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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                            ________________________

                                    FORM 10-K

 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
     EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE YEAR ENDED JUNE 30, 2001

                          COMMISSION FILE NO.000-24969

                            ________________________

                            mPHASE TECHNOLOGIES, INC.

                         (Name of issuer in its charter)


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

587 CONNECTICUT AVE., NORWALK, CT                              06854-1711
 (Address of principal executive                               (Zip Code)
           offices)

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

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                           COMMON STOCK, NO PAR VALUE

                                (Title of Class)

                            ________________________

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934,
during the preceding 12 months (or for shorter period that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]

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 October 5, 2001, there were 43,898,367 shares of common stock, no par
value, stated value $.01, outstanding and the aggregate market price of shares
held by non-affiliates was approximately $9,408,433 (Based upon a closing common
stock price of $.44 on October 5, 2001) (solely for the purpose of calculating
the preceding amount, all directors and officers of the registrant are deemed to
be affiliates.)

<PAGE>

                            mPHASE TECHNOLOGIES, INC.

                           ANNUAL REPORT ON FORM 10-K
                        FOR THE YEAR ENDED JUNE 30, 2001

                                TABLE OF CONTENTS

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                                     PART I
ITEM 1.  Business......................................................      3
ITEM 2.  Properties ...................................................     23
ITEM 3.  Legal Proceedings.............................................     23
ITEM 4.  Submission of Matters to a Vote of Security Holders...........     23

                                     PART II
ITEM 5.  Market for Registrant's Common Equity and Related
         Stockholder Matters...........................................     25
ITEM 6.  Selected Consolidated Financial Data..........................     26
ITEM 7.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations...........................     28
ITEM 8.  Financial Statements and Supplementary Data...................     33
ITEM 9.  Changes in and Disagreements with Accountants on
         Accounting and Financial Disclosure...........................     33

                                    PART III
ITEM 10. Directors, Executive Officers and Key Employees of the
         Registrant....................................................     34
ITEM 11. Executive Compensation........................................     37
ITEM 12. Security Ownership of Certain Beneficial Owners and
         Management....................................................     41
ITEM 13. Certain Relationships and Related Transactions................     42

                                     PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on
         Form 8-K .....................................................     44
         Report of Independent Public Accountants......................     F1
         Report of Certified Public Accountants........................     F2
         Financial Statements..........................................    F3-F8
         Notes to Financial Statements.................................   F9-F23
</TABLE>

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                                     PART I

FORWARD-LOOKING STATEMENTS

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

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

ITEM 1.  BUSINESS

                         GENERAL DESCRIPTION OF BUSINESS

mPhase Technologies, Inc. ("mPhase" or the "Company") is a development stage
technology company headquartered in Norwalk, Connecticut. The Company is a
developer of broadband communications equipment and aggregator of digital video
content. The Company's suite of products enable telephone companies and other
telecommunications service providers to provide up to 380 channels of digital
television, high-speed Internet and voice simultaneously over the existing
copper wire connection from the telephone service provider to a subscriber's
home. The Traverser(TM) Digital Video and Data Delivery System(TM) uses Rate
Adaptive Digital Subscriber Line technology, commonly referred to as RADSL, to
enable telephone companies and other emerging communications service providers
to cost-effectively deliver a full suite of voice, data and video services over
the existing copper wire telephone infrastructure.

mPhase believes that topologies employed by its technology provide end users
with quality and security superior to that of fiber optic or co-axial cable
connections because the Traverser(TM) provides a one-to-one connection from the
telephone company's central office to the subscriber's home. The bandwidth
connecting the telephone service provider to the subscriber is not shared by
multiple users. Conversely, multiple subscribers must share the bandwidth on a
co-axial or fiber optic cable system and cable services are delivered to
multiple users through a single transmission pipe. These shared services tend to
degrade and slow down with additional users. Moreover, data transmitted over
shared bandwidth as it is with cable service is considered less secure.

The Company believes that the Traverser(TM) is the only system that is capable
of providing voice, data and video services to subscribers up to 12,000 feet
from the telephone company's central office through an end-to-end system over
the installed telephone infrastructure, without requiring telephone companies to
upgrade their existing copper wire networks to fiber optic cable in their

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subscriber's service areas. Our products do not require fiber or co-axial cable
upgrades so the Company believes that the Traverser(TM) is uniquely positioned
to enable small and mid-sized domestic and international communications service
providers to compete in the market for integrated voice, data and video services
in the most cost effective manner.

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

On June 25, 1998, mPhase acquired Microphase Telecommunications, Inc., a
Delaware 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(TM)
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
version 1.0 of the Traverser(TM) for BMW's telephone transmission network. BMW
has agreed that, upon its notice and consent, mPhase will be able to demonstrate
to potential customers the functioning system at BMW's facilities. The Company
also has installed systems for Pioneer Communications, Inc. and CariPAC.com. The
Pioneer system was installed at its facility in Ulysses, Kansas in May 1999 and
the Company installed one system in China and one in Hong Kong for CariPAC.com
in late 1999.

As of June 2000, mPhase completed its initial beta testing period for the
Traverser(TM) at Hart Telephone. There are currently approximately eighty
subscribers at Hart Telephone and the Company expects Hart Telephone to rollout
over 100 subscribers no later than October 31, 2001. Hart Telephone is providing
these subscribers with telephone, Internet and video services using the
Traverser(TM). mPhase has inventory in place to support low-rate production of
version 1.1 of the Traverser(TM) for up to 1,000 units per month. mPhase is in
development of the version 2.0, which the Company expects will provide an

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enhanced program guide, near video on-demand for pay-per-view movies, two video
channels and an integrated browser.

mPhase's revenue, historically, has been derived from sales of its DSL Component
Line, the majority of which has come from its sales of POTS Splitter Shelves. In
its fiscal year ended June 30, 2000, and June 30, 2001, the Company generated
$279,476 and $10,524,134 in revenue, respectively, from the commercial sale of
its DSL Component Line. Its other DSL component products, including Microfilters
and Central Office Low Pass Filter Shelves, are marketed to other DSL equipment
vendors. mPhase does not believe that the sales of its Traverser(TM) will be
materially impaired and could be enhanced by the sale of these component
products to these potential competitors.

Products & Services

         Traverser

mPhase's principal and flagship product, the Traverser(TM) Digital Video and
Data Delivery System(TM) DVDDS(TM), is a patented end-to-end system enabling the
delivery of digital broadcast television, analog voice service and high-speed
data, as well as other ancillary services, over a single copper telephone wire.

The Traverser(TM) consists of network elements located at a programming and
control center owned by the telephone company, the central office and at the
subscriber's residence or business. The key elements of the Traverser(TM), which
are fully described below, are the System Management Work Station, the POTS
Splitter Shelves, the Access Shelves, and the Intelligent Network
Interfaces(TM).

The mPhase Traverser(TM) System consists of three key elements: a digital
head-end called the Programming and Control Center (PCC), Central Office (CO)
equipment called the Universal Access Shelf, and Customer Premises Equipment
(CPE) called the Intelligent Network Interface (INI(TM)). In order for a
subscriber to receive services from a telco via the Traverser(TM) System, all
three components must be installed.

Telcos using the mPhase Traverser(TM) System need to build a digital video
head-end to receive television content. This includes installing a satellite
receiving dish, off-the-shelf video equipment and mPhase's software to manage
the video content at the PCC. Local off-air channels are received, digitized and
combined with the signals received via satellite at the PCC. The PCC can be
co-located with a single central office or remotely located and connected to
each CO via dark fiber, SONET ring or ATM transfers.

The Traverser(TM) CO equipment, known as the mPhase Universal Access Shelf,
integrates video signals from the PCC with the Internet and voice signals. The
output of the Universal Access Shelf consists of DSL "lines" capable of carrying
a single high-quality video stream, high-speed data at speeds up to 1 Mbps
downstream and telephone voice service to subscribers over existing telephone
lines.

Upon reaching the home or business, the DSL line is fed into the INI(TM), which
functions as a digital set-top box or interface device. The INI(TM) separates
the three signals and routes them to the television, PC and telephone.

