25 |  | $3.00
|Second Quarter                  | 5.94  |  | 1.47 
|Third Quarter                   | 3.38  |  | 1.22 
|Fourth Quarter                  | 2.61  |  | 1.03 
|                                |       |  |      
|Fiscal year ended June 30, 2002 |       |  |      
|First Quarter                   | $1.67 |  | $.31 
|Second Quarter                  | .86   |  | .31  
|Third Quarter                   | .62   |  | .27  
|Fourth Quarter                  | .50   |  | .23  
|                                |       |  |      
|Fiscal Year ended June 30, 2003 |       |  |      
|First Quarter                   | $.32  |  | $.15 
|Second Quarter                  | .31   |  | .15  
|Third Quarter                   | .36   |  | .19  
|Fourth Quarter                  | .42   |  | .28  
|                                |       |  |      
|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  

22

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(B) HOLDERS



As
of June 30, 2007, mPhase had approximately 388 million shares of common stock
outstanding and approximately 18,000 stockholders of record and 198 million
shares of common stock reserved for issuance upon the conversion of warrants and
options respectively. As of June 30, 2006 we had approximately 278 million
shares of common stock outstanding and approximately 17,000 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

23

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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 EITF00-1, 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.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|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.

24

---



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.



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.



Effective for the three-month period ended September 30, 2004 the Company issued
the following unregistered securities:



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.



Effective for the three-month period ended December 31, 2004 the Company issued
the following unregistered securities:



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.



Effective for the three-month period ended March 31, 2005 the Company issued the
following unregistered securities:



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.

25

---



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.



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.

26

---



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.

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 forth 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, 2006, 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.

27

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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 finders 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 finders 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.



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.

28

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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.



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 the years ended June 30, 2002,
June 30, 2003, June 30, 2004, June 30, 2005, June 30, 2006 and June 30, 2007and
the balance sheet data as of June 30, 2002, June 30, 2003, June 30, 2004, June
30, 2005, June 30, 2006 and June 30, 2007 are derived from financial statements
that have been audited by Rosenberg Rich Baker Berman & Company, independent
auditors, and are included in this document.

29

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SUMMARY OPERATING DATA

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



|                                                        | 2003       | 2004       | 2005        | 2006        | 2007        | Cumulative 
    from 
    inception 
    October 2, 1996
    
    to June 30, 
    2007
|------------------------------------------------------- | ---------- | ---------- | ----------- | ----------- | ----------- | ---------------------------------------------------------------------------------------
|Total revenues                                          | $1,582     | $4,641     | $1,711      | $975        | $154        | $22,449                                                                                
|Cost of sales                                           | 1,493      | 4,068      | 1,446       | 974         | 90          | 16,424                                                                                 
|Research and development                                | 3,538      | 4,070      | 5,127       | 8,035       | 6,393       | 57,972                                                                                 
|General and administrative                              | 2,684      | 4,178      | 6,580       | 11,121      | 8,684       | 105,440                                                                                
|Depreciation and amortization                           | 515        | 123        | 63          | 79          | 94          | 3,125                                                                                  
|Operating loss                                          | (6,649)    | (7,798)    | (11,505)    | (19,234)    | (15,107)    | (160,512)                                                                              
|Other income (expense), net                             | 50         | 150        | 382         | (5,182)     | (1,726)     | (7,631)                                                                                
|Interest income (expense)                               | (51)       | (111)      | (111)       | (35)        | (18)        | (169)                                                                                  
|Net loss                                                | ($6,650)   | ($7,759)   | ($11,234)   | ($24,451)   | ($16,851)   | ($168,312)                                                                             
|Basic and diluted net loss per share                    | ($0.10)    | ($0.10)    | ($0.10)     | ($0.12)     | ($0.05)     |                                                                                        
|Shares used in basic and diluted net loss per
    share | 65,217,088 | 77,677,120 | 108,657,578 | 199,610,372 | 310,395,562 |                                                                                        







|BALANCE SHEET DATAAs of June 30(in thousands)
|---------------------------------------------
|                                             
|                                             
|Cash and cash equivalents                    
|Working capital (deficit)                    
|Total assets                                 
|Long-term obligations, net of current portion
|Total stockholders' (deficit)                



The
statement of operations data as of the periods indicated below are derived from
unaudited financial statements. The operations data for the quarterly periods
ended September 30, 2001 and each quarter thereafter to and including the
quarter ended December 31, 2001 are derived from unaudited financial statements
reviewed by Arthur Andersen LLP and the operations data for the quarterly
periods from March 31, 2003 and each quarter thereafter through and including
the quarter ended June 30, 2007, have been 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.

30

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|FISCAL 2007 QUARTERLY                                   |                                     
|------------------------------------------------------- | ------------------------------------
|STATEMENT OF OPERATIONS  
    DATA:                     | September 30                        
|                                                        | (in thousands, except share amounts)
|Total revenues                                          | $106                                
|Costs and Expenses:                                     |                                     
|Cost of sales                                           | 85                                  
|Research and development                                | 1,990                               
|General and administrative                              | 1,962                               
|Depreciation and amortization                           | 22                                  
|Operating loss                                          | (3,954)                             
|Interest expense, Net                                   | (4)                                 
|Other Income (expense)                                  |                                     
|Net Loss                                                | ($3,958)                            
|Basic and diluted net loss per share                    | ($0.01)                             
|Shares used in basic and diluted net loss per
    share | 282,306,237                         





|FISCAL 2006 QUARTERLY         | Three months ended                                    
|----------------------------- | ------------------------------------------------------
|STATEMENT OF OPERATIONS DATA: | September 30                                          
|                              | (in thousands, except share amounts)                  
|                              | Total revenues                                        
|                              | Cost of Sales                                         
|                              | Research and development                              
|                              | General and administrative                            
|                              | Depreciation and amortization                         
|                              | Operating loss                                        
|                              | Interest expense, Net                                 
|                              | OTHER income (EXPENSE) NET                            
|                              | Net loss                                              
|                              | Basic and diluted net loss per share                  
|                              | Shares used in basic and diluted net loss per share(1)
|                             

31

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|FISCAL 2005
    QUARTERLY                | Three months ended                      
|---------------------------------------- | ----------------------------------------
|STATEMENT OF
    OPERATIONS              | September 30                            
|DATA:                                    |                                         
|                                         | (in thousands, except share
    amounts)
|Total revenues                           | $179                                    
|Costs and
    Expenses:                  |                                         
|Cost of Sales                            | 130                                     
|Research and
    development             | 1,101                                   
|General and
    administrative           | 709                                     
|Depreciation and
    amortization        | 1                                       
|Operating loss                           | (1,762)                                 
|Interest expense,
    Net                | (29)                                    
|Other Income
    (Expense) Net           | (41)                                    
|Net loss                                 | ($1,832)                                
|Basic and diluted
    net loss per share | ($.02)                                  
|Shares used in
    basic and diluted net | 89,719,962                              
|loss per share(1)                        |                                         







|FISCAL 2004
    QUARTERLY                | Three months ended                  
|---------------------------------------- | ------------------------------------
|STATEMENT OF
    OPERATIONS              | September 30                        
|DATA:                                    |                                     
|                                         | (in thousands, except share amounts)
|Total revenues                           | $2,489                              
|Costs and
    Expenses:                  |                                     
|Cost of sales                            | 2,099                               
|Research and
    development             | 611                                 
|General and
    administrative           | 605                                 
|Depreciation and
    amortization        | 46                                  
|Operating loss                           | (872)                               
|Interest expense,
    Net                | (16)                                
|Other Income
    (Expense) Net           | 23                                  
|Net Loss                                 | ($865)                              
|Basic and diluted
    net loss per share | ($.01)                              
|Shares used in
    basic and diluted net | 71,725,318                          
|loss per share(1)                        |                                     

32

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(1)
The quarterly earnings per share data above are computed independently for each
of the quarters presented. As such, the sum of the quarterly per common share
information may not equal the full year amounts due to rounding differences
resulting from changes in the weighted-average number of common shares
outstanding.



|FISCAL 2003
    QUARTERLY                | Three months ended                      
|---------------------------------------- | ----------------------------------------
|STATEMENT OF
    OPERATIONS              | September 30                            
|DATA:                                    |                                         
|                                         | (in thousands, except share
    amounts)
|Total revenues                           | $210                                    
|Costs and
    Expenses:                  |                                         
|Cost of sales                            | 197                                     
|Research and
    development             | 803                                     
|General and
    administrative           | 893                                     
|Depreciation and
    amortization        | 131                                     
|Operating loss                           | (1,814)                                 
|Interest expense,
    Net                | (18)                                    
|Gain on debt
    extinguishment          | 41                                      
|Gain (Loss) on
    investments           | -                                       
|Net Loss                                 | ($1,791)                                
|Basic and diluted
    net loss per share | ($.03)                                  
|Shares used in
    basic and diluted net | 60,881,131                              
|loss per share(1)                        |                                         

33

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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 is a development-stage company that historically develops, markets and
sells a line of innovative DSL based broadband communications equipment and IP
Television delivery solutions. mPhase was organized on October 2, 1996. On
February 17, 1997, the Company acquired Tecma Laboratories, Inc., a public
corporation in a reverse merger transaction. This resulted in the Company's
stock becoming publicly traded on the NASDAQ Over-the-Counter Bulletin Board. As
of September 21, 2007, the Company has outstanding 391,736,000 shares of common stock
held by approximately 18,000 shareholders and 48,213,00 stock options and
160,983,644 warrants convertible into shares of the Company's common stock at
prices ranging from $.13 per share to $.89 per share



On
June 25, 1998, the Company acquired Microphase Telecommunications, Inc. in a
stock for stock exchange, whose principal assets included patents and patent
applications utilized in the Company's legacy Traverser DVDDS system for the
delivery of broadcast television, high speed internet and voice over copper
telephone lines. The DVDDS is a patented end to end system that enables a
telecommunications service provider to deliver up to several hundred channels of
motion picture experts group two (MPEG-2) standard broadcast digital
television, high speed internet and voice over copper telephone lines between a
central office facility of the provider and a customer's premise. mPhase has
not, as yet, derived any material revenues from sales of the DVDDS. The DVDDS is
a proprietary technology developed in conjunction with Georgia Tech Research
Corporation (GTRC) and is one of the first systems of its kind developed. The
system is the only system on the market that utilizes non- Internet Protocol
(IP) transmission over ADSL.  The legacy DVDDS platform has been replaced by
the Company's TV+ solution.



The
Company is a developer and seller of broadband communications products for
telephone service providers. The Company's TV+ solution is an open-standards,
carrier class solution of middleware/software enabling telephone service
providers to deliver broadcast television using internet protocol (IPTV), video
on demand, voice and high-speed internet over such providers existing
infrastructure. The Company also provides systems integration solutions for
delivery of broadcast television (IPTV), video on demand, high-speed internet
and voice using internet protocol over the existing infrastructure of a
telephone service provider. The Company's TV+ solution is highly scalable
(compared to other middleware requires less routers and servers) with
significant cost savings and  is reliable middleware designed to operate with
any IP based network. In addition the Company designs, manufacturers and sells
DSL component products including its new customer premises VDSL splitter.



Our
current TV+ solution, utilizes a communications framework based upon Internet
Protocol (IP) instead of Asynchronous Transfer Mode (ATM) that is utilized by
earlier versions of the product. ATM is an industry standard for transportation
of data based upon a packaging of information into a fixed-size cell format for
transportation across networks. Many telecommunications service providers
currently deploy equipment that handles this protocol because it can support
voice, video, data and multimedia applications simultaneously with a high degree
of reliability. IP is another transport protocol that maintains network
information and routes packets across networks. IP packets are larger and can
hold more data than ATM cells. Historically, there have been concerns that
service providers would be unable to provide the same quality of service with IP
because it is not optimized for time-sensitive signals such as broadcast
television and voice. Nevertheless, there is a greater demand by
telecommunication service providers for IP systems for delivery of television,
voice and high-speed data because such systems are significantly more cost
effective to deploy based upon greater scalability.



Our
TV+ solution is an open standards-based carrier class technology that may be
used over any infrastructure such as fiber, coax, or copper. The TV+ solution
may be used in combination with the set top box of any vendor and will operate
with any DSLAM or multicast routers transport equipment used for delivery of
IPTV.  We believe the system's architecture is the most reliable and highly
scalable solution available for IPTV. Our solution enables a telecommunications
service provider to custom tailor the deployment of feature rich IP television,
video on demand, high-speed internet and voice. The solution allows a service
provider to start small and test its take rate among customers with a maximum of
flexibility of design, features and cost allowing it to enter the market for
converged services to its customers on an optimal basis.



Our
TV+ platform requires a telecommunications service provider to have or build a
digital video head-end to downlink channels of broadcast television programming
from satellites. The cost of building a digital head end has been substantially
reduced in the past few years as off the shelf technology has become less
expensive. Such equipment includes a satellite receiving dish, video grooming
equipment and mPhase's system management software necessary for managing the
video content. mPhase does not manufacture such digital head-end equipment.

34

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mPhase also designs and markets a line of DSL component products. The Company is
currently reevaluating this area with respect to developing a new VDSL customer
premises splitter product. To date, all sales revenue has been derived from
sales of its POTS splitters and related low-pass filter products. mPhase expects
to derive its first material revenues from sales of its TV+ product during
fiscal year 2008.



In
February of 2004, the Company entered into the field of Nanotechnology research
and development of micro power cell batteries of various voltages. The initial
goal is to develop batteries for military applications having significantly
longer shelf life prior to activation, instant on capabilities due to their
extremely small internal size, and power management capabilities to
significantly extend their duty cycle periods than are currently available in
the market. The Company believes that such development is consistent with its
strategy of being a pioneer in areas of high growth technology and potentially
diversifies its mix of products. The Bell labs division of Lucent Technologies,
Inc. has been engaged by mPhase to perform research and development of a power
cell that will have a relatively unlimited shelf life and other advantages for
soldiers in the field (such as lack of detection). Such Development Agreement
has been renewed for two one year periods commencing in February of 2005 and
continuing through February of 2007 at a cost of $1.2 million per annum. In
March of 2007, such contract was extended through April 27, 2007 at a cost of
$200,000 and again through July 30, 2007 at a cost of $300,000. The Company is
currently negotiating with Bell Labs for a further extension of such contract.



On
March 11, 2005 the Company announced that it had expanded its nanotechnology
research and efforts to develop extremely sensitive uncooled magnetic sensors,
commonly known as a magnetometer, as a new product line. During fiscal year 2006
the Company entered into a renewal of a $1.2 million Development Agreement with
the Bell Labs Division of Lucent Technologies, Inc. to develop an ultra
sensitive magnetic detection device known as a magnetometer which has
significant potential military applications. The magnetometer also has potential
commercial applications in all phones and the food industry. Such contract
expired in March of 2007 and is currently the Company is currently negotiating
with the Bell Labs for its renewal.