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The Company anticipates selling the product in a minimum bundle of 1,000
subscriber units per initial telco order. The initial sale price of $1,500 per
subscriber (with 1,000 unit bundles equating to $1.5 million per 1,000
subscribers) includes: (i) all central office equipment, including the amortized
cost for a one-time central office control center unit (video control shelf and
management workstation) and the central office subscriber video shelf, and (ii)
the consumer premise interface equipment (set-top box).

Since its inception in June 1997, the Company's operating activities have
centered on developing, building and testing the Traverser(TM); establishing
relationships with third party developers and manufacturers; and commencing
sales and marketing efforts. mPhase has not yet derived any material revenue
from the sale of the Traverser(TM).

The Company believes that technology used by the Traverser(TM) is unique because
it enables simultaneous delivery of reliable digital-quality television
programming, high-speed Internet access and telephone communications without
major upgrades to the local loop network.

The Traverser(TM) enables communications service providers to send reliable,
MPEG-2 digital-quality television over the installed copper wire, in addition to
high-speed data transmission and voice services, allowing them to compete
effectively with cable operators and satellite services for subscribers in the
last mile. MPEG-2 is the standard used by computer and telecommunications
equipment manufacturers to transmit video and photographic images over copper
wire networks. The Traverser(TM) technology provides 4-5 Mbps of bandwidth for
digital video delivery with an additional 1 Mbps upstream and 1 Mbps downstream
for Internet service, which is up to 40 times faster than regular 56k dial-up
Internet service. Additionally, the bandwidth provided over the copper line by
the Traverser(TM) is dynamic and may be entirely used for either video or
Internet service, independent of the other, based on the subscriber's
preference.

The Traverser(TM) utilizes technology that mPhase licenses exclusively from
Georgia Tech and RADSL chip technology, which the Company purchases from
GlobeSpan Semiconductor, Inc. Georgia Tech currently provides a significant
portion of the engineering research and design to develop the Traverser(TM). The
Traverser(TM) also utilizes an advanced filter technology developed by
Microphase Corporation, a privately-held company with which mPhase shares common
management. The hybrid filters in mPhase circuit boards enable more efficient
impedance matching of the copper loop, which permits longer transmission
distances, higher data rates and decreased signal bit error rates.

The Traverser(TM) is utilized in conjunction with popular telecommunications
transport protocols such as Digital Signal Level 3.0, Synchronous Optical
Network, Synchronous Digital Hierarchy, Asynchronous Transfer Mode or frame
relay and is highly adaptable. mPhase is also in the process of evaluating the
extent to which its network products can be used in conjunction with other
transport protocols. The Traverser(TM) is transparent to the switch and digital
loop carrier, supports emergency service operation and relieves dial-up Internet
switch congestion.

         POTS Splitter Shelves

The POTS Splitter Shelf is an essential component of any full-rate DSL system
employing circuit switched telephony. It combines data and voice signals,
enabling POTS to seamlessly pass through to the circuit switched network. The
mPhase POTS Splitter Shelf can be easily installed into telco's central offices
or remote locations, such as DLC (Digital Loop Carrier) cabinets or

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MDU's (Multiple Dwelling Units) and is compatible with all DSL equipment
regardless of manufacturer. The innovative design of the mPhase POTS Splitter
Shelf ensures efficient use of central office space by enabling up to 144 lines
per shelf on the 23-inch chassis, or 120 lines per shelf on the 19-inch chassis,
one of the highest port densities and smallest footprints of all passive central
office POTS Splitter Shelves.

         Microfilters

mPhase has developed a complete line of Microfilters, including a 2 and 4-pole
filter for use in single and multi-phone households, as well as a NID Splitter.

Target Markets

mPhase primarily markets the Traverser(TM) in the United States to independent
telephone companies, having up to 1,000,000 lines that are incumbent local
exchange carriers. The Company believes these companies will seek to minimize
capital expenditures in offering enhanced broadband services to their customers.
mPhase believes that it will experience a longer sales cycle in marketing to
larger telephone companies such as the Regional Bell Operating Companies than
with the smaller independent companies.

mPhase also intends to market the Traverser(TM) to large international telephone
companies, where it believes conditions for telecom, broadband and video
application growth are the most promising. Most of the international market has
low teledensity rates and few over-air options. Moreover, cable television
service is rarely available in most international markets, particularly in areas
outside of the urban centers, making them prime candidates for the
Traverser(TM). For example, the majority of Central and South American homes
receive only two or three broadcast channels. According to industry research,
the current cable subscriber base in South America is 8.3 million. This
represents less than ten (10%) percent of the TV households, with over half of
the subscribers concentrated in Argentina.

mPhase has recently decreased the size of its direct sales force due to the
slowdown in capital spending in the telecommunications market. The Company,
however, continues to market its products directly to communications service
providers in the United States and to negotiate with international resellers.
mPhase has signed a non-exclusive distribution agreement with CariPAC
International, a distributor of telephone equipment in Hong Kong and southern
China, to distribute the Traverser(TM) and has installed a system in both China
and Hong Kong for beta testing. mPhase has executed an evaluation agreement with
TelMex, the leading communications services provider in Mexico, under which
TelMex has conducted performance trials on the Traverser(TM). The Company
anticipates a second round of testing to commence under its agreement with
TelMex. mPhase has recently installed a trial system in Ankara, Turkey at Turk
Telecom, where the Traverser(TM) is deployed in forty-eight homes with fifteen
digital channels. In addition, mPhase has also installed a trial system with
eight users at RT Communications an Incumbent Exchange Carrier in Wyoming. The
Company is currently in discussions with other third party distributors and
intends to pursue the resale channels for various parts of the world.

For the next twelve months, mPhase has three goals in relation to its
advertising and promotional efforts:

         - to increase brand and product awareness;
         - to establish a clear and meaningful market positioning for the
           product; and

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          - to support sales of the system

mPhase seeks to develop brand and product recognition among key decision-makers
in domestic telecommunications companies through direct marketing and trade show
exhibitions. All promotional efforts, including communication materials and
trade show exhibitions, will be designed to effectively and clearly communicate
our products' key benefits and features relative to the competition.

mPhase plans to use Hart Telephone as a showcase for potential customers. The
Company believes this will effectively convey the concept of a complete turn-key
solution, enabling potential customers to see and experience the mPhase
solution.

Distribution Methods of the Products and Services

mPhaseTelevision.Net, Inc. provides telephone company customers with
television programming delivered via satellites, in the form of MPEG2 signals,
to be distributed to their subscribers over a DSL network using the
Traverser(TM). mPhaseTelevision.Net, Inc. is operated from AlphaStar's
facilities in Oxford, Connecticut under a lease from AlphaStar. Hart Telephone
is the first customer of mPhaseTelevision.Net; testing began at Hart in March
2000.

mPhase contributed the initial funding for a 50% ownership interest in
mPhaseTelevision.Net, Inc. by lending it $1,000,000 at 8% per annum interest.
The loan is repayable to the Company in common stock at the time that
mPhaseTelevision.Net qualifies for listing in the NASDAQ Small Cap Market.
mPhase also contributed $20,000 in cash to the joint venture and granted options
to AlphaStar to purchase 200,000 shares of its stock for $4.00 per share. The
agreement requires AlphaStar to provide mPhaseTelevision.Net the right to
transmit television broadcasts over AlphaStar's digital satellite network. On
May 1, 2000, mPhase acquired an additional 6.5% interest in mPhaseTelevision.Net
for an additional $1,500,000 in cash. The Company reports mPhaseTelevision.Net
as a consolidated subsidiary.

mPhaseTelevision.Net, Inc. has established affiliation agreements whereby
programmers have granted mPhase the authority to downlink, digitize and
retransmit television content to each of its telephone company customers.
mPhaseTelevision.Net, Inc. further has the contractual authority to resell
television content to its telco at a cost determined by mPhaseTelevision.Net,
Inc. To date, mPhaseTelevision.Net has secured affiliation agreements with over
80 channels and is awaiting the receipt of up to an additional 50 channels worth
of television content. Prior to granting such rights, the programmers thoroughly
evaluated mPhase and mPhaseTelevision.Net's business model and technical
capabilities. mPhaseTelevision.Net is a pioneer in the obtaining of rights to
content as described above and is the first known company to secure affiliation
agreements specifically for the delivery and resale of content over copper-based
networks.

Status New Products

          European Harmonized POTS Splitter Shelf

mPhase has developed a cost effective Central Office POTS (Plain Old Telephone
Service) Splitter that addresses the needs of the European DSL (Digital
Subscriber Line) market. This `harmonized' product enables the Company to meet
increases in demand for DSL powered, high-speed networks throughout Europe where
engineering specifications may differ from those found in those in the

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United States. The mPhase Harmonized Shelf is designed to be in compliance with
standards set by the International Telecommunication Union (ITU) and the
European Telecommunications Standards Institute (ETSI).

         ADSL over ISDN Splitter Card

The ISDN Splitter is a critical component of any ADSL over ISDN system. It
combines ADSL and ISDN signals, enabling ISDN and high-speed data to coexist on
the same network. The mPhase ISDN Splitter Shelf supports ADSL over ISDN
splitting with custom designs for 2B1Q and 4B3T line encoding techniques. It can
be easily installed into telcos' central offices or remote locations, such as
DLC (Digital Loop Carrier) cabinets or MDU's (Multiple Dwelling Units) and is
compatible with European ADSL equipment regardless of manufacturer. The
innovative design of the mPhase ISDN Splitter Shelf ensures efficient use of
central office space with one of the highest port densities and smallest
footprints of all central office ISDN Splitters.

         iPOTS(TM)

The mPhase iPOTS(TM), Intelligent POTS Splitter, offers a needed solution for
the DSL industry; it allows telcos to correctly perform necessary line testing,
qualification, troubleshooting and loop maintenance. Previously, loops could not
be remotely tested through a conventional POTS Splitter without the use of
expensive cross connects or relay banks because of the mandatory DC blocking
capacitors in the CO splitter (required by the ITU, ANSI and ETSI). The unique
(patent pending) iPOTS(TM) circuit allows most test heads to perform both narrow
and wideband testing of the local loop through the central office POTS Splitter.

Competitive Business Conditions

The telecommunications equipment market is characterized by swift technological
change. Currently, communications service providers have the option to offer
several broadband solutions in the last mile, including the existing ISDN or T-1
technologies offered by telephone companies, fiber optic cable or hybrid coaxial
cable upgrades 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 domestic deployment
methodologies, mPhase believes that DSL can compete favorably with these other
technologies. In particular, telephone companies and other copper-wire based
service providers, which are interested in maximizing the installed copper wire
infrastructure from the standpoint of cost effectiveness and ease of
development, will favor DSL or other copper-based broadband technologies.

mPhase's competitors who sell DSL systems like the Traverser(TM) or other
technologies, which incorporate broadband solutions over copper wire include:
ADTRAN, AG Communications Systems, Alcatel S.A., Aware, Inc., CISCO Systems,
Inc., Copper Mountain, , ESI, Fidelity Holdings (which produces the I-Gate DSL
technology), General Data Com, Lucent Technologies, Next Level Communications,
Inc., Nokia, PairGain Technologies, Paradyne, SourceNet, Turnstone Systems, TUT
Systems and Westell Technologies. In addition, we compete with Myrio Corporation
and iMagicTV, Inc. who provide infrastructure software products to deliver
multi-channel digital television over telephone networks by using Internet
Protocol.

Integrated Services Digital Network.  Technologies for high-speed data
transmission over copper lines include Integrated Services Digital Network, or

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ISDN. ISDN currently delivers 128 kbps for computer networking connections,
which is twice as fast as analog modem dial-up speed. While ISDN does provide
faster access than analog modems, it is expensive, difficult to install, and not
as fast as competing high-speed technologies. Moreover, it does not allow for
simultaneous data transmission and normal telephone service on the same line and
it is not capable of delivering digital television.

Fiber Optic Cable. Fiber optic cable is another alternative that allows high
bandwidth transmission. However, mPhase feels it would be prohibitively
expensive for local loop communications service providers to install fiber optic
cable to every home.

Coaxial Cable. Cable companies have begun offering high-speed Internet access
through cable modems. These modems provide the potential of wider bandwidth (up
to 10 Mbps as compared to 56 kbps analog modems). Coaxial cable is relatively
expensive and has the drawbacks associated with a shared bandwidth medium.

Satellite. Telecommunications and cable companies can relay video signals via
satellite as opposed to utilizing underground wire infrastructures to transmit
the content.

Manufacturing

In late 1999, mPhase contracted with Flextronics, a major third party contract
manufacturer, to manufacture its central office equipment and Intelligent
Network Interfaces(TM). The Company intends to seek additional strategic
partners for the aggregation and development of television and Internet content,
manufacturing, sales, distribution and technological advancements. mPhase is
targeting leading contract manufacturing companies with strategically located
facilities in North America, Mexico and Asia with whom it can establish
long-term relationships. By using contract manufacturers, mPhase will attempt to
avoid the substantial capital investments required for internal production.

Patents and Licenses

mPhase has filed and intends to file United States patent and/or copyright
applications relating to some of its proposed products and technologies, either
with our collaborators, strategic partners or on its own. There can be no
assurance, however, that any of the patents obtained will be adequate to protect
its technologies or that the Company will have sufficient resources to enforce
its patents.

mPhase may license its technology and products in foreign markets so it 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 its 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 mPhase's ability to make
and sell its products. There can also be no assurance that competitors will not
infringe the Company's patents or will not claim that it is 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 mPhase to significant liabilities to third parties, require
disputed rights to be licensed from third parties or require the Company to
cease its operations.

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The intellectual property owned and licensed by mPhase falls into two general
categories, analog and digital intellectual property. The Company has a pending
patent application, which was filed in June 1999 claiming priority to three
provisional patent applications for the analog portion of our technology used in
relation to the Traverser(TM) product.

mPhase's DSL filter technology enables increased video clarity over copper wire,
longer transmission distances and decreased signal error rate. The intellectual
property related to the DSL filters includes:

  - low pass filter shelves and POTS Splitters, which combine the Traverser(TM)
    DSL spectrum and the traditional voice service; and

  - ADSL filters which are filters that conform to the worldwide DSL standard
    and are utilized in the transmission of data and voice service at up to 8
    Mbps. believes that both of these components are key to providing a DSL
    signal at sufficient quality and service distances for combined video and
    data delivery.

mPhase licenses its digital intellectual property. mPhase also has an exclusive,
worldwide license to manufacture and market products using the technology
developed by Georgia Tech under the Company contract with them. The exclusive
license with Georgia Tech is applicable for the duration of their patent
protecting the system design and other technology related to the Traverser(TM).

The licensed patent-pending technology developed at Georgia Tech covers the
capabilities of the Traverser(TM). The two United States patents under
application are:

          - Computer System and Method for Providing Digital Video and Data
            over a Communications Channel; and
          - Apparatus and Method for Transporting Infrared and Radio
            Frequency Signals.

The patent for the System and Method for the Delivery of Digital Video and Data
over a Communications Channel was issued on November 28, 2000.

The digital intellectual property mPhase licenses provides several unique
aspects of the Traverser(TM). Among these is the backplane design, which
provides every subscriber the ability to view any channel available. All
subscribers in a given system could be watching the same channel, or could be
watching different channels with no degradation of service. The proprietary
design, which does not incorporate a Digital Subscriber Line Access Multiplexer
architecture, makes the Traverser(TM) a true broadcast system rather than a mere
video delivery system.

The patent issued on March 27, 2001 for the System and Method for Maintaining
Timing Synchronization in a Digital Video Network covers the development of the
Framer and the Framer chip. The Framer is an Application Specific Integrated
Circuit, which gives the Traverser(TM) the capability of allocating both the
downstream and upstream bandwidth into virtually any application required. This
feature allows the Traverser(TM) to deliver both MPEG-2 Digital Video and
Internet data simultaneously and also allows for future applications of the
Traverser(TM).