The Company has outsourced to
Bell Labs significant Research and Development Work for development from
December of 2002 through May of 2006 for its efforts to develop its product
migration from the legacy Traverser DVDDS through its TV+ solution.



Effective December 1, 2002, mPhase entered into a Development Agreement with the
Bell Laboratories division of Lucent Technologies, Inc. for 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 BTS 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 mPhase's' BTS.



In
July of 2003, mPhase successfully deployed for testing the TV+ platform for 3
customers of Hart Telephone Company.



As
of September 15, 2003, mPhase entered into a Development Agreement with the Bell
Laboratories division of Lucent Technologies, Inc for further development of its
TV+ product.



In
August of 2004, mPhase extended its contract with the Bell Labs division of
Lucent Technologies, Inc. to develop Release 3.0 of its TV+ product as an IP
delivery based system. Such effort continued through May of 2006 at which time
the Company transferred systems development and integration work on it TV+
solution from Bell Labs to Velankani.



During fiscal year 2006, the Company completed the shift of its development
efforts with respect to its TV+ product from its ATM products characterized by
Releases 1.0 and 2.0 of its TV+ product to an IP delivery protocol in Release
3.0 of its TV+ product. Such transformation, to meet a major shift in
requirements of telecommunication service providers for delivery of converged
services delayed the expected commencement of material revenues from the TV+
product from fiscal year 2006 to fiscal year 2008. The Company believes that it
will commence receiving revenues in fiscal year 2008 from initial commercial
deployments of its IPTV+ product. Until such time such revenues are realized,
the Company intends on maintaining its reduced cost structure except for greater
software research and development cost related to continued development of the
IPTV which management believes will permit the Company to ultimately achieve
profitability. The Company believes the initial deployments and the resultant
revenues of its flagship Release 3.0 of its TV+ solution are not expected to
occur until the second quarter of fiscal year 2008. An upturn of spending in the
telephonic industry for DSL component products should increase sales and improve
the Company's margins and provide the Company the opportunity to attain
profitability.

35

---



The
Company has incurred net losses totaling approximately $169 million during the
development of its flagship product from inception through June 30, 2007. In
fiscal 2001, the Company had anticipated that the sales of its component
products would be able to supplement research expenditures then being performed
by Georgia Tech Research Institute developing the legacy Traverser DVDDS
product. In fiscal 2002 POTS Splitter sales declined with the overall decline of
DSL deployments and spending in the telephonic industry. The Company sales of
its POTS splitter product continued to slow during most of fiscal year 2003 with
overall revenue decreasing approximately $1 million as telecommunications
spending continued to decline.



In
the first quarter of fiscal year ended June 30, 2004, the Company experienced a
significant increase in revenues from its POTS splitter product which resulted
in revenues increasing from approximately $2.5 million in fiscal year 2003 to
approximately $4.6 million in fiscal year 2004. In fiscal year 2005, revenues
from POTS splitter products again decreased to approximately $1.2 million. In
fiscal years 2006 and 2007, POTS Splitter sales continued to decline to $975,482
and $110,312 respectively and the Company shifted its component parts efforts to
development of a new VDSL customer premises splitter to replace its former ADSL
Splitter products.



The
Company did receive an order for 1000 set top boxes and software of its former
ATM version of its TV+ product from a major Russian telecommunications service
provider in fiscal year 2005 resulting in approximately $280,000 of revenue.
However such deployment has not been continued with the Company's newer IP
protocol release of its IPTV solution. In September of 2006 the Company
announced that it had been awarded a test deployment of its new IPTV solution
with Comstar/Odessa, a major telecommunications provider in the Ukraine. It is
expected that by November of 2007, Comstar/Odessa, will have completed its
initial evaluation of the Company's IPTV solution and decide whether to go
forward with the deployment of up to 6,000 customers in fiscal year 2008. The
Company has not received any revenues to date from such trial



Revenues. To date, all material revenues have been generated from sales of POTS
Splitter Shelves and other DSL component products to a small number of
telecommunications companies. mPhase believes that future revenues are difficult
to predict because of the length and variability of the commercial roll-out of
the TV+ platform to various telecommunications service providers but does
anticipate some sales of its IPTV+ solution in fiscal year 2008. Since the
Company believes that there may be a significant international market for the
TV+ platform, involving many different countries with different regulations,
certifications and commercial practices than the United States, future revenues
are highly subject to changing variables and uncertainties. Additionally, the
continued instability of the telecommunications market evidenced by reduced in
capital spending from its peak in fiscal year 2001 across the whole telecom
sector contributes to our difficulty in accurately predicting future revenues.



Cost
of revenues. The costs necessary to generate revenues from  the
sale of POTS Splitter Shelves and other DSL component products include direct
material, labor and manufacturing. mPhase paid these costs to Janifast, Ltd.,
which has facilities in the People's Republic of China and is owned by and
managed by certain senior executives of the Company. The cost of revenues also
includes certain royalties paid to Microphase Corporation, a privately held
corporation organized in 1955, which shares certain common management with the
Company. Costs for future production of the Traverser product will consist
primarily of payments to manufacturers to acquire the necessary components and
assemble the products and future patent royalties payable to GTRC. Microphase
does not share in revenues from sales of the TV+ product.



Research and development. Research and development expenses consist principally
of payments made to Lucent and for development of the TV+ product and
Nanotechnology products. All research and development costs are expensed as
incurred.



General and administrative. Selling, general and administrative expenses consist
primarily of salaries and related expenses for personnel engaged in direct
marketing of the TV+ platform, the POTS Splitter Shelves and other DSL component
products, as well as support functions including executive, legal and accounting
personnel. Certain administrative activities are outsourced on a monthly fee
basis to Microphase Corporation. Finally, mPhase leases the principal office
from Microphase Corporation. During fiscal year ended June 30, 2006 the company
incurred non-cash charges amounting to $6,276,423 for stock based compensation
(including options) awarded to officers, employees and consultants. During
fiscal year ended June 30, 2007 such charges amounted to $3,363,218.

36

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TWELVE MONTHS ENDED JUNE
30, 2007 VS. JUNE 30, 2006



Revenues.Total revenues for the year ended June 30, 2007 decreased to $153,504 from
$975,482 for the year ended June 30, 2006. The decrease was primarily
attributable to decreased sales of the Company's ADSL POTS Splitter product line
caused by a downturn of orders and the move of telecommunications service
providers from ADSL to VDSL technology for deployment of IPTV. The Company also
recognized $43,192 of revenue in connection with its nanotechnology battery product
mostly
in the form of advisory revenues to a major credit card provider seeking to
develop a smart credit card. The Company did not receive any additional
revenues in fiscal year 2007 from its new IPTV solutions. The Company spent
considerable efforts during fiscal year 2007 continuing product development of
its IPTV solution and we do expect certain added revenue in fiscal year 2008
from deployments of our TV+ solution.



Cost of sales.Cost of sales was $89,802 for the year ended June 30, 2007 as compared to
$974,583 in the year ended June 30, 2006. This decrease of $884,781 reflects the
decline in sales resulting from the shift in strategy in the IPTV segment from
the sale of component parts (POTS Splitters etc) to an IPTV solution system
based product such as (Comstar/Odyessa).  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 $6,393,215 for the year ended June 30,
2007 as compared to $8,034,964 in the year ended June 30, 2006, a decrease of
$1,641,749. Expenditures to strategic vendors related to the IPTV business
amounted to $3.1 for FYE 2007 as compared to $4.0 million for FYE 2006.
Expenditures related to Nanotechnology amounted to $2.3 million compared to $2.5
for FYE 2006.



General and Administrative Expenses.
Selling, general and administrative expenses were $8,684,053 for the year ended
June 30, 2007 down from $11,121,235 for the comparable period in 2006, a
decrease of $2,437,182. During fiscal year ended June 30, 2006 the company
incurred non-cash charges amounting to $6,276,423 for stock based compensation
(including options) awarded to officers, employees and consultants. During
fiscal year ended June 30, 2007 such charges amounted to $3,363,218 a decrease
of $2,913,205.

Other significant components were an increase in payroll of $474,130 to
$1,987,119 and an increase in legal expense of $449,545 to $726,122. These
increases were partially offset by a decrease in officer compensation fees of
$325,000.



Other Income and Expensereflects non cash charges of $1,874,020 for FYE 2007 versus $5,530,504 in FYE
2006 for the value of shares issued to investors to reflect market changes in
the common stock (reparation expense).



Net loss.mPhase recorded a net loss of $16.8 million for the year ended June 30, 2007 as
compared to a loss of $24.5 million for the same period ended June 30, 2006.
This represents a loss per common share of  ($.05) in 2007 as compared to $(.12)
in 2006, based upon weighted average common shares outstanding of 310,395,562
and 199,610,372 during the periods ending June 30, 2007 and June 30, 2006
respectively.



TWELVE MONTHS ENDED JUNE 30, 2006 VS. JUNE 30, 2005



Revenues.Total revenues for the year ended June 30, 2006 decreased to $975,482 from
$1,711,085 for the year ended June 30, 2005. The decrease was primarily
attributable to decreased sales of the Company's POTS Splitter product line
caused by a downturn of orders from one customer that orders component products
from the Company. The Company also recognized $280,000 of revenue in connection
with the first sale of 1000 ports of Release 2.0 its TV+ solution to a major
telecommunications service provider in Russia in fiscal year 2005 but received
no additional orders for Version 3.0 of its TV+ solution in fiscal year 2006.
The Company cannot predict when the demand for telecommunication equipment will
resume, however we do expect certain added revenue in fiscal year 2007 from
deployments of our TV+ solution.



Cost of sales
Cost of sales was $974,583 for the year ended June
30, 2006 as compared to $1,446,151 in the year ended June 30, 2005. Cost of
revenues decreased for the twelve months ended June 30, 2006 compared to the
prior period ending June 30, 2005 primarily because of decreased sales. Gross
margins for the period ended June 30, 2006 were .1%. The gross margins have
varied dramatically as spending among telecommunication providers has
contracted, coupled with downward pressures related to the supply and demand of
telecommunications products. The single most significant reason the margins
decreased dramatically was due to the reduced selling price of our POTS Splitter
product.



Research and Development.
Research and development expenses were $8,034,964 for the year ended June 30,
2006 as compared to $5,127,438 in the year ended June 30, 2005, an increase of
$2,907,526. Such expenditures included $4,384,749 incurred with Lucent
Technologies, Inc. for the year ended June 30, 2006 as compared to $3,319,280
during the comparable period in 2005. In addition we incurred $2,346,875 with
Microphase and other strategic vendors for the year ended June 30, 2006 as
compared to $919,937 during the comparable period in 2005.



The
significant increase in research and development expenses with Lucent
Technologies, Inc. is due to the continued and accelerated development of the
TV+ product together with the extension of the $1.2 million month Development
Agreement for an additional 12 months related to the battery and power pack
product development utilizing nanotechnology and the extension for an additional
12 months at a total of  $1.2 million Development Agreement with Lucent to
develop ultra electronic sensor devices also using nanotechnology. Such
expenditures may increase in fiscal year 2007 since the Company's strategy is to
further enhance the features and cost reduce its TV+ and expand its product line
in the Nanotechnology area.

37

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Research expenditures incurred with Microphase sharply declined as the Company
reexamined the viability of it Broadband Loop Watch product during the second
half of fiscal year 2006. Expenditures that were incurred in fiscal year 2006
were related to the continuing development of the Company's DSL component
products, including the Company's line of POTS Splitters and Microfilters and
the Company's the Broadband Loop Watch.



General and Administrative Expenses.
Selling, general and administrative expenses were $11,121,235 for the year ended
June 30, 2006 up from $6,579,761 for the comparable period in 2005, an increase
of $4,541,474. Included is an increase of non-cash charges relating to the
issuance of common stock and options to consultants, and employees which totaled
$6,276,423 for the year ended June 30, 2006 as compared to $3,150,343 during the
comparable period in 2005. Other components of the increase in selling, general
and administrative expenses were increases in payroll of approximately $128,000
to $1,603,000,  an increase in the use of outside consultants of approximately
$399,000 to $1,103,000, marketing expenses such as trade shows of $104,000 to
$372,000.



Other Income and Expensereflects a  charge of $5,530,504 for the value of shares issued to
investors to reflect market changes in the common stock.



Net loss.mPhase recorded a net loss of $24,450,650 for the year ended June 30, 2006 as
compared to a loss of $11,234,324 for the same period ended June 30, 2005. This
represents a loss per common share of  $(.12) in 2006 as compared to $(.10) in
2005, based upon weighted average common shares outstanding of 199,610,372 and
108,657,578 during the periods ended June 30, 2006 and June 30, 2005
respectively.

38

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CURRENT PLAN OF OPERATIONS



RESEARCH AND DEVELOPMENT ACTIVITIES



mPhase throughout its history has outsourced its research and development
activity with respect to both of its TV platforms as well as its POTS splitter
products and nanotechnology products. GTARC has conducted a significant amount
of research and development for mPhase pursuant to a research agreement
comprised of a series of delivery orders, which outline the timing, necessary
actions and form of payment for specific tasks related to the completion of
certain components of the DVDDS legacy product. Microphase has performed
research and development for mPhase with respect to certain component DSL
products such as the low pass filters and POTS Splitters and the legacy DVDDS
product. Currently mPhase major research and development is performed by the
Bell Laboratories division of Lucent Technologies, Inc. in connection with its
IPTV solution as well as exploratory development of nanotechnology products.



Since inception, but prior to FYE June 30,2006, the Company incurred $13.5 million
for research and development conducted by GTARC. With the completion of the
DVDDS legacy product, the Company has shifted its research and development from
GTARC to Lucent Technologies Inc. in connection with its TV+ product as well as
its entry into the nanotechnology product area. Such new research and
development during Fiscal Year 2006 was (a) for completion 3.0 of the TV+
product and (b) entry into the nanotechnology product area focused initially on
(a) power cells and batteries and (b) ultra magnetic sensory devices each
designed for military applications. 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 expenditures
during FYE 2007 have been in connection with Nanotechnology.



The
amount of research and development costs the Company has expended from its
inception through June 30, 2007 is $58.1 million. During the year ended June 30,
2007, the Company incurred research and development expenses of $6.5 million
related to the continued development of its current IPTV solution and other DSL
products and services as compared to $5.5 million for the same period ended June
30, 2006. In addition the Company incurred research and development expenses for
the fiscal year June 30, 2007 of $2.3 for its nanotechnology products as
compared to $2.5 million for fiscal year ended June 30, 2006.



STRATEGIC ALLIANCES IMPLEMENTED



The
Company and Lucent share jointly in certain intellectual property being
developed with respect to disposable power cells, which is the subject of
exploratory development using the science of nanotechnology.