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mPhase also has patents pending that protect the software management and control
of the individual Traverser(TM) links, the DVDDS(TM), all firmware, C++ and Java
code which are upper-level programming languages written for the project and the
channel changing methodology and interface to the electronic program guide at
the customer site through the Intelligent Network Interface(TM).

mPhase purchases from GlobeSpan telecommunication rate adaptive DSL chipsets
used in the Traverser(TM).

mPhase also relies on unpatented proprietary technology, and it can make no
assurance that others may not independently develop the same or similar
technology or otherwise obtain access to its unpatented technology. If the
Company is unable to maintain the proprietary nature of the Traverser(TM)
technology, its future operations would likely be adversely affected.

Government Regulation

The Federal Communication Commission, or FCC, and various state public
utility and service commissions, regulate most of mPhase's potential domestic
customers. 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.

Research and Development

mPhase has designed the Traverser(TM) and its ancillary component parts in
conjunction with Georgia Tech, which conducts a majority of our digital research
and development for the Traverser(TM) line of products. Microphase, Inc.
contributed the analog technology incorporated in the design of the
Traverser(TM), as well as providing ongoing development of analog components for
the Traverser(TM). mPhase expects Georgia Tech to continue research and
development of the Traverser(TM), to enhance its features and functionality and
to develop version 2.0 of the Traverser(TM) and additional products utilizing
Traverser(TM) technology.

As of June 30, 2001, mPhase had been billed and accrued approximately
$12,974,000 for research and development conducted by Georgia Tech, of which
approximately $1,870,480 remained outstanding.

On March 26, 1998, mPhase entered into a license agreement with Georgia Tech,
which owns the Digital Video and Data Delivery System(TM) technology. Georgia
Tech has granted mPhase the exclusive license to use and re-sell this technology
in the Traverser(TM). The Company will pay Georgia Tech royalties of 5% on the
sales of the Traverser(TM). The agreement expires automatically when the patents
covering the invention expire. Georgia Tech may terminate the agreement if
mPhase does not make royalty payments of at least $50,000 by March of 2002 and
at least $100,000 during each twelve (12) month period thereafter.

mPhase will pay Microphase a royalty of 3% comprised of a percentage of the
commercial product sales of DSL-related technology.

                                       12

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Employees

mPhase presently has approximately 17 full-time and contract employees, two of
whom are also employed by Microphase Corporation. See the description in the
section entitled "Certain Relationships and Related Transactions."

Risk Factors

An investment in mPhase's common stock involves a high degree of risk. You
should carefully consider the following risks before making an investment
decision. You should also refer to the other information set forth in this
document, including the company's financial statements and the related notes.

Risks Related to Financial Aspects of the Company's Business

mPhase expects to incur substantial net losses for the foreseeable future and
expects to raise substantial additional capital.

mPhase expects to generate operating losses and negative cash flow into the
foreseeable future because it must fund its increasing sales, marketing and
promotional activities, its equipment production efforts and its continued
research and development activities to maintain its technology and develop new
technology. The Company expects to fund these activities through additional
public or private offerings of its stock. mPhase had net losses, including
non-cash charges for stock based employee compensation, of approximately $24.0
and $38.2 million for the twelve-month periods ended June 30, 2001 and June 30,
2000, respectively. The Company has sold Pots Splitters and Microfilters of
approximately $1 million for the period between June 30, 2001 and October 15,
2001. mPhase cannot be certain when and if it will achieve sufficient revenues
in relation to its expenses to become profitable. The Company believes that
increasing its revenues will depend in large part on its ability to:

     - raise additional capital;
     - finalize the commercial design of the Traverser(TM)and its management
       software;
     - generate significant revenue from sales of the Traverser(TM);
     - gain market acceptance for its products and increase its market share
       based upon the timing, strength and success of its sales efforts and its
       strategic and commercial alliances;
     - develop effective marketing and other promotional activities to
       penetrate its target customer base;
     - develop strategic and commercial relationships that balance its
       current and long-term ability to capitalize on its technology; and
     - generate and sustain substantial revenue growth while maintaining
       reasonable expense levels.

Slower revenue growth than mPhase anticipates or operating expenses that exceed
its expectations would materially harm its business. If the Company achieves
profitability, it cannot be certain that it will be able to sustain or increase
that profitability in the future.

mPhase's limited operating history makes it difficult for you to evaluate its
business and prospects.

As of June 30, 2001, mPhase received no purchase orders for the Traverser(TM) or
programming content offered by its subsidiary mPhaseTelevision.Net. The
Company's revenue of approximately $279,500 for the fiscal year ended June 30,
2000 and $10,524,100 for the year ended June 30, 2001 was derived largely from
sales of its DSL component products. mPhase generated $20,000 from sales of
trial versions of the Traverser(TM) product for the fiscal year ended June 30,
2000. As a result, the Company has only a limited operating history and no

                                       13

<PAGE>

sales of its principal product upon which you may evaluate its business and
prospects. You should consider mPhase's prospects in light of the heightened
risks and unexpected expenses and difficulties frequently encountered by
companies in an early stage of development. These risks, expenses and
difficulties, which are described further in this section entitled "Risk
Factors", particularly apply to mPhase because the market for equipment that
delivers voice, data and video services is new and rapidly evolving. Due to the
Company's limited operating history, it will be difficult for you to evaluate
whether it will successfully address these risks.

mPhase's sales cycle is lengthy and variable so the timing of its revenues is
difficult to predict, and it may incur sales and marketing expenses with no
guarantee of future sales.

mPhase's potential customers view the purchase of the Traverser(TM) as a
significant and strategic decision. As a result, its customers, the foreign and
domestic telecommunications service providers, will typically undertake
significant evaluation and testing of its products before deployment. This
evaluation process frequently results in a lengthy sales cycle, typically
ranging from six months to more than a year. Furthermore, mPhase is targeting
international communications service providers, which operate under a number of
different telecommunications equipment compliance standards. These international
service providers will require that mPhase receive local standards approval
before it is able to enter into field trials or definitive sales agreements.
Furthermore, because the Company is selling a new product with limited real
environment exposure, tests and trials may not necessarily result in purchases
of the Traverser(TM).

Before a customer places an order, mPhase may incur substantial sales and
marketing expenses and expend significant management efforts. In addition,
because its customers are both domestic and foreign telecommunications service
providers, product purchases may frequently be subject to unexpected government
regulatory, administrative, processing and other delays on the part of its
customers. Moreover, purchase orders for mPhase's products may have lengthy
payable periods because of payment delay from its customers. As a result, sales
forecasted attributable from a potential customer may not be realized and this
could result in lower than expected revenues.

mPhase may not be able to obtain sufficient financing to fund its business and,
as a result, it may not be able to grow and compete effectively.

mPhase expects to incur substantial expenses to develop and market its products.
It expects to generate losses into the foreseeable future so it does not expect
that the income from its operations will be sufficient to satisfy its cash
requirements. The Company may need additional capital if it needs to respond to
unforeseen technological or marketing hurdles, or if it desires to take
advantage of unanticipated opportunities. Therefore, mPhase will need to seek
additional financing from public or private sources. The Company's success in
raising enough additional financing to satisfy its capital requirements will
depend on a number of factors, including:

     - market conditions;
     - the success of its product development efforts;
     - its operating performance; and
     - investor sentiment.

The status of these factors may make the timing, amount, terms and conditions of
additional financing unattractive for mPhase. In addition, to the extent that
the Company is able to obtain additional financing through the issuance

                                       14

<PAGE>

of equity securities, its stockholders may experience dilution. If the Company
obtains financing through loans or any other type of debt financing, it may
become subject to restrictions on its spending or ability to pay dividends.
Funds may not be available at the time or times needed on terms acceptable to
the Company, if at all. If adequate funds are not available, or are not
available on acceptable terms, mPhase may not be able to take advantage of
market opportunities, to develop products or to otherwise respond to competitive
pressures effectively.

mPhase's Operations May Become Strained Due to its Growth.