CRITICAL ACCOUNTING POLICIES



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
principals to revenue recognition based upon the interpretations and practices
of the SEC. The Company recognizes revenue for its POTS Splitter Shelf and other
DSL component products at the time of shipment, at which time; no other
significant obligations of the Company exist, other than normal warranty
support.



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."



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.

39

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INVENTORY RESERVE AND VALUATION ALLOWANCE



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 consists 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.



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.
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, Martin Smiley and 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.
Abraham Biderman,  and Mr. Anthony Guerino own a relatively small
amount of stock, warrants and options in mPhase Technologies, Inc.



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, the chairman of the
board of mPhase, 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.

40

---



Significant charges from related
parties are summarized for the periods enumerated as follows:



|Charges and Expenses with Related Parties | Year Ended June 30,
|----------------------------------------- | -------------------
|                                          | 2005               
|Charges incurred with Janifast Ltd.       |                    
|Cost of sales                             | $1,536,494         
|Reparation Expense                        |                    
|Total Janifast                            | $1,536,494         
|                                          |                    
|Charges incurred with Microphase Corp.    |                    
|Cost of sales                             |                    
|(Including Royalties)                     | $94,740            
|Research and development                  | 60,000             
|General and administrative                | 304,030            
|Reparation Expense                        |                    
|Total Microphase Corp.                    | $458,770           
|                                          |                    
|Total Charges with Related Parties        |                    
|Cost of sales                             | $1,631,234         
|Research and development                  | 60,000             
|General and administrative                | 304,030            
|Reparation Expense                        |                    
|Total Charges with Related Parties        | $1,995,264         



LIQUIDITY AND CAPITAL
RESOURCES



At
June 30, 2007, mPhase had a working capital deficit of $3,088,439 as compared to
a working capital deficit of $1,093,784 as of June 30, 2006. The Company
believes this will be sufficient for its short-term liquidity. During fiscal
year ended June 30, 2007 it is estimated that the Company will need to raise
approximately $8-10 million to meet longer term liquidity needs through June 30,
2008. Such monies would be necessary primarily to fund future expenditures for
research and development of enhanced features for its TV+ product and
development of its Nanotechnology products. Finally, (depending upon sales and
margins in fiscal year 2008) additional capital may be required to fund a
portion of any growth necessary in operations.



Included in the Company's working capital position at June 30, 2007, were the
conversions of approximately $991,709 of accounts payable and accrued expenses
due to related parties and strategic vendors to equity.



Through June 30, 2007, the Company has incurred development stage losses
totaling approximately $168,311,619. At June 30, 2007, the Company had cash and
cash equivalents of $23,253 compared to $1,359,924 at June 30, 2006.
Historically, mPhase has funded its operations and capital expenditures
primarily through private placements of common stock. During the upcoming year,
management expects that its ongoing financial needs will continue to be provided
primarily by financing activities supplemented in small part by sales of its IPTV product line and specific research activities. At June 30, 2007, the
Company had accounts and subscriptions receivable of $501,961 and inventory of  $505,910. This compared to $106,237 of accounts receivable and  $161,270 of inventory at June 30, 2006.



Cash
used in operating activities was $9.1 million during the twelve months ending
June 30, 2007. During such period, the cash used by operating activities
consists principally of the net loss ($16.9 million). This amount is offset in
part by non-cash charges related to issuance of common stock and options for
services and reparation cost of $3.4 million and $1.9 million respectively. In
addition, accounts payable and accrued expenses have increased by $2.1 million and
the converted debt of approximately $1.0 million.



During the twelve-month period ended June 30, 2007, the Company raised capital
through private placements with accredited investors, whereby the Company issued
47,958,060 shares of the Company's common stock, generating net proceeds to the
Company of $6.2 million and generated $2.1 million of funds through the
conversion of  14,740,669 warrants  into shares of the Company's common stock.



During the twelve-month period ended June 30, 2006, the Company raised capital
through private placements with accredited investors and the exercise of
previously outstanding warrants, whereby the Company issued 72,786,897 shares of
the Company's common stock pursuant to private placements, generating net
proceeds to the Company of $10,057,651 and 15,720,120 shares of the Company's
common stock pursuant to the exercise of warrants at exercise prices ranging
from $.17 to $.25 per share, generating net proceeds of $3,007,724. The Company
incurred $782,567 of cash expenses and issued 2,924,462 shares of common stock
and 2,924,462 warrants, each to purchase one share of its common stock at prices
ranging from $.18 to $.25 per share to finders, consultants and investment
banking firms in connection with these private placements.



41

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During the fiscal year ended June 30, 2006,
certain strategic vendors and related parties converted approximately $590,000
of accounts payable and accrued expenses into 3,331,864 shares of the
Company's common stock and 3,277,778 warrants.



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

|                                |           |  |           |  |          
|------------------------------- | --------- |  | --------- |  | ---------
|Janifast:                       | 2005      |  | 2006      |  | 2007     
|Number of shares                | 1,000,000 |  | 950,000   |  | 830,769  
|Number of warrants              | 1,000,000 |  | 950,000   |  | 0        
|Amount converted to equity      | $200,000  |  | $171,000  |  | $108,000 
|Microphase Corporation:         |           |  |           |  |          
|Number of shares                | 1,250,000 |  | 2,050,000 |  | 0        
|Number of warrants              | 1,250,000 |  | 2,050,000 |  | 0        
|Amount converted to equity      | $250,000  |  | $369,000  |  | $0       
|Strategic Vendor Conversions:   |           |  |           |  |          
|Number of shares                | 0         |  | 331,864   |  | 5,242,959
|Number of warrants              | 0         |  | 277,778   |  | 0        
|Amount converted to equity      | $0        |  | $50,000   |  | $883,709 
|Officers                        |           |  |           |  |          
|Number of shares                | 1,009,875 |  | 0         |  | 0        
|Number of warrants (A)          | 1,009,875 |  | 0         |  | 0        
|Amount converted to equity      | $201,975  |  | $0        |  | $0       
|Total Related Party Conversions |           |  |           |  |          
|Number of shares                | 3,259,875 |  | 3,331,864 |  | 6,073,728
|Number of warrants              | 3,259,875 |  | 3,277,778 |  | 0        
|Amount converted to equity      | $651,975  |  | $590,000  |  | $991,709 





42

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LOSSES DURING THE DEVELOPMENT
STAGE AND MANAGEMENT'S PLANS



Through June 30, 2007, the Company incurred development stage losses totaling
approximately $168,311,619 and at June 30, 2007 had a working capital deficit of
$3,088,439. Contributing factors affecting the Company's negative working
capital position at June 30, 2007, was the raising of substantial monies to the
company in private placements totaling $6,191,369 and the exercise of warrants
in the amount of $2,069,667. During fiscal year June 2007, the company
experienced difficult capital markets funding management of the Company desired
to avoid unnecessary dilution by issuing large amounts of equity at depressed
prices to raise larger sums of cash. As noted above, during the fiscal year
ended June 30, 2007 the Company's efforts to maintain a manageable working
capital position included conversions of approximately $991,709 of accounts
payable and accrued expenses due to related parties and strategic vendors to
equity. At June 30, 2007, the Company had $23,253 of cash and cash equivalents
and $501,961 of trade and subscriptions receivable to fund short-term working capital
requirements. 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 market and sell its products.



During the fiscal years ended June 30, 2005, 2006 and 2007, the Company was able
to negotiate extended payment terms for overdue accounts payable with strategic
vendors. These obligations are now classified as notes payable and included in
current and long-term portions of notes payable in the accompanying balance
sheets, based upon the revised payment terms. The Company believes it can
maintain its present repayment schedule, or otherwise renegotiate such terms
that are satisfactory to the Company and these vendors.



On
August 30, 2004, the Company paid $100,000 to Piper & Rudnick LLC, 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 on December 1, 2007. In addition, Piper Rudnick agreed
to convert an additional $150,000 of such payable into a 5 year cashless warrant
to purchase the Company's common stock at $.25 per share. This agreement
replaced in its entirety a prior agreement effective March 31, 2002 in which the
Company was $473,787 in arrears with respect to a Promissory Note as of June 30,
2004. The Company has made payments through the payment due June 1, 2006 but has
not made the payment due September 1, 2006.



The
Company believes that it will be able to complete the necessary steps in order
to meet its cash flow requirements throughout fiscal 2008 and continue its
development and commercialization efforts. Management's plans in this regard
include, but are not limited to, the following:



We
intend to continue to invest in technology and telecommunications hardware and
software necessary to keep our products. We continue to operate on an austerity
budget with sharply reduced administrative and marketing expenses.



We
continue our efforts to raise additional funds through private placements of our
common stock, the proceeds of which are required to fund continuing development
stage expenditures and the commercial roll-out of our IPTV solution. However,
there can be no assurances that we will generate sufficient revenues to provide
positive cash flows from operations or that sufficient capital will be available
when needed or at terms that we deem to be reasonable.



We
have evaluated our cash requirements for fiscal year 2008 based upon certain
assumptions, including our ability to raise additional financing and initial
expected sales of our TV+ product. The Company anticipates that it will need to
raise approximately $5-10 million additional monies primarily in private
placements of its common stock with accredited investors, or alternatively we
will need to curtail certain expenses as incurred at the present levels
including marketing and research and development expenses. We have no
commitments from affiliated or third parties to provide additional financing. In
the event that we do not receive any proceeds from additional financings, we
will attempt to further reduce expenditures and continue to operate the Company
from sales revenue and any funding that may be available from affiliated
companies. Additional investment in technology design to enhance the features
and reduce the cost of the TV+ platform will be necessary over the next 12
months. In addition, the Company is currently obligated to pay $100,000 per
month to Lucent for development of its power cell and battery products using
nanotechnology and $100,000 per month to Lucent for development of its
magnetometer product, in each case through March of 2007. As of June 30, 2007,
the Company owes Lucent $400,000 with respect to its  Magnetometer product.



Should these cash flows not be available to us, we believe we would have the
ability to revise our operating plan and make certain further reductions in
expenses, so that our resources available at June 30, 2007, plus financing to be
secured during fiscal year 2008, and expected POTS splitter revenues, will be
sufficient to meet our obligations until the end of fiscal year 2008. We have
continued to experience operating losses and negative cash flows. To date, we
have funded our operations with a combination of component sales, debt
conversions with related parties and strategic vendors and private equity
offerings. Management believes that we will be able to secure the necessary
financing in the short term to fund our operations into our next fiscal year.
However, failure to raise additional funds, or generate significant cash flows
through revenues, could have a material adverse effect on our ability to achieve
our intended business objectives.



43

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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, 2007. 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



None.



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE



None.



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, 2007 are as follows:

|                                         |     |                                     
|---------------------------------------- | --- | ------------------------------------
|NAME                                     | AGE | POSITION(S)                         
|Necdet F. Ergul                          | 84  | Chairman of the Board and Director  
|Ronald A. Durando                        | 50  | Chief Executive Officer and Director
|Gustave T. Dotoli (2)                    | 72  | Chief Operating Officer and Director
|Martin Smiley                            | 60  | Chief Financial Officer             
|OUTSIDE DIRECTORS                        |     |                                     
|Anthony H. Guerino (1)(2)                | 59  | Director                            
|Abraham Biderman (1)(2)                  | 59  | Director                            
|Dr. Victor Lawrence                      | 60  | Director                            
|(1) Member of the Audit Committee        |     |                                     
|(2) Member of the Compensation Committee |     |                                     

44

---





NECDET F. ERGUL has served as mPhase's Chairman of the Board since October 1996
with the exception of a three-month period when he temporarily resigned due to
the press of personal business. Mr. Ergul also currently serves as the Chairman
of the Board of Directors, President and Chief Executive Officer of Microphase
Corporation, a leading developer of military electronic defense and
telecommunications technology, which he founded in 1955. In addition to his
management responsibilities at Microphase, he is active in engineering design
and related research and development. Mr. Ergul holds a Masters Degree in
Electrical Engineering from the Polytechnic Institute of Brooklyn, New York.



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.



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.



45

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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 2007. All the
officers and directors filed all of the required forms in a timely manner.



46

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ITEM 11. EXECUTIVE COMPENSATION



The
following table sets forth, for the fiscal year ended June 30, 2007 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, 2007.

|                               |      |          |          |             |              |                              
|------------------------------ | ---- | -------- | -------- | ----------- | ------------ | -----------------------------
|SUMMARY EXECUTIVE COMPENSATION
|                               |      |          |          |             |              |                              
|NAME &
    PRINCIPAL POSITION  | YEAR | SALARY   | BONUS    | STOCKAWARDS | OPTIONAWARDS | NON
    
    EQUITY
INCENTIVE
|Ronald Durando                 | 2007 | $393,600 | $0       | $860,000    | $184,000     | N/A                          
|President                      | 2006 | $393,600 | $250,000 | $1,260,000  | $1,596,200   |                              
|Chief Executive Officer        | 2005 | $305,000 |          |             | $500,000     |                              
|                               |      |          |          |             |              |                              
|Gustave Dotoli                 | 2007 | $282,000 | $0       | $450,000    | $105,000     | N/A                          
|Chief Operating Officer        | 2006 | $282,000 | $75,000  | $525,000    | $836,400     |                              
|                               | 2005 | $215,000 |          |             | $300,000     |                              
|                               |      |          |          |             |              |                              
|Martin Smiley                  | 2007 | $200,000 | $0       | $262,500    | $43,750      | N/A                          
|Executive Vice President       | 2006 | $175,000 |          | $331,213    | $213,850     |                              
|CFO Chief Legal Council        | 2005 | $125,000 |          | $119,000    |              |                              
|                               |      |          |          |             |              |                              

|Note re: 2005                                                                                                            |         |           |  |  |  |  |  |  |  | 
|------------------------------------------------------------------------------------------------------------------------ | ------- | --------- |  |  |  |  |  |  |  | 
|Value represents estimate based
    on FYE closing price                                                                 |         |           |  |  |  |  | 
|Durando                                                                                                                  | OPTIONS | 2,500,000 |  |  |  |  |  |  |  | 
|Dotoli                                                                                                                   | OPTIONS | 1,500,000 |  |  |  |  |  |  |  | 
|Smiley                                                                                                                   | STOCK   | 425,000   |  |  |  |  |  |  |  | 
|                                                                                                                         |         |           |  |  |  |  |  |  |  | 
|Footnotes                                                                                                                |         |           |  |  |  |  |  |  |  | 
|#1 consists of directors
    fees of $7,500 in both 2006 and 2007                                                       
|#2 consists of directors
    fees of $7,500 in both 2006 and 2007plus 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                                