Upon successful testing and introduction of the Traverser(TM), mPhase will need
to expand its marketing and sales efforts, operations and production, as well as
provide customer support. The Company's management, personnel, systems,
procedures, controls and customer service may be inadequate to support such
expansion. The Company expects significant strains on its order and fulfillment
process, its quality control systems and customer support once the sales of the
Traverser(TM) commences. To manage expansion effectively, mPhase must implement
and improve its operational systems, procedures, controls and customer service
on a timely basis and increase its staff or obtain these services through third
party contractors. The Company will also require capital to attain this growth
and management. If the Company is unable to properly manage operations, controls
and customer support, or secure financing to implement this growth, its
operating results, reputation and customer relationships could be harmed.

Risks Related to mPhase's Target Markets

A significant market for the Company's products may not develop if telephone
companies do not successfully deploy broadband services such as high-speed data
and video.

Many telephone companies have recently begun offering high-speed data services.
Most telephone companies have not offered multi-channel video services at all.
Unless telephone companies make the strategic decision to enter the market for
providing broadband services, a significant market for mPhase's products may not
develop. Sales of its products largely depend on the increased use and
widespread adoption of broadband services and the ability of its customers to
market and sell broadband services, including video services, to their
customers. Certain critical issues concerning use of broadband services are
unresolved and will likely affect their use. These issues include security,
reliability, speed and volume, cost, government regulation and the ability to
operate with existing and new equipment. Even if telephone companies decide to
deploy broadband services, this deployment may not be successful. Telephone
companies may delay deployments of broadband services. Factors that could cause
telephone companies not to deploy, to delay deployment of, or to fail to deploy
successfully the services for which mPhase's products are designed include the
following:

     - industry consolidation;
     - regulatory uncertainties and delays affecting telephone companies;
     - varying quality of telephone companies' network infrastructure and cost
       of infrastructure;
     - upgrades and maintenance;
     - inexperience of telephone companies in obtaining access to video
       programming content from third party providers;
     - inexperience of telephone companies in providing broadband services and
       the lack of sufficient technical expertise and personnel to install
       products and implement services effectively;

                                       15

<PAGE>

     - uncertain subscriber demand for broadband services; and
     - inability of telephone companies to predict return on their investment in
       broadband capable infrastructure and equipment.

Unless mPhase's products are successfully deployed and marketed by telephone
companies, it will not be able to achieve its business objectives and increase
its revenues.

Government regulation of mPhase's customers and related uncertainty could cause
its target customers to delay the purchase of its products.

mPhase's target market consists of domestic and international telecommunications
service providers. Domestic communications service providers are regulated by
the Federal Communications Commission, or FCC. They also require that equipment
located at their facilities comply with FCC, NEBS, UL and ANSI standards.
International telecommunications service providers operate under a number of
various equipment compliance standards and are regulated by their respective
governments and agencies. These international service providers will require
that mPhase receive local government and regulatory approval before it is able
to enter into field trials or definitive sales agreements.

In the U.S., The Telecommunications Act of 1996 requires regional Bell operating
companies, to offer their competitors cost-based access to some elements of
their networks. These telephone companies may not wish to make expenditures for
infrastructure and equipment required to provide broadband services if they will
be forced to allow competitors access to this infrastructure and equipment. The
FCC recently announced that, except in limited circumstances, it will not
require incumbent carriers to offer their competitors access to the facilities
and equipment used to provide high-speed data services. Nevertheless, other
regulatory and judicial proceedings relating to telephone companies' obligations
to provide elements of their network to competitors are pending.

The uncertainties caused by both foreign and domestic regulatory proceedings may
cause telephone companies to delay purchasing decisions. The outcomes of any
regulatory proceedings may cause these telephone companies not to deploy
services for which mPhase's products are designed or to further delay
deployment. Additionally, telephone companies' deployment of broadband services
may be slowed down or stopped because of the need for telephone companies to
obtain permits from city, state, federal or foreign national authorities to
implement infrastructure for products such as mPhase's. Any delay in deployment
of products by the Company's customers could harm its sales.

mPhase's potential customers will not purchase its products if they do not have
the infrastructure necessary to use its products.

The Traverser(TM) is based on the use of copper telephone wire. The copper wire
infrastructures installed and maintained by telephone companies vary in quality
and reliability. A significant portion of the existing networks have been
installed and repaired over many years and are out of date. The copper wiring
used by telephone companies is also unshielded, making data transmission
susceptible to interference. In addition, copper wiring has a basic transmission
property that causes the signal quality to degrade rapidly as the frequency
increases or the distance traveled by the signal increases. As a result of these
limitations, the Traverser(TM) may not be a viable solution for customers
requiring service at performance levels beyond the current limits of copper
telephone wire and this could harm mPhase's sales.

                                       16

<PAGE>

Successful implementation of the Traverser(TM) is highly dependent on the
telephone companies' commitment and ability to continue to maintain their
infrastructure so that it will operate at a consistently high performance level.
Copper wire infrastructure upgrades may be costly, and telephone companies may
not have the necessary financial resources. This is particularly true for the
smaller independent telephone companies and international telephone companies
who are an important part of mPhase's target market. If its potential customers
lack the adequate infrastructure, the Company may not be able to sell the
Traverser(TM) to them and generate the revenues it anticipates.

Additionally, in order to utilize mPhase's products to offer digital video
services, its potential customers may need to build a satellite earth station to
receive video broadcasts and install fiber optic cable from these stations to
their central offices. The capital expenditures required to install the earth
stations may exceed the financial resources of its potential customers. There
can be no assurance that its potential customers will make the investment
necessary to upgrade their facilities in order to use its products.

Some telecommunications service providers, such as Bell Canada, are currently
offering Direct Broadcast Services, commonly referred to as "DBS", a technology,
which provides multiple channel digital television through satellite
distribution to individual satellite dish receptors located at the home. Since
there are telecommunications service providers that sell DBS services, these
companies already provide their subscribers with access to a digital television
service and do not require its technology to provide digital video services.

Some telecommunications service providers are also re-selling DBS. These
telecommunications service providers receive a commission for the sale of DBS
services so they are aligned with DBS providers. These affiliations make it more
difficult for mPhase to market the Traverser(TM). Telecommunications service
providers allied with DBS broadcasters are able to market digital television
services to their subscribers, but are not required to take on the
responsibility of managing or distributing the television content.

Risk Related to the Industry

Intense competition in the telecommunications equipment market could limit or
prevent mPhase's profitability.

The telecommunications equipment market is characterized by swift technological
change. Several available technologies such as fiber optic cable, co-axial cable
and hybrid co-axial cable, wireless transmission, satellite transmission and
voice and video transmission using Internet Protocol compete with DSL for market
share. Communications service providers may also use other technologies such as
ISDN (Integrated Services Digital Network) or fiber-based DSL solutions to
deploy high-speed services comparable to those provided by the Company's
Traverser(TM) products.

mPhase's direct competitors are other equipment companies that supply DSL
technology including ADTRAN, Alcatel S.A., Aware, Inc., Pliant Technologies,
CISCO Systems, Inc., ECI Telecom Ltd., Lucent Technologies, Next Level
Communications, Inc., Orckit Communications, PairGain Technologies, TUT Systems,
Westell Technologies, AG Communications Systems, Copper Mountain, Nokia,
Interspeed and Paradyne Networks, Inc. In addition, mPhase competes with Myrio
Corporation and iMagicTV, Inc. who provide infrastructure software

                                       17

<PAGE>

products to deliver multi-channel digital television over telephone networks by
using Internet Protocol.

If mPhase is unable to compete effectively in the telecommunications market or,
in particular, the market for DSL telecommunications equipment, the Company's
revenue and future profitability may be materially adversely affected. Most of
mPhase's current and potential competitors have significantly greater selling
and marketing experience, technical capability and manufacturing and financial
resources. mPhase's competitors may be able to predict future market trends more
accurately than the Company can and, as a result, develop new technologies that
compete with its products or even render its products obsolete.

Although mPhase believes that its products have certain technological advantages
over its competitors, realizing and maintaining such advantages will require a
continued high level of investment in research and development, marketing and
customer service and support. Additionally, new competitors with greater market
presence and financial resources may enter the Company's market, thereby further
intensifying competition.