47

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|Option Exercises and Stock
    Vesting |               |            
|-------------------------------------- | ------------- | -----------
|FYE June 30,2007                       |               |            
|                                       |               |            
|                                       | OPTION AWARDS |            
|                                       | Number of     |            
|                                       | shares        | Value      
|                                       | acquired      | realized   
|Name                                   | on exercise   | on exercise
|                                       |               |            
|Ronald Durando                         |               |            
|President CEO                          | 0             | N/A        
|                                       |               |            
|Gustave Dotoli                         |               |            
|COO                                    | 0             | N/A        
|                                       |               |            
|Martin Smiley                          |               |            
|Executive VP                           |               |            
|CFO Chief Legal                        |               |            
|Council                                | 0             | N/A        



48

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STOCK OPTIONS



The
following table contains information regarding options granted in the fiscal
year ended June 30, 2007 to the executive officers named in the summary
compensation table above. For the fiscal year ended June 30, 2007, mPhase
granted options and compensatory warrants to acquire up to an aggregate of
8,855,000 shares to employees and directors & consultants.

|        |             |              |           |        |            |                           
|------- | ----------- | ------------ | --------- | ------ | ---------- | --------------------------
|Name    | Number of   | % of Total   | Exercise  | Market | Expiration | Potential Realizable Value
|        | Securities  | Option/SARS  | or        | Price  | Dates      | of Assumed Annual         
|        | Underlying  | Granted to   | Base      | on     |            | Rates of Stock Price      
|        | Option/SARS | Employees in | Price     | Grant  |            | Appreciation for          
|        | Granted (#) | Fiscal Year  | ($/Share) | Dates  |            | 5 Year Option Term        
|        |             |              |           |        |            | 0%                        
|A.      |             |              |           |        |            |                           
|Ronald  | 1,400,000   | 15.8         | $.21      | $.19   | 8/24/11    | $0                        
|Durando |             |              |           |        |            |                           
|        |             |              |           |        |            |                           
|        |             |              |           |        |            |                           
|Gustave | 900,000     | 10.2         | $.21      | $.19   | 8/24/11    | $0                        
|T.      |             |              |           |        |            |                           
|Dotoli  |             |              |           |        |            |                           
|        |             |              |           |        |            |                           
|        |             |              |           |        |            |                           
|Martin  | 400,000     | 4.5          | $.21      | $.19   | 8/24/11    | $0                        
|Smiley  |             |              |           |        |            |                           
|        |             |              |           |        |            |                           





49

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|OUTSTANDING EQUITY AWARDS           |               |                 |             |          |           
|----------------------------------- | ------------- | --------------- | ----------- | -------- | ----------
|at FISCAL YEAR END JUNE
    30.2007 |               |                 |             |          |           
|                                    | Number of     | Number of       | Equity      |          |           
|                                    | Securities    | Securities      | Incentive   |          |           
|                                    | underlying    | underlying      | Plan awards |          |           
|                                    | Unexercised   | Unexercised     | Number of   | Option   | Option    
|                                    | Options       | Options         | Securities  | Exercise | Expiration
|                                    | (Exercisable) | (Unexercisable) |             | Price    | Date      
|                                    |               |                 |             |          |           
|Ronald Durando                      | 500,000       | 0               | 0           | $0.45    | 6/19/2009 
|President CEO                       | 1,000,000     | 0               | 0           | $0.45    | 6/19/2009 
|                                    | 2,500,000     | 0               | 0           | $0.35    | 12/31/2009
|                                    | 550,000       | 0               | 0           | $0.18    | 2/23/2011 
|                                    | 3,450,000     | 0               | 0           | $0.18    | 2/23/2011 
|                                    | 475,000       | 0               | 0           | $0.21    | 2/23/2011 
|                                    | 3,525,000     | 0               | 0           | $0.21    | 2/23/2011 
|                                    | 1,000,000     | 0               | 0           | $0.21    | 3/28/2011 
|                                    | 750,000       | 0               | 0           | $0.25    | 6/14/2011 
|                                    | 25,000        | 0               | 0           | $0.25    | 6/14/2011 
|                                    | 1,400,000     | 0               | 0           | $0.21    | 8/24/2006 
|                                    | 450,000       | 0               | 0           | $0.40    | 6/30/2008 
|                                    |               |                 |             |          |           
|Gustave Dotoli                      | 250,000       | 0               | 0           | $0.45    | 6/19/2009 
|COO                                 | 500,000       | 0               | 0           | $0.35    | 6/19/2009 
|                                    | 1,000,000     | 0               | 0           | $0.35    | 12/31/2009
|                                    | 550,000       | 0               | 0           | $0.18    | 2/23/2011 
|                                    | 1,250,000     | 0               | 0           | $0.18    | 2/23/2011 
|                                    | 475,000       | 0               | 0           | $0.21    | 2/23/2011 
|                                    | 1,325,000     | 0               | 0           | $0.21    | 2/23/2011 
|                                    | 750,000       | 0               | 0           | $0.21    | 3/28/2011 
|                                    | 500,000       | 0               | 0           | $0.25    | 6/14/2011 
|                                    | 25,000        | 0               | 0           | $0.25    | 6/14/2011 
|                                    | 900,000       | 0               | 0           | $0.21    | 8/24/2006 
|                                    | 350,000       | 0               | 0           | $0.40    | 6/30/2008 
|                                    |               |                 |             |          |           
|Martin Smiley                       | 550,000       | 0               | 0           | $0.18    | 2/23/2011 
|Executive VP                        | 475,000       | 0               | 0           | $0.21    | 2/23/2011 
|CFO Chief Legal                     | 25,000        | 0               | 0           | $0.21    | 2/23/2011 
|Council                             | 250,000       | 0               | 0           | $0.25    | 6/14/2011 
|                                    | 400,000       | 0               | 0           | $0.21    | 6/24/2011 
|                                    | 200,000       | 0               | 0           | $0.40    | 6/30/2008 
|                                    |               |                 |             |          |           

COMPENSATION COMMITTEE
INTERLOCKS AND INSIDER PARTICIPATION



The
members of the Compensation Committee during fiscal 2007 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 2007 that has a director or
executive officer serving also as a director on mPhase's Board of Directors,
except that Mr. Dotoli is also a member of the Board of Directors of PacketPort,
a company in which Mr. Durando serves as Chief Executive Officer. Mr. Dotoli,
together with Mr. Durando and Mr. Ergul, are collectively controlling
shareholders of Janifast and Mr. Dotoli and Mr. Ergul are also Directors of
Janifast. Janifast has produced components for the TV+. mPhase plans to use
Janifast to produce certain portions of orders for its Television platform in
the future.

50

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ITEM 12. SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



The following table sets forth
as of June 30, 2007 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         | -          | -          | 842,500    | 842,500     | 0.22%
|Abraham
    Biderman    | 1,101,900  | -          | 1,065,000  | 2,166,900   | 0.56%
|Gus Doteli              | 8,367,200  | 1,138,067  | 7,525,000  | 17,030,267  | 4.39%
|Ron Durando 
    (3)    | 18,230,632 | 581,667    | 15,175,000 | 33,987,299  | 8.76%
|Ned Ergul (4)           | 3,850,000  | 200,000    | 2,655,000  | 6,705,000   | 1.73%
|Martin Smiley           | 6,377,629  | 2,545,569  | 1,700,000  | 10,623,198  | 2.74%
|Microphase              | 16,060,019 | 6,572,222  | -          | 22,632,241  | 5.84%
|Janifast                | 16,577,778 | 1,950,000  | -          | 18,527,778  | 4.78%
|Total
    Affiliates    | 70,565,158 | 12,987,525 | 28,962,500 | 112,515,183 |      



(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 387,846,008 shares outstanding on June 30, 2007, and,
with respect to each person holding options or warrants to purchase shares that
are exercisable within 60 days after June 30, 2007, 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 1,126,113 shares held by Durando Investment LLC, Shares held by
Janifast which Mr. Durando controls are stated separately.



(4)
Includes 200,000 shares owned by Berin Snyder, his daughter and 150,000 owned
by Eda Peterson, his daughter. Shares held by Microphase which Mr. Ergul
controls are stated separately.



51

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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 COB of Janifast Limited. Mr. Durando and Mr. Dotoli are officers of
Microphase Corporation. Mr. Dotoli is also a shareholder of Janifast Limited.
Mr. Ergul, the chairman of the board of mPhase, owns a controlling interest and
is a director of Microphase Corporation and is a director and shareholder of
Janifast Limited. Microphase, Janifast, are significant shareholders of mPhase.



Transactions with Officers, Directors and their Affiliates



Directors that are significant shareholders of Janifast Limited include Messrs
Ronald A. Durando, Gustave T. Dotoli, Martin Smiley and Necdet F. Ergul.



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



|                                           |            |          |          |          |          |         |          |          |            | TOTAL     
|------------------------------------------ | ---------- | -------- | -------- | -------- | -------- | ------- | -------- | -------- | ---------- | ----------
|                                           | Durando    | Dotoli   | Ergul    | Biderman | Smiley   | Guerino | Lawrence | Janifast | Microphase | 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



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 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
are payable on demand.



During the 12 month period ended June 30, 2006 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.

52

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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.



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, 2006, 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.

53

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During fiscal year end June 30, 2006, 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.



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, 2006 and for the period
of time from mPhase's inception (October 2, 1996) to June 30, 2006, $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.



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.

54

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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 that expired in March 8, 2007 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 the $75,000 due December
1, 2006, that is presently, in arrears.





SUBSEQUENT EVENT

On July 26, 2007 Mr.
Durando provided a bridge loan of $55,000 to the Company. On August 13, 2007
Messrs. Durando, Dotoli and Smiley each provided bridge loans of $16,000 (or a
total of $48,000) to the Company. On August 27, 2007, Messrs Durando, Dotoli and
Smiley provided additional bridge loans to the Company of $19,000 (or total of
$57,000) to the Company. Finally, at various points throughout the month of
September, Mesers Durando and Dotoli provided additional bridge loans of $92,500
and $2,100 respectively. Each of the bridge loans is evident by a Demand
Promissory Note from the Company with an interest rate of 12%.

On August 21, 2007 the
Company announced that it had acquired from Mr. Durando, in exchange for a 12%
demand promissory note in the principal amount of $110,000, a 10% interest in
Sovereign Tracking LLC, a New Jersey limited liability company, that holds the
license for a (Patent for a Real-Time Location System) to track high value
assets. Mr. Robinson will assign all rights, title and interest
to the Patent to Sovereign Tracking, LLC.

Finally, effective July
1,2007, the Company formed two wholly owned subsidiaries to facilitate future
financing and operations of two business units. Such subsidiaries are Granita
Inc. which will operate the IPTV business and Always Ready Inc which will
operate all Nanotechnology related business. Effective on that date all related
assets and liabilities were transferred to those subsidiaries.

55

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



(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
Tecma Laboratory, Inc. filed December 20, 1979 (incorporated by reference to
Exhibit 3(a) to our registration statement on Form 10SB-12G filed on October 16,
1998 (file no. 000-24969)).

3.2*

Certificate of Correction to
Certificate of Incorporation of Tecma Laboratory, Inc. dated June 19, 1987
(incorporated by reference to Exhibit 3(b) to our registration statement on Form
10SB-12G filed on October 16, 1998 (file no. 000-24969)).

3.3*

Certificate of Amendment of
Certificate of Incorporation of Tecma Laboratory, Inc. filed August 28, 1987
(incorporated by reference to Exhibit 3(c) to our registration statement on Form
10SB-12G filed on October 16, 1998 (file no. 000-24969)).

3.4*

Certificate of Amendment of
Certificate of Incorporation of Tecma Laboratories, Inc. filed April 7, 1997
(incorporated by reference to Exhibit 3(d) to our registration statement on Form
10SB-12G filed on October 16, 1998 (file no. 000-24969)).

3.5*

Certificate of Amendment of
Certificate of Incorporation of Lightpaths TP Technologies, Inc. filed June 2,
1997 (incorporated by reference to Exhibit 3(e) to our registration statement on
Form 10SB-12G filed on October 16, 1998 (file no. 000-24969)).

3.6*

Certificate of Amendment of
Certificate of Incorporation of mPhase Technologies, Inc. filed September 15,
2000 (incorporated by reference to Exhibit 3i to our quarterly report on Form
10Q filed on November 13, 2000 (file no. 000-24969)).

3.7*

Bylaws of the Company
(incorporated by reference to Exhibit 3(g) to our registration statement on Form
10SB-12G filed on October 16, 1998 (file no. 000-24969)).

4.1*

Form of Registration Rights
Agreement, dated January 26, 2001, by and among the Company and the purchasers
listed on Schedule A attached thereto (incorporated by reference to Exhibit 4.1
to our registration statement on Form S-1 filed on June 18, 2001 (file no.
33-63262)).

4.2*

Form of Registration Rights
Agreement, dated February 9, 2001, by and among the Company and the purchasers
listed on Schedule A attached thereto (incorporated by reference to Exhibit 4.2
to our registration statement on Form S-1 filed on June 18, 2001 (file no.
33-63262)).

4.3*

Form of Warrant.

4.4*

Warrant Issued to Piper Rudnick
LLP.

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)).

10.3*

Employment Agreement between
Ronald A. Durando and the Company (incorporated by reference to Exhibit 10.8 to
our registration statement on Form SB-2 filed on August 13, 1999 (file no.
333-85147)).

10.4*

Employment Agreement between
Gustave T. Dotoli and the Company (incorporated by reference to Exhibit 10.9 to
our registration statement on Form SB-2 filed on August 13, 1999 (file no.
333-85147)).

56

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|EXHIBITS  |            
|--------- | -----------
|NUMBER    |            
|REFERENCE | DESCRIPTION



10.5*

Employment Agreement between
Martin S. Smiley and the Company, dated as of August 15, 2000

10.8*

Supply Agreement by and between
the Company and Hart Telephone Company, Inc., date of August 19, 1998
(incorporated by reference to Exhibit 10.8 to our registration statement on Form
S-1 filed on June 18, 2001 (file no. 33-63262)).

10.9*

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 our preliminary proxy statement on
Form Pre 14A filed on March 21, 2001 (file no.000-30202)).

10.11*

License Agreement, dated July 31,
1996, by and between AT&T Paradyne Corporation and Microphase Corporation.
(incorporated by reference to Exhibit 10.11 to our registration statement on
Form S-1 filed on June 18, 2001 (file no. 33-63262)).

10.12(a)*

Assignment Agreement dated
February 17, 1997, by and between the Company and Microphase Corporation.
(incorporated by reference to Exhibit 10.12 to our registration statement on
Form S-1 filed on June 18, 2001 (file no. 33- 63262)).

10.12(b)*

Distribution Agreement effective
May 15, 2002 by and between Corning Cable System and the Company.