Technologies that compete with mPhase's products include
telecommunications-related wireline technologies, cable-based technologies,
fixed wireless technologies and satellite technologies. If the Company's
potential customers choose these alternative technologies to deploy high-speed
services, its business, financial condition and results of operations could be
harmed. mPhase's technology may not be able to compete effectively against these
technologies on price, performance or reliability. While the Company believes a
market exists for its products, there can be no assurance that its products will
gain wide market acceptance or that it will be able to maintain any market share
through innovation. The development of mPhase' DSL products is a complex and
uncertain process requiring accurate anticipation of technological and market
trends. The Company may not be successful in its development or introduction of
new products.

mPhase's equipment is subject to regulation and certification.

The Federal Communications Commission requires that telephone equipment used in
central offices be certified in accordance with Parts 15 and 68 of its rules and
regulations. Part 15 specifies a maximum allowable amount of electromagnetic
radiation from an electronic device in a commercial or residential environment
at specific frequencies. Part 68 tests the equipments resistance to lightning
strikes. NEBS testing is also recommended for telco equipment. It assures a
telco that the equipment does not require extensive installation and is
reliable. The testing covers a large range of requirements including criteria
for personnel safety, protection of property, and operational continuity. NEBS
also covers physical requirements including: Space Planning, Temperature,
Humidity, Fire, Earthquake, Vibration, Transportation, Acoustical, Air Quality
and Illumination; and electrical criteria including: Electrostatic Discharge
(ESD), Electromagnetic Interference (EMI), Lightning and AC Power Fault, Steady
State Power Induction, Corrosion, DC Potential Difference, Electrical Safety and
Bonding and Grounding. In addition, Underwriters Laboratories also requires
certain safety standards be tested and certified. The UL 1950 standard applies
to the Traverser(TM) System.

The Central Office Traverser(TM) equipment is currently undergoing NEBS testing,
that will include FCC Part 68 and FCC Part 15 certification. The Customer
Premises Traverser(TM) equipment is FCC Part 68 and FCC Part 15 certified and
will be UL listed by the end of June. The Traverser(TM) has not

                                       18

<PAGE>

completed all certification testing and there can be no assurance that it will
be fully certified. In the event that the Traverser(TM) fails any portion of the
certification testing, the product may need to be redesigned, mPhase may incur
significant increases in its development expenses and the production of the
Traverser(TM) will be delayed. The Company cannot sell the Traverser(TM) if it
is not able to obtain certification and will not be able to conduct its plan of
operations as currently contemplated.

mPhase's products may become obsolete.

mPhase's position in existing markets or potential markets could be eroded
rapidly by product advances. The life cycles of its products are difficult to
estimate. The Company's growth and future financial performance will depend in
part upon its ability to enhance existing products and develop and introduce new
products that keep pace with:

          - the increasing use of the Internet;
          - the growth in remote access by telecommuters;
          - the increasingly diverse distribution methods for high quality
            digital video; and
          - other industry and technological trends.

mPhase expects that its continued and future product development efforts will
continue to require substantial investments. The Company may not have sufficient
resources to make the necessary investments. If it fails to cost-effectively
develop new products that quickly respond to new competition and customer
requirements, the demand for its products may fall and the Company could lose
revenues.

Other Risks Associated with mPhase's Business

mPhase depends on a third party to develop its products. The Company relies upon
the Georgia Tech Research Corporation ("Georgia Tech"), an affiliate of the
Georgia Institute of Technology, for research involved with the development of
its digital technology and products. mPhase has entered into a Basic Ordering
Research Agreement with Georgia Tech, which includes a series of delivery orders
providing guidelines for the research and development of portions or components
of the Traverser(TM). Georgia Tech developed working prototypes and the version
1.1 Traverser(TM). mPhase's business will be materially adversely affected if
Georgia Tech does not perform its responsibilities under the agreement on an
acceptable basis or terminates the relationship and mPhase is unable to replace
their development services on a prompt basis, if at all.

mPhase licenses critical technology from Georgia Tech, Microphase Corporation
and GlobeSpan Semiconductor, Inc. (formerly AT&T Paradyne, Inc.) for use in its
Traverser(TM) product line. Georgia Tech has granted mPhase the exclusive
worldwide license to use and re-sell the patented Digital Video and Data
Delivery System(TM) technologies in the Traverser(TM). Georgia Tech Research
Corporation may terminate the agreement if the Company does not make royalty
payments of at least $50,000 on or before March 26, 2002 and at least $100,000
for each twelve-month period thereafter. mPhase's non-exclusive license
agreement with GlobeSpan Semiconductor provides it with the ability to use their
patented CAP RADSL technology in its DSL products. In the event that any of the
Company's licensing agreements are not renewed or are terminated, there can be
no assurance that it would be able to find similar technology for use in the
Traverser(TM). In such event, mPhase would not be able to sell the

                                       19

<PAGE>

Traverser(TM) and carry out its plan of operations. Its licensing agreements may
also be subject to significantly higher licensing fees in the future, which
could substantially increase its production costs. Such an increase could
substantially impact mPhase's profitability or cause it to increase the price of
the Traverser(TM) and eliminate an important advantage its product has over
competitive equipment.

mPhase's success depends on its ability to protect its intellectual property. To
protect its proprietary rights, the Company has filed provisional patents and
copyright applications relating to some of its proposed products and technology.
Georgia Tech Research Corporation has filed an application for a U.S. Patent for
its Digital Video and Data Delivery System(TM). Although mPhase believes that
some of its technology is patentable, it may not be able to obtain patents on
this technology. Even if the patents are obtained, they may not adequately
protect the Company's technologies from third party infringement. The Company
may seek foreign patent protection, but foreign patent protection may not be
granted. mPhase's failure to protect its intellectual property could materially
adversely affect it.

The telecommunications industry is characterized by the existence of a large
number of patents and frequent litigation based on allegations of patent
infringement. From time to time, third parties may assert patent, copyright,
trademark and other intellectual property rights to technologies that are
important to mPhase's business. Any claims asserting that the Traverser(TM) and
component parts infringe or may infringe proprietary rights of third parties, if
determined adversely to the Company, could have a material adverse effect on its
business, financial condition or results of operations. In the event of an
adverse result in any litigation with third parties that could arise in the
future, mPhase could be required:

          - to pay substantial damages, including paying treble damages if the
            Company is held to have willfully infringed;
          - to halt the manufacture, use and sale of infringing products;
          - to expend significant resources to develop non-infringing
            technology; and/or
          - to obtain licenses to the infringing technology.

Licenses may not be available from any third party that asserts intellectual
property claims against mPhase, on commercially reasonable terms, or at all. In
addition, litigation frequently involves substantial expenditures and can
require significant management attention, even if the Company ultimately
prevails. In addition, the Company indemnifies its customers for patent
infringement claims, and it may be required to obtain licenses on their behalf,
which could subject it to significant additional costs.

mPhase contracts for the manufacture of all of its products and have limited
in-house manufacturing capabilities. The Company relies primarily on other
companies to manufacture our products. The efficient operation of its business
will depend, in large part, on its ability to have these other companies
manufacture its products in a timely manner, cost-effectively and in sufficient
volumes while maintaining consistent quality. Any manufacturing disruption could
impair mPhase's ability to fulfill orders and could cause it to lose customers.

mPhase's products use components that may not be available due to excessive
market demand. Shortages of these components could increase significantly the
Company's costs and adversely impact its profitability. If the Company is not
able to obtain component parts for its equipment, then its sales will be

                                       20

<PAGE>

adversely impacted because it may not be able to deliver its equipment to
customers in a timely manner.

mPhase has common management with affiliates who supply it with components.

Necdet F. Ergul, the Chairman of the Board, Ronald A. Durando, the President and
Chief Executive Officer, and Gustave T. Dotoli, the Chief Operating Officer and
Vice President, respectively, are officers of Microphase Corporation. Necdet F.
Ergul and Ronald Durando are also major shareholders of Microphase Corporation.
mPhase currently purchases passive components for the Traverser(TM), and its DSL
component products, including the POTS Splitter Shelf and Splitter Cards, which
are components of the POTS Splitter Shelves, from Microphase. Microphase also
provides resources and technology related to the development of the
Traverser(TM), and other DSL products. Microphase may not be the most economical
provider of these components and resources and conflicts of interest may arise
due to the relationship between mPhase and Microphase. In addition, the Company
will pay to Microphase a royalty comprised of 3% of any commercial product sales
of any DSL-related technologies.