10.13.*

Development Agreement between
Lucent Technologies, Inc. and mPhase Technologies, Inc., effective as of
December 1, 2002, relating to Video Services Switch and Statement of Work, dated
December 9, 2002.** 10.14. * Purchase Order between the Company and Lucent
Technologies, Inc., dated December 15, 2002, for cost reduction of the mPhase
Traverser INI set box. **

10.15.*

Co-Branding Agreement, dated as of
January 21, 2003, between the Company and Lucent Technologies, Inc.**

10.16*

Systems Integrator Agreement,
dated as of April 4, 2003, between the Company and Lucent Technologies, Inc.**

10.17*

Development Agreement between
Lucent Technologies, Inc and mPhase technologies, Inc. relating to Broadcast
Television Switch (BTS) effective as of September 15, 2003.**

10.18*

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

10.19*

Software License Agreement between
Espial Group, Inc, a Canadian Corporation and mPhase Technologies, Inc. entered
into November 28, 2004.

10.20*

Software Development Agreement
between Magpie Telecom Insiders, Inc, and mPhase Technologies, dated September
2, 2004 and Work Order dated January 3, 2005 10.21* Development Agreement
effective March 11, 2005 between Lucent Technologies Inc and mPhase Technologies
relating to development of Magnetometers.

10.22*

Amendment No. 2 to Development
Agreement dated as of March 9, 2005 relating to Micro Power Source Cells between
mPhase Technologies, Inc and Lucent Technologies, Inc.

10.23*

Amendment No. 2 to Development
Agreement between Lucent Technologies, Inc. and mPhase Technologies, Inc. dated
as September 15, 2003

10.24*

Amendment No. 3 to Development
Agreement between Lucent Technologies, Inc and mPhase Technologies, Inc. dated
September 15,2003

10.25*

Amendment No. 4 to Development
Agreement between Lucent Technologies, Inc and mPhase Technologies, Inc. dated
as of September 15, 2003

10.26*

Annexure B Statement of Work dated
August 22, 2005 between Magpie Insiders, Inc. and mPhase Technolgies, Inc.

10.27*

Annexure C Statement of Work dated
January 25, 2006 between Magpie Insiders Inc and mPhase Technologies, Inc.

10.28*

3rd Amendment to
Software License dated March 10, 2006 between Espial Group Inc. and mPhase
Technologies, Inc.

10.29**

4th Amendment to
Software License dated June 27,2006 between Espial Group, Inc and mPhase
Technologies, Inc.

57

---





|EXHIBITS  |            
|--------- | -----------
|NUMBER    |            
|REFERENCE | DESCRIPTION

10.32A

Agreement between Rubenstein Investor
Relations, Inc and mPhase Technologies, Inc dated January 10.32B*Services Agreement between
Rubenstein Associates, Inc and mPhase Technologies, Inc dated January

10.33*

Memorandum of Understanding between
Latens and mPhase Technologies, Inc dated January 23, 2007

10.34*

Amendment #4 between Lucent
Technologies and mPhase Technologies, Inc dated February 3, 2007

10.35*

First Amendment to the Master Work
Agreement between Velankani and mPhase Technologies, Inc dated February 6, 2007

10.36*

Cooperative Research Agreement
between Rutgers and mPhase Technologies, Inc dated February 5, 2007

10.37*

Statement of Work Espial and mPhase
Technologies, Inc dated February 22, 2007

10.38*

Payment Agreement between Espial and
mPhase Technologies, Inc dated February 22, 2007

10.39*

Reseller Agreement between Steeleye
Technologies and mPhase Technologies, Inc dated March 28, 2007

10.40*

Consulting Agreement between CT
Nanobusiness Alliance and mPhase Technologies, Inc. dated May 10, 2007

10.41*

Escrow Agreement between Wilson
Sonsini Goodrich & Rosati and mPhase Technologies, Inc dated May 2007

10.42*

Non-Exclusive Distribution Agreement
between Netdialogue and mPhase Technologies, Inc. dated December 13, 2006

10.43*

Cooperative Research and Development
Agreement between US Army Picatinny and mPhase Technologies, Inc dated December
20, 2006

10.44*

Amendment # 5 between Lucent
Technologies Inc and mPhase Technologies, Inc.

10.45*

Private Equity Credit Agreement by
and between mPhase Technologies, Inc. and Double U Master Fund LP. Dated as of
June 27, 2007.

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)).

23.1*

Consents of Schuhalter, Coughlin &
Suozzo, LLC dated August 31, 1998 and reference to Exhibit 23 to our
registration statement on Form 10SB-12G filed on October 16, 1998 (file no.
000-24969)).

23.2*

Consents of Schuhalter, Coughlin &
Suozzo, LLC dated April 23, 1999 and Mauriello, Franklin & LoBrace, P.C. dated
April 23, 1999 (incorporated by reference to Exhibit 23 to our registration
statement

23.3*

Consent of Schuhalter, Coughlin &
Suozzo, LLC dated August 13, 1999 (incorporated by reference to Exhibit 23.1 to
our registration statement on Form SB-2 filed on August 13, 1999 (file no.
333-85147)). 23.4 Consent of Schuhalter, Coughlin & Suozzo, LLC.

23.5

Consent of Rosenberg Rich Baker
Berman and Company.

23.6*

Consent of Piper Marbury Rudnick &
Wolfe LLP (incorporated by reference to our registration statement, Amendment
No. 2 filed on Aug. 15, 2001.)

23.7*

Consent of Rosenberg, Rich, Baker,
Berman and Company (incorporated by reference to our registration statement,
Amendment No. 1/A filed on August 1 2002.)

23.8*

Consent of Schuhalter, Coughlin &
Suozzo, LLC (incorporated by reference to our registration statement, Amendment
No 1/A filed on August 2, 2002.)

23.9*

Consent of Piper&Rudnick LLP.
(incorporated by reference to our registration statement, Amendment No. 1/A
filed on August 2, 2002)

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.

58

---





* 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.







CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                                                                                                                               |  | PAGE      
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------
|Report of Rosenberg Rich Baker Berman & Company                                                                                                                                                                |  | F-1       
|Report of Arthur Andersen LLP                                                                                                                                                                                  |  | F-2       
|Report of Schuhalter, Coughlin & Suozzo, PC                                                                                                                                                                    |  | F-3       
|Consolidated Balance Sheets as of June 30, 2006 and 2007                                                                                                                                                       |  | F-4       
|Consolidated Statements of Operations for the years ended June 30, 2005,
    2006 and 2007 and for the period from inception (October 2, 1996) through
    June 30, 2007.                                      |  | F-5       
|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
    nine years in the period ended June 30, 2007 |  | F6-F11    
|Consolidated Statements of Cash Flows for the years ended June 30, 2005,
    2006 and 2007 and for the period from inception (October 2, 1996) through
    June 30, 2007.                                      |  | F-12      
|Notes to Consolidated Financial Statements                                                                                                                                                                     |  | F-13  F-27

59

---





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, 2007 and June 30, 2006, and the related consolidated
statements of operations, changes in stockholders' equity (deficit), cash flows
and Schedule II (Valuation and Qualifying Accounts, Item 14B) for each of the
three years ended June 30, 2007 and for the period from inception
(October 2, 1996) to June 30, 2007. 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,
2007 and 2006 and the results of their operations and their cash flows for each
of the three years in the period ended June 30, 2007 and for the period from
inception to June 30, 2007, 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.





Rosenberg Rich Baker Berman &
Company Bridgewater, NJ



September 27, 2007



60

---





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.



61

---





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





62

---

mPHASE TECHNOLOGIES, INC. 
(A DEVELOPMENT STAGE COMPANY) 
CONSOLIDATED BALANCE SHEETS

|                                                                                             | June 30,      |  | June 30,     
|-------------------------------------------------------------------------------------------- | ------------- |  | -------------
|                                                                                             | 2006          |  | 2007         
|                                                                                             |               |  |              
|ASSETS                                                                                       |               |  |              
|CURRENT ASSETS                                                                               |               |  |              
|Cash and cash
    equivalents                                                                | $1,359,925    |  | $23,253      
|Accounts receivable                                                                          | 106,237       |  | 1,961        
|Subscriptions
    receivable                                                                 |               |  | 500,000      
|Inventories                                                                                  | 161,270       |  | 505,910      
|Prepaid and other
    current assets                                                         | 66,777        |  | 442,585      
|                                                                                             |               |  |              
|Total Current Assets                                                                         | 1,694,209     |  | 1,473,709    
|                                                                                             |               |  |              
|Property and
    equipment, net                                                              | 350,120       |  | 282,801      
|Patents and licensing
    rights, net                                                        | 87,579        |  | 51,140       
|Other assets                                                                                 | 50,000        |  | 0            
|TOTAL ASSETS                                                                                 | $2,181,908    |  | $1,807,650   
|                                                                                             |               |  |              
|                                                                                             |               |  |              
|LIABILITIES AND
    STOCKHOLDERS' EQUITY                                                     |               |  |              
|CURRENT LIABILITIES                                                                          |               |  |              
|Accounts payable                                                                             | $1,638,322    |  | $2,355,250   
|Accrued expenses                                                                             | 557,342       |  | 933,145      
|Due to related parties                                                                       | 274,271       |  | 852,405      
|Notes payable, related
    parties                                                           |               |  | 321,000      
|Current portion of
    long-term debt                                                        | 318,058       |  | 76,640       
|Deferred revenue                                                                             |               |  | 23,708       
|TOTAL CURRENT
    LIABILITIES                                                                | $2,787,993    |  | $4,562,148   
|                                                                                             |               |  |              
|TOTAL LIABILITIES                                                                            | $2,787,993    |  | $4,562,148   
|                                                                                             |               |  |              
|COMMITMENTS AND
    CONTINGENCIES (Note 10)                                                  |               |  |              
|                                                                                             |               |  |              
|STOCKHOLDERS' DEFICIT                                                                        |               |  |              
|                                                                                             |               |  |              
|                                                                                             |               |  |              
|Common stock, par
    value $.01, 900,000,000 shares authorized                              |               |  |              
|278,235,984 and
    387,846,004 shares issued 278,222,234 and 387,832,254outstanding at June |               |  |              
|30, 2006 and June 30,
    2007, respectively                                                 | $2,782,360    |  | $3,878,460   
|Additional paid in
    capital                                                               | 148,079,585   |  | 162,100,718  
|Deferred Compensation                                                                        |               |  | (414,084)    
|Deficit accumulated
    during development stage                                             | (151,460,057) |  | (168,311,619)
|                                                                                             |               |  |              
|Less-Treasury stock,
    13,750 shares at cost                                               | (7,973)       |  | (7,973)      
|TOTAL STOCKHOLDERS'
    DEFICIT                                                              | ($606,085)    |  | ($2,754,4498)
|                                                                                             |               |  |              
|                                                                                             |               |  |              
|TOTAL LIABILITIES
    AND STOCKHOLDERS' DEFICIT                                              | $2,181,908    |  | $1,807,650   
|                                                                                             |               |  |              
|The accompanying notes
    are an integral part of these Consolidated Financial Statements.  |               |  |              
|                                                                                             |               |  |              

63

---

mPHASE
TECHNOLOGIES, INC. 
(A DEVELOPMENT STAGE COMPANY) 
CONSOLIDATED STATEMENT OF OPERATIONS

|                                                                                            |               |  |                     |  |               |  | (Date of      
|------------------------------------------------------------------------------------------- | ------------- |  | ------------------- |  | ------------- |  | --------------
|                                                                                            |               |  | For the Years Ended |  | Inception) to
|                                                                                            |               |  | June 30,            |  | June 30,     
|                                                                                            | 2005          |  | 2006                |  | 2007          |  | 2007          
|                                                                                            |               |  |                     |  |               |  |               
|REVENUES                                                                                    | $1,711,085    |  | $975,482            |  | $153,504      |  | $22,449,111   
|                                                                                            |               |  |                     |  |               |  |               
|COSTS AND
    EXPENSES                                                                      |               |  |                     |  |               |  |               
|Cost of Sales                                                                               | 1,446,151     |  | 974,583             |  | 89,802        |  | 16,423,743    
|Research and
    Development (including non-                                                |               |  |                     |  |               |  |               
|cash stock
    related charges of $0, $200,850, $92,600                                     |               |  |                     |  |               |  |               
|and $2,410,119,
    for 2005, 2006, 2007 and                                                |               |  |                     |  |               |  |               
|inception to date
    respectively)                                                         | 5,127,438     |  | 8,034,964           |  | 6,393,215     |  | 57,972,417    
|General and
    Administrative (including non-                                              |               |  |                     |  |               |  |               
|cash stock
    related charges of $2,948,083,                                               |               |  |                     |  |               |  |               
|$6,075,573, $3,448,785 and
    $61,768,086 for 2005, 2006, 2007                             |               |  |                     |  |               |  |               
|and inception to
    date respectively)                                                     | 6,579,761     |  | 11,121,235          |  | 8,684,053     |  | 105,440,145   
|Depreciation and
    Amortization                                                           | 62,679        |  | 78,416              |  | 93,855        |  | 3,124,857     
|                                                                                            |               |  |                     |  |               |  |               
|TOTAL COSTS AND
    EXPENSES                                                                | 13,216,029    |  | 20,209,198          |  | 15,260,925    |  | 182,961,162   
|                                                                                            |               |  |                     |  |               |  |               
|LOSS FROM
    OPERATIONS                                                                    | (11,504,944)  |  | (19,233,716)        |  | (15,107,421)  |  | (160,512,051) 
|                                                                                            |               |  |                     |  |               |  |               
|OTHER INCOME
    (EXPENSE)                                                                  |               |  |                     |  |               |  |               
|Interest Income
    (Expense), net                                                          | (110,469)     |  | (34,569)            |  | (18,310)      |  | (168,451)     
|Other Income
    (Expense) net                                                              | 381,089       |  | (5,182,365)         |  | (1,725,831)   |  | (7,631,117)   
|                                                                                            |               |  |                     |  |               |  |               
|TOTAL OTHER
    INCOME (EXPENSE)                                                            | 270,620       |  | (5,216,934)         |  | (1,744,141)   |  | (7,799,568)   
|                                                                                            |               |  |                     |  |               |  |               
|NET LOSS                                                                                    | ($11,234,324) |  | ($24,450,650)       |  | ($16,851,562) |  | ($168,311,619)
|                                                                                            |               |  |                     |  |               |  |               
|LOSS PER COMMON
    SHARE, basic and                                                        |               |  |                     |  |               |  |               
|diluted                                                                                     | ($0.10)       |  | ($0.12)             |  | ($0.05)       |  |               
|                                                                                            |               |  |                     |  |               |  |               
|WEIGHTED AVERAGE
    COMMON                                                                 |               |  |                     |  |               |  |               
|SHARES
    OUTSTANDING, basic and                                                           |               |  |                     |  |               |  |               
|diluted                                                                                     | 108,657,578   |  | 199,610,372         |  | 310,395,562   |  |               
|                                                                                            |               |  |                     |  |               |  |               
|                                                                                            |               |  |                     |  |               |  |               
|The accompanying
    notes are an integral part of these Consolidated Financial Statements. |               |  |                     |  |              