Ronald A. Durando and Gustave T. Dotoli are also president and vice-president,
respectively, of PacketPort.com, a company that develops Internet Protocol
Telephony products and services.

Janifast Holdings, Ltd., a Delaware corporation, is the parent-corporation of a
manufacturer that produces components for the prototype Traverser(TM)and may
produce such components for mPhase in the future. Necdet F. Ergul, Ronald A.
Durando and Gustave T. Dotoli are controlling shareholders of Janifast with an
aggregate ownership interest of greater than 75% of Janifast. Mr. Durando is
Chairman of the Board of Directors of Janifast and each of Messrs. Dotoli and
Ergul are Directors of Janifast.

mPhase's success depends upon the services of its senior management and key
technical personnel, including its Chief Executive Officer, Ronald A. Durando,
its Chief Operating Officer, Gustave T. Dotoli, its Chief Technology Officer,
David Klimek and its Chief Financial Officer and General Counsel, Martin S.
Smiley. The loss of the services of any of these executive officers or any of
the Company's key management, sales or technical personnel could have a material
adverse effect on its business and prospects. In addition, the Company's success
is largely dependent upon its ability to hire highly qualified managerial, sales
and technical personnel. These individuals are in high demand and mPhase may not
be able to attract the caliber or quantity of staff that is needed.

The price of mPhase's common stock has been volatile and may fluctuate
substantially. The stock market has periodically experienced significant price
and volume fluctuations that have affected the market prices for the securities
of technology companies such as the Company. As a result, investors in its
common stock may experience a decrease in the value of their common stock
regardless of its operating performance or prospects.

Additionally, mPhase's stock price may be subject to substantial fluctuations in
response to a variety of factors, including:

          - problems encountered when testing the Traverser(TM);
          - fluctuations in quarterly operating results;
          - changes in reports by financial analysts;
          - announcements of strategic relationships, acquisitions or capital
            commitments by the Company or its competitors;
          - recent technological innovations;

                                       21

<PAGE>

          - new products or services offered by the Company or its competitors;
          - changes in key personnel;
          - changes in strategic relationships with third parties by the Company
            or its competitors; and
          - sales of common stock;

Many of these events or factors are beyond mPhase's control.

Anti-takeover provisions in mPhase's charter documents and New Jersey law could
prevent or delay a change in control of the Company that a stockholder may
consider favorable.

If a proposal by mPhase's directors is approved by its stockholders, certain
provisions of its certificate of incorporation and by-laws would make it more
difficult for a third party to acquire control of the Company, even if such
change in control would be beneficial to or favored by its shareholders. For
example, provisions of mPhase's certificate of incorporation include:

          - prohibiting cumulative voting in the election of directors;
          - restricting business combinations with interested stockholders;
          - issuance of preferred stock without stockholder approval;
          - the existence of a rights plan, which would have the effect of
            providing some holders of its common stock with a premium of the
            market price of its stock;
          - limiting the persons who may call special meetings of
            stockholders; and
          - establishing advance notice requirements for nominations for
            election to the Board of Directors or for proposing matters that
            can be acted on by stockholders at stockholder meetings.

As a New Jersey corporation, mPhase is also subject to the New Jersey
Shareholders Protection Act contained in Section 14A:10A-1. In general, Section
14A:10A-1 prohibits a publicly-held New Jersey corporation from engaging in a
"business combination" with an "interested shareholder" for a period of five
years following the date the person became an interested shareholder, unless,
among other things:

          - the Board of Directors approved the transaction in which such a
            shareholder became an interested shareholder prior to the date the
            interested shareholder attained such status; and
          - the business combination is approved by the affirmative vote of
            the holders of at least 66 2/3% of the corporation's voting stock
            not beneficially owned by the interested shareholder at a meeting
            called for such purpose.

A "business combination" generally includes a merger, sale of assets or stock,
or other transaction resulting in a financial benefit to the interested
shareholder. In general, an interested shareholder is a person who, together
with affiliates and associates, owns, or within five years prior to the
determination of interested shareholder status, did own, 10% or more of the
corporation's voting stock.

Future sales by holders of mPhase's common stock and warrants may cause the
market price of its stock to decline.

                                       22

<PAGE>

mphase's stock price has declined as a result of sales of a large number of
shares in the market after its recent registration of 3,479,275 shares on an S-1
registration statement. Such sales could make it more difficult for the Company
to raise funds through future affairs of common stock.

In addition to the shares of common stock recently registered pursuant to Form
S-1, dated August 15, 2001, approximately 9,723,000 shares of mPhase's common
stock have been sold to investors in private placements. The purchasers of these
shares may sell some or all of their shares in accordance with Rule 144
promulgated by the Securities and Exchange Commission under the Securities Act
of 1933, as amended. A large volume of sales by these holders could have a
further significant adverse impact on the market price of the Company's common
stock.

ITEM 2.  PROPERTIES

The corporate headquarters is located at 587 Connecticut Avenue, Norwalk, CT
06854-1711. The Company leased this office space from Microphase Corporation on
a month-to-month basis for $11,050 per month, which includes certain
administrative services. The Company also maintains an office and research
facility at the Georgia Tech Research Corporation in Atlanta, Georgia as part of
its basic ordering agreement with Georgia Tech.

In addition, mPhase's joint venture mPhaseTelevision.Net, Inc. is entitled to
use certain facilities in Oxford, CT under the term of a joint venture, which
facility provides uplink and downlink satellite.

ITEM 3.  LEGAL PROCEEDINGS

On or about September 30, 2000, mPhase received notice that on September 22,
2000, a former employee commenced a lawsuit in the United States District Court
for the Middle District of Tennessee against the Company, two of the Company's
officers, and one of the Company's outside attorneys. The action alleges that
the Company failed to timely remove restrictions from plaintiff's restricted
stock, and failed to provide plaintiff with an employment contract. The
plaintiff alleged violations of federal securities law, Tennessee securities
law, and common law and seeks damages of $1,679,000 plus punitive damages. The
plaintiff seeks damages of $2,000,000 plus punitive damages for the employment
claim. On July 25, 2001, the court rendered its decision regarding all
defendants' motion to dismiss the plaintiff's complaint. Of the thirteen causes
of action alleged in the complaint, seven were dismissed in their entirety and
three were dismissed in part. mPhase believes it has meritorious defenses to
plaintiff's claims and plans to vigorously defend the action.

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

As described in mPhase's Definitive Proxy Statement (DEF-14A), filed on May 4,
2001, the following proposals were submitted to shareholders for their approval
at an annual meeting held on May 30, 2001: (1) a proposal to elect nine (9)
Directors to hold office until the next Annual Meeting; (2) a proposal to
approve and adopt an amendment to our Amended Certificate of Incorporation to
change the par value of our shares from no par value to $.01 par value and to
authorize a class of 20,000,000 shares of preferred stock; (3) a proposal to
adopt the 2001 Stock Incentive Plan; and (4) a proposal to ratify the
appointment of Arthur Andersen LLP as the independent accountants

                                       23

<PAGE>

for mPhase's fiscal 2001 year. The aforementioned proposals are explained in
greater detail in the Proxy Document; shareholders of record as of April 6, 2001
were entitled to vote before the deadline of May 30, 2001, and all proposals
were approved by the shareholders on that date, except proposal number two.

The vote was as follows: (1) Election of Directors - 26,892,916 votes were cast
in favor of the election of each of the nine directors and there were no votes
cast against and 307,775 abstentions; (2) Amendment to Certificate of
Incorporation - 6,192,741 votes were cast in favor of amending the Certificate
of Incorporation and there were 907,109 votes against and 39,251 abstentions;
(3) 2001 Stock Incentive Plan - 11,496,075 votes were cast in favor of the 2001
Stock Incentive Plan and there were 988,642 votes against and 54,384
abstentions; and (4) Ratify Independent Auditors - 27,120,148 votes were cast in
favor of ratifying Arthur Anderson as the Independent Auditors and there were
63,373 votes against and 17,170 abstentions. Each of the directors was elected
by the same number of votes in favor and there were no votes against their
election.