64

---

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 ELEVEN YEARS 
IN THE PERIOD ENDED JUNE 30, 2007

|                                  |            |  |           |  |          |  |            |  |          |  |              |  | Total       
|--------------------------------- | ---------- |  | --------- |  | -------- |  | ---------- |  | -------- |  | ------------ |  | ------------
|                                  | Common     |  |           |  |          |  | Additional |  | Deferred |  |              |  | Stockholders
|                                  | Stock      |  | Par Value |  | Treasury |  | Paid-In    |  | Compen   |  | Accumulated  |  | Equity      
|                                  | Shares     |  | 0.01      |  | Stock    |  | Capital    |  | sation   |  | Deficit      |  | (Deficit)   
|Balance, October 2,
    1996      |            |  |           |  |          |  |            |  |          |  |              |  |             
|(date of inception).              | 1,140,427  |  | $11,404   |  |          |  | $459,753   |  |          |  | ($537,707)   |  | ($66,550)   
|Issuance of common stock
    of   |            |  |           |  |          |  |            |  |          |  |              |  |             
|Tecma Laboratories,
    Inc., for |            |  |           |  |          |  |            |  |          |  |              |  |             
|100% of the Company.              | 6,600,000  |  | 66,000    |  |          |  | (537,157)  |  |          |  | 537,707      |  | 66,550      
|Issuance of common
    stock, in  |            |  |           |  |          |  |            |  |          |  |              |  |             
|private placement, net
    of     |            |  |           |  |          |  |            |  |          |  |              |  |             
|offering costs of
    $138,931    | 594,270    |  | 5,943     |  |          |  | 752,531    |  |          |  |              |  | 758,474     
|                                  |            |  |           |  |          |  |            |  |          |  |              |  |             
|Net loss                          |            |  |           |  |          |  |            |  |          |  | (781,246)    |  | (781,246)   
|                                  |            |  |           |  |          |  |            |  |          |  |              |  |             
|Balance, June 30,
    1997        | 8,334,697  |  | $83,347   |  |          |  | $675,127   |  |          |  | ($781,246)   |  | ($22,772)   
|Issuance of common stock          |            |  |           |  |          |  |            |  |          |  |              |  |             
|with warrants, in
    private     |            |  |           |  |          |  |            |  |          |  |              |  |             
|placement, net of
    offering    |            |  |           |  |          |  |            |  |          |  |              |  |             
|costs of $84,065                  | 999,502    |  | 9,995     |  |          |  | 791,874    |  |          |  |              |  | 801,869     
|Issuance of common stock          |            |  |           |  |          |  |            |  |          |  |              |  |             
|for services                      | 300,000    |  | 3,000     |  |          |  | 147,000    |  |          |  |              |  | 150,000     
|Issuance of common stock
    in   |            |  |           |  |          |  |            |  |          |  |              |  |             
|connection with
    investment    |            |  |           |  |          |  |            |  |          |  |              |  |             
|in unconsolidated
    subsidiary  | 250,000    |  | 2,500     |  |          |  | 122,500    |  |          |  |              |  | 125,000     
|Repurchase of 13,750
    shares   |            |  |           |  |          |  |            |  |          |  |              |  |             
|of common stock                   |            |  |           |  | (7,973)  |  |            |  |          |  |              |  | (7,973)     
|Issuance of common stock          |            |  |           |  |          |  |            |  |          |  |              |  |             
|with warrants in private          |            |  |           |  |          |  |            |  |          |  |              |  |             
|placement, net of
    offering    |            |  |           |  |          |  |            |  |          |  |              |  |             
|costs of $121,138                 | 1,095,512  |  | 10,955    |  |          |  | 659,191    |  |          |  |              |  | 670,146     
|Issuance of common stock          |            |  |           |  |          |  |            |  |          |  |              |  |             
|for financing services            | 100,000    |  | 1,000     |  |          |  | (1,000)    |  |          |  |              |  |             
|Issuance of common stock
    in   |            |  |           |  |          |  |            |  |          |  |              |  |             
|consideration for 100%
    of the |            |  |           |  |          |  |            |  |          |  |              |  |             
|common stock of
    Microphase    |            |  |           |  |          |  |            |  |          |  |              |  |             
|Telecommunications, Inc.          | 2,500,000  |  | 25,000    |  |          |  | 1,685,000  |  |          |  |              |  | 1,710,000   
|                                  |            |  |           |  |          |  |            |  |          |  |              |  |             
|Net loss                          |            |  |           |  |          |  |            |  |          |  | (4,341,059)  |  | (4,341,059) 
|                                  |            |  |           |  |          |  |            |  |          |  |              |  |             
|Balance, June 30,
    1998        | 13,579,711 |  | $135,797  |  | ($7,973) |  | $4,079,692 |  |          |  | ($5,122,305) |  | ($914,789)  

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

65

---

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 ELEVEN YEARS 
IN THE PERIOD ENDED JUNE 30, 2007



|                               |              |  |           |  |          |  |             |  |              |  |               |  | Total       
|------------------------------ | ------------ |  | --------- |  | -------- |  | ----------- |  | ------------ |  | ------------- |  | ------------
|                               |              |  |           |  |          |  | Additional  |  |              |  |               |  | Stockholders
|                               | Common       |  | Par Value |  | Treasury |  | Paid-In     |  | Deferred     |  | Accumulated   |  | Equity      
|                               | Stock Shares |  | 0.01      |  | Stock    |  | Capital     |  | Compensation |  | Deficit       |  | (Deficit)   
|Balance, June 30, 1998         | 13,579,711   |  | $135,797  |  | ($7,973) |  | $4,079,692  |  |              |  | ($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 costsof $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.

66

---

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 ELEVEN YEARS 
IN THE PERIOD ENDED JUNE 30, 2007

|                               |            |  |           |  |          |  |              |  |              |  |                 |  | Total       
|------------------------------ | ---------- |  | --------- |  | -------- |  | ------------ |  | ------------ |  | --------------- |  | ------------
|                               | Common     |  |           |  |          |  | Additional   |  |              |  |                 |  | Stockholders
|                               | Stock      |  | Par Value |  | Treasury |  | Paid-In      |  | Deferred     |  | Accumulated     |  | Equity      
|                               | Shares     |  | 0.01      |  | Stock    |  | Capital      |  | Compensation |  | Deficit         |  | (Deficit)   
|                               |            |  |           |  |          |  |              |  |              |  |                 |  |             
|Balance, June 30,
    2000     | 31,404,540 |  | $ 314,045 |  | ($7,973) |  | $74,370,291  |  | ($1,225,668) |  | ($66,122,191)   |  | $7,328,504  
|Issuance of common stock       |            |  |           |  |          |  |              |  |              |  |                 |  |             
|upon exercise of options       | 320,000    |  | 3,200     |  |          |  | 324,300      |  |              |  |                 |  | 327,500     
|Issuance of common stock       |            |  |           |  |          |  |              |  |              |  |                 |  |             
|with warrants in private       |            |  |           |  |          |  |              |  |              |  |                 |  |             
|placements, net of cash        |            |  |           |  |          |  |              |  |              |  |                 |  |             
|offering costs of
    $512,195 | 4,329,850  |  | 43,298    |  |          |  | 7,766,547    |  |              |  |                 |  | 7,809,845   
|Issuance of common stock       |            |  |           |  |          |  |              |  |              |  |                 |  |             
|for services                   | 450,000    |  | 4,500     |  |          |  | 1,003,125    |  |              |  |                 |  | 1,007,625   
|Issuance of options and        |            |  |           |  |          |  |              |  |              |  |                 |  |             
|warrants for services          |            |  |           |  |          |  | 5,849,585    |  |              |  |                 |  | 5,849,585   
|                               |            |  |           |  |          |  |              |  |              |  |                 |  |             
|Deferred employee stock        |            |  |           |  |          |  |              |  |              |  |                 |  |             
|option compensation            |            |  |           |  |          |  | 607,885      |  | (607,885)    |  |                 |  |             
|Amortization of deferred       |            |  |           |  |          |  |              |  |              |  |                 |  |             
|employee stock option          |            |  |           |  |          |  |              |  |              |  |                 |  |             
|compensation                   |            |  |           |  |          |  |              |  | 1,120,278    |  |                 |  | 1,120,278   
|Issuance of common stock       |            |  |           |  |          |  |              |  |              |  |                 |  |             
|in settlement of debt to       |            |  |           |  |          |  |              |  |              |  |                 |  |             
|directors and related          |            |  |           |  |          |  |              |  |              |  |                 |  |             
|parties                        | 4,840,077  |  | 48,402    |  |          |  | 2,371,637    |  |              |  |                 |  | 2,420,039   
|Net 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)   |  | $1,864,642  
|Issuance of Common stock       |            |  |           |  |          |  |              |  |              |  |                 |  |             
|with warrants in private       |            |  |           |  |          |  |              |  |              |  |                 |  |             
|placement                      | 6,980,643  |  | 69,807    |  |          |  | 1,903,943    |  |              |  |                 |  | 1,973,750   
|Issuance of Common stock       |            |  |           |  |          |  |              |  |              |  |                 |  |             
|for services                   | 2,976,068  |  | 29,760    |  |          |  | 1,169,241    |  |              |  |                 |  | 1,199,001   
|Issuance of options and        |            |  |           |  |          |  |              |  |              |  |                 |  |             
|warrants for services          |            |  |           |  |          |  | 1,877,937    |  |              |  |                 |  | 1,877,937   
|Cancellation of unearned       |            |  |           |  |          |  |              |  |              |  |                 |  |             
|options to former              |            |  |           |  |          |  |              |  |              |  |                 |  |             
|employees                      |            |  |           |  |          |  | (140,802)    |  | 140,802      |  |                 |  |             
|Amortization of deferred       |            |  |           |  |          |  |              |  |              |  |                 |  |             
|employee stock option          |            |  |           |  |          |  |              |  |              |  |                 |  |             
|compensation                   |            |  |           |  |          |  |              |  | 548,550      |  |                 |  | 548,550     
|                               |            |  |           |  |          |  |              |  |              |  |                 |  |             
|Issuance of common stock       |            |  |           |  |          |  |              |  |              |  |                 |  |             
|and warrants in
    settlement |            |  |           |  |          |  |              |  |              |  |                 |  |             
|of debt to related
    parties |            |  |           |  |          |  |              |  |              |  |                 |  |             
|and strategic vendors          | 7,492,996  |  | 74,930    |  |          |  | 2,663,728    |  |              |  |                 |  | 2,738,658   
|Sale of Common stock to        |            |  |           |  |          |  |              |  |              |  |                 |  |             
|certain Officers and           |            |  |           |  |          |  |              |  |              |  |                 |  |             
|Directors in private           |            |  |           |  |          |  |              |  |              |  |                 |  |             
|placement                      | 2,000,000  |  | 20,000    |  |          |  | 980,000      |  |              |  |                 |  | 1,000,000   
|Issuance of Common stock       |            |  |           |  |          |  |              |  |              |  |                 |  |             
|upon exercise of options       | 13,334     |  | 133       |  |          |  | 3,867        |  |              |  |                 |  | 4,000       
|Net 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.

67

---

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 ELEVEN YEARS 
IN THE PERIOD ENDED JUNE 30, 2007

|                                          |            |  |          |  |          |  |               |  |              |  |                 |  | Total        
|----------------------------------------- | ---------- |  | -------- |  | -------- |  | ------------- |  | ------------ |  | --------------- |  | -------------
|                                          | Common     |  | Par      |  |          |  | Additional    |  |              |  |                 |  | Stockholders 
|                                          | Stock      |  | Value    |  | Treasury |  | Paid-In       |  | Deferred     |  | Accumulated     |  | Equity       
|                                          | Shares     |  | 0.01     |  | Stock    |  | Capital       |  | Compensation |  | Deficit         |  | (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           |  | $(108,016,197)  |  | $ (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.

68

---

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 ELEVEN YEARS IN THE PERIOD ENDED JUNE 30,
2007Additional
    
    
    
    TotalCommon
    
    Par Value
    
    Treasury
    
    Paid-In
    
    Accumulated
    
    StockholdersStock Shares
    
    0.01
    
    Stock
    
    Capital
    
    Deficit
    
    Equity (Deficit)Balance,
    June 30, 2004
    88,899,962
    
    $888,999
    
    ($7,973)
    
    $111,976,095
    
    ($115,775,083)
    
    $2,917,962Issuance of Shares
    inPrivate Placement
    39,853,661
    
    398,535
    
    
    
    6,888,553
    
    
    
    7,287,088Issuance of in
    connectionwith exercise of
    warrants
    3,637,954
    
    36,380
    
    
    
    644,229
    
    
    
    680,609Conversion of Debt
    toCommon stock andwarrants
    3,895,171
    
    38,952
    
    
    
    1,174,134
    
    
    
    1,213,086Options Awarded toConsultants
    
    
    
    
    
    
    2,191,043
    
    
    
    2,191,043Options Awarded toOfficers
    
    
    
    
    
    
    625,290
    
    
    
    625,290Issuance of shares
    toOfficers and
    consultantsfor services
    1,151,000
    
    11,510
    
    
    
    322,500
    
    
    
    334,010Exercise of
    cashlesswarrants
    4,949,684
    
    49,499
    
    
    
    (49,499)Exercise of
    warrants byofficers
    1,770,400
    
    17,704
    
    
    
    
    
    
    
    17,704Reparation of
    PrivatePlacement 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
    stockpursuant to the
    exercise ofwarrants, net of
    cashexpenses of
    $108,000
    15,720,120
    
    157,201
    
    
    
    2,850,523
    
    
    
    3,007,724Issuance of common
    stockwith warrants in
    privateplacements, net of
    cashexpenses of
    $674,567
    72,786,897
    
    727,868
    
    
    
    9,329,781
    
    
    
    10,057,649Issuance of common
    stockfor services
    11,500,000
    
    115,000
    
    
    
    2,324,000
    
    
    
    2,439,000Conversion of
    relatedparty and strategic
    vendordebts to common
    stockand warrants
    3,331,864
    
    33,319
    
    
    
    556,681
    
    
    
    590,000Stock options
    awarded toconsultants,
    employeesand officers
    
    
    
    
    
    
    3,837,423
    
    
    
    3,837,423Issuance of
    additionalshares and warrants
    toeffect revised
    pricing onprevious private
    offeringcharged 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.
69
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 ELEVEN YEARS IN THE PERIOD ENDED JUNE 30,
2007
TotalAdditional
    
    
    
    Shareholders
  $.01 Stated
    Treasury
    Paid in
    Deferred
    Accumulated
    (Deficit)
  Shares
    Value
    Stock
    Capital
    Compensation
    Deficit
    EquityBalance June 30,2006
    278,235,984
    $2,782,360
    ($7,973)
    $148,079,585
    
    
    ($151,460,057)
    ($606,085)Issuance of commonstock pursuant to theexercise of warrants(net of cash expensesof $150,000)
    14,740,669
    $147,406
    
    
    $1,922,261
    
    
    
    $2,069,667Issuance of commonstock in privateplacements, (net ofcash expenses of$216,134)
    47,958,060
    $479,581
    
    
    $5,711,788
    
    
    
    $6,191,369Issuance of commonstock for services
    18,172,983
    $181,730
    
    
    $2,486,885
    ($627,250)
    
    
    $2,041,365Conversion of relatedparty and strategicvendor debt tocommon stock
    6,073,728
    $60,737
    
    
    $930,972
    
    
    
    $991,709Issuance ofadditional shares andwarrants to effectrepricing
    22,664,580
    $226,646
    
    
    $1,647,374
    
    
    
    $1,874,020Stock optionsawarded toemployees andofficers
    
    
    
    $1,321,853
    
    
    
    $1,321,853Deferred stockcompensation
    
    
    
    
    $213,166
    
    
    $213,166Net 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)
  The accompanying notes are an integral part of
    these Consolidated Financial Statements.

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

70

---

mPHASE TECHNOLOGIES, INC. 
(A DEVELOPMENT STAGE COMPANY) 
CONSOLIDATED STATEMENTS OF CASH FLOWS
October 2, 1996For the Year ended
    
    
    (Date of Inception)
  June 30,
    
    
    To June 30,2005
    2006
    2007
    2007Cash Flow From Operating Activities:Net Loss
    ($11,234,324)
    ($24,450,650)
    ($16,851,562)
    ($168,311,619)Adjustments to reconcile net loss to net cashused in operating activities:Depreciation and amortization
    280,590
    206,935
    218,237
    7,036,002(Gain) loss on debt extinguishments
    (418,696)
    
    
    
    (772,216)Loss on unconsolidated subsidiary
    
    
    
    1,466,467Non-cash charges relating to issuance ofcommon stock, common stock options andwarrants
    3,336,064
    6,276,423
    3,363,218
    62,434,594Reparation charges
    
    5,530,504
    1,874,020
    7,404,524Other non cash charges including amortizationof deferred compensation
    
    
    213,166
    600,981Changes in assets and liabilities:Accounts receivable
    (469,741)
    887,604
    104,276
    425,915Inventories
    533,030
    328,872
    (344,640)
    (510,471)Prepaid expenses and other current assets
    55,439
    (41,155)
    (375,808)
    (361,524)Other non-current assets
    (50,000)
    17,250
    50,000
    (559,932)
  Accounts payable, Accrued expenses
    (411,348)
    785,006
    2,084,440
    8,781,254Due to/from related partiesMicrophase
    257,348
    (60,787)
    154,122
    2,730,394Janifast
    254,063
    (485,556)
    (104,088)
    2,367,324Officers
    34,200
    (23,400)
    528,100
    1,007,656Lintel and other
    37,411
    
    
    23,708
    530,180Net cash used in operating activities
    ($7,795,964)
    ($11,028,954)
    ($9,062,811)
    ($75,730,471)
  Cash Flow from Investing Activities:Payments related to patents and licensing rights
    ($34,167)
    
    
    
    ($450,780)Purchase of fixed assets
    ($121,476)
    ($340,493)
    ($114,480)
    (3,217,555)Net Cash (used) in investing activities
    ($155,643)
    ($340,493)
    ($114,480)
    ($3,668,335)
  Cash Flow from Financing Activities:Proceeds from issuance of common stock andexercises of options and warrants
    $8,393,717
    $13,065,375
    $7,761,037
    $79,692,605Payments of notes payable
    (65,970)
    (372,479)
    (241,418)
    (901,704)Advances from Microphase
    
    
    
    347,840Proceeds from notes payable - officers
    535,000
    
    
    321,000
    1,286,000Repayments of notes payable - officers
    (650,000)
    (314,709)
    
    
    (994,709)Repurchase of treasury stock at cost
    
    
    
    (7,973)Net increase (decrease) in cash
    $261,140
    $1,008,740
    ($1,336,672)
    $23,253CASH AND CASH EQUIVALENTS,beginning of period
    $90,045
    $351,185
    $1,359,925CASH AND CASH EQUIVALENTS, end ofperiod
    $351,185
    $1,359,925
    $23,253
    $23,253The accompanying notes are an integral part of these Consolidated Financial
Statements.
71
mPHASE TECHNOLOGIES, INC. 
(A DEVELOPMENT STAGE COMPANY) 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
JUNE 30, 20071. ORGANIZATION AND NATURE OF BUSINESS

mPhase Technologies, Inc. ("mPhase" or the "Company") was
organized on October 2, 1996. The primary business of mPhase is to design,
develop, manufacture and market high-bandwidth telecommunications products
incorporating digital subscriber line ("DSL") technology. The present activities
of the Company are focused on the deployment of its TV+ System, which delivers
MPEG2 digital television, high-speed internet and voice over copper wire.
Additionally, the Company sells a line of DSL component products. In February of
2004, the Company entered the field of Nanotechnology focused upon the
development of batteries and power cells with military applications as an
additional product line.
On February 17, 1997, mPhase acquired Tecma Laboratories,
Inc., ("Tecma") in a transaction accounted for as a reverse merger.
On June 25, 1998, the Company acquired Microphase
Telecommunications, Inc. ("MicroTel") a Delaware corporation, through the
issuance of 2,500,000 shares of its common stock in exchange for all the issued
and outstanding shares of MicroTel (Note 4). The assets acquired in this
acquisition were patents and patent applications utilized in the Company's
proprietary Traverser Digital Video and Data Deliver System ("Traverser").
On August 21, 1998, the Company incorporated a 100%
wholly-owned subsidiary called mPhaseTV.net, Inc., a Delaware corporation, to
market interactive television and e-commerce revenue opportunities. This
subsidiary is dissolved.
On March 2, 2000 the Company acquired a 50% interest in
mPhaseTelevision.Net, Inc., an incorporated joint venture with AlphaStar
International, Inc. (Note 8) for $20,000. The Company acquired an additional
interest in the joint venture of 6.5% in April of 2000 for $1.5 million. Based
on its controlling interest in mPhaseTelevision.Net, the operating results of
mPhaseTelevision.Net are included in the consolidated results of the Company
since March 2, 2000.
The Company is in the development stage and its present
activities are focused on the commercial deployment of its TV+ products for
delivery of broadcast IPTV, and DSL component products which include POTS
splitters and a line of intelligent POTS splitter products and 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.
2. LOSSES DURING THE DEVELOPMENT STAGE AND MANAGEMENT'S PLANS

Through June 30, 2007, the Company had incurred development
stage losses totaling $168,311,619, and at June 30, 2007 had a stockholders'
deficit of ($2,754,498). At June 30, 2007, the Company had $23,253 of cash and
$501,961 of receivables including $500,000 of subscriptions receivable which was
received in July 2007.
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) the successful wide scale development, deployment
and marketing of 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
2008 and continue its development and commercialization efforts. In addition, to
the above financing activities, the following business initiatives are also
ongoing and are expected to provide additional working capital to the Company.
The Company is currently negotiating with
several organizations for the commencement of field trials that would lead to
commercial sales of its broadcast television TV+ solution. In addition, it has
had continuing discussion with various financing sources regarding the
opportunities in nanotechnology. Management believes that the formation of
Granita Media (IPTV) and AlwaysReady Inc (Nanotechnology) in July 2007, will
enhance funding possibilities.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.

72

---

mPHASE TECHNOLOGIES, INC. 
(A DEVELOPMENT STAGE COMPANY) 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
JUNE 30, 2007
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESPRINCIPLES OF CONSOLIDATION 
The consolidated financial statements include the accounts of
mPhase, its wholly-owned and majority owned subsidiaries. Significant
intercompany 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.
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 for its
POTS Splitter Shelf and other DSL component products at the time of shipment, at
which time, no other significant obligations of the Company exist, other than
normal warranty support. Revenue related to research agreements relative to its
nanotechnology line are amortized over the term of the agreement on a straight
line basis

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. The Company had revenue from two customers of 36% and 16%
during the fiscal year ended June 30, 2006.

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 $100,000. Cash
balances exceeded FDIC insured limits at June 30, 2006 and at times throughout
the year ended June 30, 2007.

RESEARCH AND DEVELOPMENT 
Research and Development cost are charged to operations when
incurred. The amounts charged to expense for the years ended 2005, 2006, 2007
and inception to date
were $5,127,438, $8,034,964,  $6,393,215 and $57,972,417 respectively.

73

---

mPHASE TECHNOLOGIES, INC. 
(A DEVELOPMENT STAGE COMPANY) 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
JUNE 30, 2007
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)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
$54,321, $55,987, and $36,439 for the years ended June 30, 2005, 2006, and 2007,
respectively. The impairment test for the Company's patents and license rights
resulted in the Company concluding that no impairment in addition to
amortization previously recorded was necessary during the year ended June 30,
2007.
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
consists 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.
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
and June 30, 2007. 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.
INCOME TAXES 
The Company accounts for income taxes using the liability
method. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using tax rates and laws expected to be in effect
when the differences are expected to reverse. Valuation allowances are provided
against deferred tax assets for which it has been determined the assets will not
be realized.

REPARATION EXPENSE As an incentive for addition 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 are charged Reparation Expense, which is included in Other Expenses.
Reparations expenses have amounted to $0, $5,530,504, $1,874,020 and $7,404,524 for the years
ended 2005, 2006, 2007 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.

---



mPHASE TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007



SUPPLEMENTAL CASH FLOW
INFORMATION





|                                             |         |          |         
|-------------------------------------------- | ------- | -------- | --------
|                                             |         |          |         
|                                             | 2005    | 2006     | 2007    
|                                             |         |          |         
|Interest Paid                                | $48,090 | $34,569  | $18,310 
|Non Cash Investing and Financing Activities: |         |          |         
|Conversion of vendor debt to equity          |         | $590,000 | $991,709

4. PROPERTY AND EQUIPMENT



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



|                                  | 2006      | 2007     
|--------------------------------- | --------- | ---------
|Research
    Equipment            | $481,337  | $470,939 
|Office and
    Marketing          | 73,255    | 195,900  
|Gross Cost                        | 554,592   | 666,839  
|Less
    Accumulated Depreciation | (204,472) | (384,038)
|Net Property
    and Equipment    | $350,120  | $282,801 



Depreciation expense for the
years ended June 30, 2005, 2006 and 2007 was $227,269, $150,948 and $181,798
respectively, of which $218,911, $128,519 and $124,382 respectively, relates to
research laboratory and testing equipment included in research and development
expense.



5. ACCRUED EXPENSES



Accrued expenses consist of the
following:

|                    | 2006     | 2007    
|------------------- | -------- | --------
|Lucent
    Projects | $100,000 | $400,000
|Finders Fees        | $0       | $250,000
|Other
    Projects  | $457,342 | $283,145
|Total               | $557,342 | $933,145



75

---





mPHASE TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007

6. LONG TERM DEBT

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |          |         
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------- | --------
|Long-term debt is comprised of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | June 30, | June 30,
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 2006     | 2007    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |          |         
|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. The Company is currently in default of this agreement.
    (See also Note 8,
    Stockholders Equity) | $125,000 | $75,000 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |          |         
|Note payable to vendor bearing 8% interest due in weekly payments of $5,000
    including accrued interest. These payments commenced in January 2002 and
    originally were scheduled to continue until June 2004.  This note was in
    arrears on June 30, 2006 and was included in current portion of long term
    debt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | $193,058 | $0      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |          |         
|Total                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | $318,058 | $75,000 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |          |         
|Less: Current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | $318,058 | $75,000 
|Long-Term Debt, non-current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | $0       | $0      



7. 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 30, 2005
and June 2006, the Company received authorization to increase the number of
authorized shares to 500 million and 900 million respectively.



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 finders fees to be paid of $209,000.



76

---





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 finders 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.



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
$2,041,365 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 $1,874,020.



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



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.



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)



77

---





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, 2006, 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.



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 and equal amount of shares at $.18 per share. As
addition 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.



Conversions, Settlements and
Gain on Extinguishments

As a result of the preceding,
during the three years ended June 30, 2007, extinguishments, cancellations and
conversions of debt for issuance of the Company's common stock to related
parties is summarized in Note 11 and amounts relating to strategic investors is
summarized as follows:



|                                                  | For the Years Ended June 30,
|------------------------------------------------- | ----------------------------
|Equity Conversions of Debt with Strategic Vendors | 2005                        
|                                                  |                             
|                                                  |                             
|Number of Shares                                  | 635,296                     
|                                                  |                             
|Number of Warrants                                | 1,356,696                   
|                                                  |                             
|Amount Converted to Equity                        | $426,894                    
|                                                  |                             
|Gain on Extinguishments of Debt                   | $418,696                    



The Company has no commitments
from affiliates or related parties to provide additional financings. The Company
has, from time to time, been able to obtain financings from affiliates when
conditions in the capital markets make third party financing difficult to obtain
or when external financing is available only upon very unattractive terms to the
Company, and when such capital has been available from the affiliates.

78

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mPHASE TECHNOLOGIES, INC.

(A Development Stage Company)

June 30, 2007



7.STOCKHOLDERS' EQUITY - (Continued)



STOCK INCENTIVE PLANS



A summary of the stock option
activity for the years ended June 30, 2006, 2007 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, 2005 | 24,259,833 | $0.78    
|Granted                      |            |           | 23,595,000        | $0.19                              
|Exercised                    |            |           |                   |                                    
|Cancelled/Expired            |            | 4,381,833 | $0.87            
|Outstanding at June 30, 2006 | 43,473,000 | $0.26    
|Granted                      |            |           | 8,855,000         | $0.21                              
|Exercised                    |            |           |                   |                                    
|Cancelled/Expired            |            | 6,435,000 | $0.81            
|Outstanding at June 30, 2007 | 45,893,000 | $0.25    



The fair value of options
granted in fiscal year ended June 30, 2006 and 2007 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 108.5%  and 79% and a risk-free interest
rate 4.4% and 4.8% in the years 2006 and 2007 respectively.



The per share weighted average
fair value of stock options granted during 2005,  2006 and 2007 was $.35, $.16
and $.14 respectively. The per share weighted average remaining life of the
options outstanding at June 30, 2005, 2006, and 2007 is 3.02, 3.58 and 3.4
years, respectively.



During fiscal 2006 the Company
adopted the fair value recognition provisions of FASB Statement No. 123,Accounting for Stock-Based Compensation, for stock-based employee
compensation, effective as of the beginning of the fiscal year Prior to Fiscal
year end 2006 mPhase has elected to continue to account for stock-based
compensation under APB Opinion No. 25, under which no compensation expense has
been recognized for stock options and certain compensating warrants granted to
employees at fair market value. Had compensation expense for stock options
granted under the Plan and certain warrants granted to employees in 2005, been
determined based on fair value at the grant dates, mPhase's net loss for, 2005
would have been increased to the pro forma amounts shown below.



Twelve months ended June 30,

|                                                              | 2005         
|------------------------------------------------------------- | -------------
|Net loss, as reported                                         | ($11,234,324)
|Add: Stock-based employee compensation expense net            |              
|included in report of net income, net of related tax effects  | 131,750      
|Deduct: Total stock-based employee compensation expense       |              
|determined under fair                                         | (444,396)    
|value based method for all awards, net of related tax effects |              
|Pro forma net loss                                            | ($11,546,970)
|Loss per share:                                               |              
|Basic and diluted-as reported                                 | ($.10)       
|Basic and diluted-pro forma                                   | ($.11)       



79

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mPHASE TECHNOLOGIES, INC.

(A Development Stage Company)

Notes to Consolidated Financial Statements

June 30, 2007



7. STOCKHOLDERS' EQUITY -
(Continued)



For the year ended June 30,
2006, the Company recorded non-cash charges totaling $3,837,423 in connection
with the grant of 23,595,000 options to employees and consultants and the
Company recorded non-cash charges of $2,439,000 relating to the issuance of
stock for services of employees and consultants.

For the year ended June 30,
2007, the Company recorded non-cash charges totaling $1,321,853 in connection
with the grant of 8,855,000 options to employees and consultants and the Company
recorded non-cash charges of $2,041,365 relating to the issuance of stock for
services of employees and consultants.

Charges related to options  are
the result of the differences between the quoted market value of the Company's
common stock on the date of grant and the exercise price for options issued to
employees and Black-Scholes stock option pricing calculations for options issued
to consultants



The following summarizes
information about stock options outstanding at June 30, 2007:



|RANGE OF    | NUMBER      | WEIGHTED    | WEIGHTED | NUMBER      | WEIGHTED
|----------- | ----------- | ----------- | -------- | ----------- | --------
|EXERCISE    | OUTSTANDING | AVERAGE     | AVERAGE  | EXERCISABLE | AVERAGE 
|PRICE       |             | REMAINING   | EXERCISE |             | EXERCISE
|            |             | CONTRACTUAL | PRICE    |             | PRICE   
|            |             | LIFE        |          |             |         
|$.13 - $.45 | 45,893,000  | 3.4 years   | $.25     | 45,893,000  | $.25    
|            |             |             |          |             |         
|            |             |             |          |             |         



WARRANTS



During The fiscal year ended
June 30, 2006 the company issued 105,468,248 of warrants at exercises prices
ranging from $.17 to $.25.and 21,694,335 warrants expired or were cancelled.
Such warrants were issued as part of investment units offered in private
placements and as reparation to reduce the exercise price. Included in this
amount is 950,000 and 4,322,222 issued to Janifast and Microphase respectively
at $.18. In addition Mr. Smiley received 1,647,877 and 697,692 warrants to
purchase common stock at $.21 and $.18 respectively.



During The fiscal year ended
June 30, 2007 the company issued 19,862,781 of warrants at exercises prices
ranging from $.17 to $.25.and 10,165,399 warrants expired or were cancelled. In
addition the Company received a total of $2,069,667 through the exercise of
14,740,669 warrants.



As of June 30, 2006 and 2007
warrants covering 157,108,199 and 150,818,245 shares remain outstanding with a
weighted average exercise price of $.23 and $.22 respectively.



80

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mPHASE TECHNOLOGIES, INC.

(A Development Stage Company)

Notes to Consolidated Financial Statements

June 30, 2007



8. RELATED PARTY TRANSACTIONS



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



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 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 are payable on demand.



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.

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.



MICROPHASE



The company leases office space
from Microphase at both its Norwalk and Little Falls location. Current rental
expense is $5,000 and $13,800 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.



81

---



mPHASE TECHNOLOGIES, INC

(A Development Stage Company)

Notes to Consolidated Financial Statements

June 30, 2007



8. RELATED PARTY TRANSACTIONS
-(continued)



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.



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.



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.



82

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



Generally, as summarized below,
the Company has offered conversion of debts to related parties on substantially
the same terms as concurrent private placements (typically in $.30 units, such
units including both shares of common stock and warrants to purchase a like
amount of common stock) in addition to conversion of debts pursuant to terms of
concurrent private placements and financial instruments which, pursuant to EITF
00-19 have been settled with the Company's common stock as conditioned by
benchmarks, generally coinciding with the Company's negotiations to settle any
and all obligations with Georgia Tech Research and its affiliate (see also Note
11) as follows:



|                                           |            |          |          |          |          |         |          |          |            | TOTAL     
|------------------------------------------ | ---------- | -------- | -------- | -------- | -------- | ------- | -------- | -------- | ---------- | ----------
|                                           | Durando    | Dotoli   | Ergul    | Biderman | Smiley   | Guerino | Lawrence | Janifast | Microphase | 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 summarizes
compensation to related parties for the fiscal year ended June 30, 2006:

|                                      |            |            |          |          |          |         |            |            | TOTAL     
|------------------------------------- | ---------- | ---------- | -------- | -------- | -------- | ------- | ---------- | ---------- | ----------
|                                      | Durando    | Dotoli     | Ergul    | Biderman | Smiley   | Guerino | Janifast   | Microphase | 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
|                                      |            |            |          |          |          |         |            |            |           



83

---



Equity Conversions of Debt
and Other Financial Instruments with Related Parties

|                                |  |           |  |           |  |           
|------------------------------- |  | --------- |  | --------- |  | ----------
|Janifast:                       |  | 2005      |  | 2006      |  | 2007      
|Number of shares                |  | 1,000,000 |  | 950,000   |  | 830,769   
|Number of warrants              |  | 1,000,000 |  | 950,000   |  | 0         
|Amount converted to equity      |  | $200,000  |  | $171,000  |  | $108,000  
|Microphase Corporation:         |  |           |  |           |  |           
|Number of shares                |  | 1,250,000 |  | 2,050,000 |  | 0         
|Number of warrants              |  | 1,250,000 |  | 2,050,000 |  | 0         
|Amount converted to equity      |  | $250,000  |  | $369,000  |  | $0        
|Strategic Vendor Conversions:   |  |           |  |           |  |           
|Number of shares                |  | 0         |  | 331,864   |  | 5,242,959 
|Number of warrants              |  | 0         |  | 277,778   |  | 0         
|Amount converted to equity      |  | $0        |  | $50,000   |  | $1,996,561
|Officers                        |  |           |  |           |  |           
|Number of shares                |  | 1,009,875 |  | 0         |  | 0         
|Number of warrants (A)          |  | 1,009,875 |  | 0         |  | 0         
|Amount converted to equity      |  | $201,975  |  | $0        |  | $0        
|Total Related Party Conversions |  |           |  |           |  |           
|Number of shares                |  | 3,259,875 |  | 3,331,864 |  | 6,073,728 
|Number of warrants              |  | 3,259,875 |  | 3,277,778 |  | 0         
|Amount converted to equity      |  | $651,975  |  | $590,000  |  | $2,104,561



9. INCOME TAXES



No provision has been made for
corporate income taxes due to cumulative losses incurred. At June 30, 2007,
mPhase has operating loss carryforwards of approximately $89.3 million and $88.7
million to offset future federal and state income taxes respectively, which
expire at various times from 2016 through 2024. Certain changes in stock
ownership can result in a limitation in the amount of net operating loss and tax
credit carryovers that can be utilized each year.



84

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mPHASE TECHNOLOGIES, INC.

(A Development Stage Company)

###### Notes to Consolidated Financial Statements

June 30, 2007



10. COMMITMENTS AND
CONTINGENCIES



COMMITMENTS

The Company has a lease obligation for the rental of office space in Little
Falls New Jersey until March 31, 2012. Annual obligations under the lease
require rent of $251,562 in each of the next fiscal years ending from June 30,
2008 to June 30, 2011 and $188,672 up March 31, 2012. In total such obligations
amount to $1,133,669.

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, 2005, 2006 and 2007 totaled $0, $0 and $0 respectively, and
$13,539,952 from the period from inception through June 30, 2007.



mPhase was advised in April 2002 that following an investigation by the staff of
the Securities and Exchange Commission, the staff intended to recommend that the
Commission file a civil injunctive action against Packetport.com, Inc.
(Packetport) and its Officer's and Directors. Such recommendation related to
alleged civil violations by Packetport and such Officers and Directors of
various sections of the Federal Securities Laws. The staff has alleged civil
violations of Sections 5 and 17(a) of the Securities Act of 1933 and Sections
10(b) and 13(d) of the Securities Exchanges Act of 1934. As noted in other
public filings of mPhase, the Chief Executive Officer and Chief Operating
Officer of mPhase also serve as Directors and Officers of Packetport. At that
time these persons advised mPhase that they deny any violation of law on their
part and intend to vigorously contest such recommendation or action, if any.



On November 15, 2005, the Commission filed a civil enforcement action against 6
individuals and 4 companies as a result of its investigation in federal district
court in the State of Connecticut alleging various violations of the Securities
Act of 1933 including Sections 5, Section 17(a) and the Securities Exchange Act
of 1934 including Sections 10b, Rule 10b-5, Sections, 12,Section 13, Section 16
in connection with the purchase and sale of stock of Packetport in the period on
or about December 14, 1999 into February of 2000. The defendants include the
Chief Executive Officer and Chief Operating Officer of mPase as well as
Microphase Corporation, a privately held Connecticut corporation that shares
common management with mPhase. mPhase Technologies, Inc. is not named as a party
in the enforcement action. The Chief Executive Officer and Chief Operating
Officer of mPhase, and Microphase Corporation, each deny any violation of the
law by each or any of them and intend to vigorously contest all charges set
forth in such enforcement action by the Commission.



In a ruling (3:05 CV 1747 (PCD)), dated March 21, 2007, the Honorable Peter C.
Dorsey, Senior U.S. District Court Judge for the United States District Court 
For The District Of Connecticut, granted a motion by defendants, Ronald A.
Durando and Packetport Inc. joined by defendants Gustave T. Dotoli , Microphase
Corporation and Packetport.com, Inc. to dismiss under Federal Rule 41(b) of the
Federal Rules of Civil Procedure the civil lawsuit filed on November 15, 2005 by
the Securities and Exchange Commission against Packetport.com, Inc. et. al for
lack of prosecution.



On April 4, 2007, the Securities and Exchange Commission filed a motion with the
United States District Court requesting a reconsideration of the motion to
dismiss granted by the Court  in favor of the defendants.



In a ruling dated May 23, 2007, the Judge Peter C. Dorsey granted the motion for
reconsideration filed by the Securities and Exchange Commission and reversed his
earlier ruling of March 21, 2007 and reinstated the case on the judicial
calendar to proceed to trial. On August 17, 2007, such action was dismissed with
prejudice against Durando with the approval by the SEC.



11. SUBSEQUENT EVENTS

On July 26, 2007, Mr. Durando provided a bridge loan of
$55,000 to the Company. On August 13, 2007, Messrs. Durando, Dotoli and Smiley
each provided bridge loans of $16,000 (or a total of $48,000) to the Company. On
August 27, 2007, Messrs. Durando, Dotoli and Smile provided additional bridge
loans to the Company of $19,000 (or total of $57,000) to the Company. Finally,
at various points throughout the month of September, Messrs. Durando and Dotoli
provided additional bridge loans of $92,500 and $2,100 respectively. Each of the
bridge loans is evidenced by a Demand Promissory Note from the Company with an
interest rate of 12%

On August 21, 2007, the Company announced that it had acquired from Mr.
Durando, in exchange for a 12% demand promissory note in the principal amount of
$110,000, a 10% interest in Sovereign Tracking Systems, LLC, a New Jersey
limited liability company that holds the license for a patent for a Real-Time
Location System to track high value assets. Mr. Durando had previously paid the
amount of $110,000 to Mr. William A. Robinson, the owner of Sovereign Tracking
Systems, LLC; Mr. Robinson will assign all rights, title and interest to the
patent to Sovereign Tracking Systems, LLC.

Finally, effective July 1,2007, the Company formed two wholly owned
subsidiaries to facilitate future financing and operations of two business
units. Such subsidiaries are Granita Inc. which will operate the IPTV business
and Always Ready Inc which will operate all Nanotechnology related business.
Effective on that date all related assets and liabilities were transferred to
those subsidiaries.

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ITEM 13. Controls and
Procedures



Under the supervision and with
the participation of management including the Chief Executive Officer and Chief
Financial Officer, we have evaluated the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14c and of the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that these disclosure controls and procedures are effective. There
were no changes in our internal control over financial reporting during the
fiscal year ended June 30, 2007 that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting.





ITEM 14B. VALUATION AND QUALIFYING ACCOUNTS

SCHEDULE II
mPHASE TECHNOLOGIES, INC.

VALUATION AND QUALIFYING ACCOUNTS

Years Ended June 30, 2007, 2006 and 2005

(In Thousands)

|                                                                    |            | Additions  |            |           
|------------------------------------------------------------------- | ---------- | ---------- | ---------- | ----------
|                                                                    | Balance at | Charged to | Charged to | Deductions
|                                                                    | beginning  | costs and  | other      |           
|                                                                    | of year    | expenses   | accounts   |           
|Year ended June 30, 2007                                            | 20         |            |            | (20)      
|Allowance for doubtful accounts (deducted from accounts receivable) |            |            |            |           
|                                                                    |            |            |            |           
|Allowance for obsolescence (deducted from inventory, at cost)       | 0          | 47         |            |           
|                                                                    |            |            |            |           
|Description                                                         |            |            |            |           
|Year ended June 30, 2006                                            |            |            |            |           
|                                                                    |            |            |            |           
|Allowance for doubtful accounts (deducted from accounts receivable) | $0         | 20         |            |           
|                                                                    |            |            |            |           
|Allowance for obsolescence (deducted from inventory, at cost)       | $205       |            |            | (205)     
|                                                                    |            |            |            |           
|Year ended June 30, 2005                                            |            |            |            |           
|Allowance for doubtful accounts (deducted from accounts receivable) | $0         | 0          | 0          | 0         
|                                                                    |            |            |            |           
|Allowance for obsolescence (deducted from inventory, at cost)       | $388       | 0          | 0          | (183)     
|                                                                    |            |            |            |           



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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: September 28, 2007 | 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.

|                                                     |                   
|---------------------------------------------------- | ------------------
|Necdet F. Ergul, Chairman of the Board               | September 28, 2007
|Ronald A. Durando, Chief Executive Officer, Director | September 28, 2007
|Gustave T. Dotoli, Chief Operating Officer, Director | September 28, 2007
|Martin S. Smiley, Chief Financial Officer            | September 28, 2007
|Anthony Guerino, Director                            | September 28, 2007
|Abraham Biderman, Director                           | September 28, 2007
|Victor Lawrence, Director                            | September 28, 2007



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