                                       24

<PAGE>

                                     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, mark-down, 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, 1999
  First Quarter                                             $ 4.25         $0.75
  Second Quarter                                              3.66          1.57
  Third Quarter                                               5.63          1.88
  Fourth Quarter                                              8.75          2.91

Fiscal year ended June 30, 2000
  First Quarter                                             $ 9.25         $2.97
  Second Quarter                                              6.19          2.50
  Third Quarter                                              19.13          6.50
  Fourth Quarter                                             14.13          6.00

Fiscal year ended June 30, 2001
  First Quarter                                             $ 9.25         $3.00
  Second Quarter                                              5.94          1.47
  Third Quarter                                               3.16          1.22
  Fourth Quarter                                              2.49          1.05

   (B)  HOLDERS

As of October 5, 2001, mPhase had 43,898,367 of common stock outstanding and
approximately 16,305 stockholders of record.

   (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.

Issuance of Unregistered Securities

The information required by this item is set forth in note 9 on F-16 attached
hereto and in 10-Q's dated September 30, 2000, December 31, 2000, and March 31,
2001.


                                       25

<PAGE>

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, and are included in this document.

<TABLE>
<CAPTION>
                                        From Inception                     Year Ended June 30,
                                        (October 2, 1996) ----------------------------------------------------
                                        to June 30 1997      1998          1999        2000           2001
                                        ----------------  ----------   -----------  -----------   ------------
                                                                   (in thousands, except share data)
<S>                                    <C>                <C>         <C>          <C>           <C>
STATEMENT OF OPERATIONS DATA:
Total revenues                          $       --        $       --   $        --  $       279   $     10,524
                                        ----------        ----------   -----------  -----------   ------------
Costs and Expenses:
    Cost of sales                               --                --            --          132   $      5,805
    Research and development                   192             2,297         3,563       10,157   $     10,780
    Licensing Fees                              37               450                                        --
    General and administrative                 541             1,710         4,683       17,516   $     16,151
    Depreciation and amortization               11                29           410          471   $        660
    Non-cash compensation charge                --                --        13,003       10,343   $      1,171
                                        ----------        ----------   -----------  -----------   ------------
Operating loss                                (781)            4,036        21,659       38,340   $     24,043
Other income (expense), net                     --              (305)       (1,162)          20   $         --
Interest income (expense)                       --                --           (18)         158   $         43
                                        ----------        ----------   -----------  -----------   ------------
Net loss                                $     (781)       $   (4,341)  $   (22,839) $   (38,162)  $    (24,000)
                                        ==========        ==========   ===========  ===========   ============
Basic and diluted net
loss per share                          $     (.10)       $     (.46)  $     (1.42) $     (1.41)  $       (.72)
                                        ==========        ==========   ===========  ===========   ============
Shares used in basic and diluted
net loss per share                       7,806,487         9,336,340    16,038,009   26,974,997     33,436,641
                                        ==========        ==========   ===========  ===========   ============
</TABLE>


                                            Year ended June 30
                                            ------------------
                              1997      1998       1999         2000       2001
                              ----    -------     -------      -------    ------
BALANCE SHEET DATA:                      (in thousands)


Cash and cash equivalents ... $162    $    --     $ 7,978      $ 6,432  $    31
Working capital (deficit) ... (212)    (3,073)      4,936        3,557   (1,458)
Total assets ................  369      2,175      10,624       11,184    8,997
Long-term obligations, net of
current portion .............   --         --          --           --       90
Total stockholders' equity
 (deficit)                    $(23)   $  (915)    $ 6,974      $ 7,329  $ 1,865




                                       26

<PAGE>

     The statement of operations data as of the periods indicated below are
derived from unaudited financial statements and include all adjustments
(consisting of normal recurring items) that management considers necessary for a
fair presentation of the financial statements.

<TABLE>
<CAPTION>

                                                                                 Three months ended
                                                    ------------------------------------------------------------------------
                                                     September 30           December 31         March 31          June 30
                                                    ---------------       --------------      -------------    -------------
                                                                         (in thousands, except share amounts)
                                                                                     (unaudited)
<S>                                                 <C>                   <C>                <C>
FISCAL 2001 QUARTERLY
STATEMENT OF OPERATIONS DATA:
Total revenues                                      $     1,865           $     5,231         $     2,959        $    469
                                                    ---------------       --------------      -------------    -------------
Costs and Expenses:
 Cost of sales                                              872                 2,779               1,689             465
 Research and development                                 3,162                 3,318               2,220           2,080
 General and administrative                               3,125                 2,968               2,873           7,185
 Depreciation and amortization                              123                   136                 200             201
 Non-cash compensation charge                               362                   356                 232             221
                                                    ---------------       --------------      -------------     -------------
Operating loss                                           (5,779)               (4,326)             (4,255)         (9,683)
Interest income                                              28                     8                   4               3
                                                    ---------------       --------------      -------------     -------------

Net loss                                            $    (5,751)          $    (4,318)        $    (4,251)       $ (9,680)
                                                    ===============       ==============      =============     =============

Basic and diluted net loss per share                      $(.18)                $(.13)              $(.12)       $   (.27)
                                                    ===============       ==============      =============     =============

Shares used in basic and diluted net
 loss per share                                      31,562,727            32,324,964          34,205,000         35,702,797
                                                    ===============       ==============      =============     =============
</TABLE>

<TABLE>
<CAPTION>
                                                                       Three months ended
                                                -------------------------------------------------------------------------
                                                September 30          December 31          March 31            June 30
                                                -------------        -------------      -------------       -------------
                                                             (in thousands, except share amounts)
                                                                         (unaudited)
<S>                                     <C>                   <C>                  <C>                <C>
FISCAL 2000 QUARTERLY
STATEMENT OF OPERATIONS DATA:
Total revenues                                  $        --          $         -        $        40         $       240
                                                -------------        -------------      -------------       -------------
Costs and Expenses:
 Cost of sales                                           --                   --                 19                 113
 Research and development                             1,491                1,904              2,858               3,904
 General and administrative                           1,164                1,184              7,542               7,626
 Depreciation and amortization                          114                  116                118                 123
 Non-cash compensation charge                            46                   42              5,234               5,022
                                                -------------        -------------      -------------       -------------
Operating loss                                       (2,815)              (3,246)           (15,731)            (16,548)
Other income, net                                        --                   --                 --                  20
Interest income                                          18                   41                 57                  42
                                                -------------        -------------      -------------       -------------

Net loss                                        $    (2,797)         $    (3,205)       $   (15,674)        $   (16,486)
                                                =============        =============      =============       =============

Basic and diluted net loss per share                  $(.11)               $(.12)             $(.56)              $(.55)
                                                =============        =============      =============       =============

Shares used in basic and diluted net
 loss per share                                  24,942,965           25,907,602         27,743,996          29,729,060
                                                =============        =============      =============       =============
</TABLE>

                                       27

<PAGE>


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 has designed, patented and is
currently engaged in a "controlled roll-out" of the Company's primary product,
the Traverser(TM). The Company believes that the Traverser(TM) provides a unique
"turnkey" broadband equipment solution that enables telephone companies to
deliver real time digital video programming, high-speed Internet and voice
telephony service over existing copper telephone lines. The Company believes
that the Traverser(TM) will, in many instances, provide the most cost effective,
reliable and scaleable solution for many telephone companies to provide a
comprehensive suite of bundled or unbundled services, utilizing Asymmetric
Digital Subscriber Line, or ADSL technology. mPhase also manufactures and sells
POTS Splitter Shelves and other DSL component products, which are currently
being deployed by telephone companies both in the United States and abroad.

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. 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 Traverser(TM) product. On August 21, 1998, mPhaseTV.net, Inc. was
organized as a wholly-owned subsidiary to act as the Company's marketing vehicle
for video services and voice-routing over the Internet. On March 2, 2000, mPhase
acquired an interest in mPhaseTelevision.Net, Inc., a joint venture organized to
provide digital television programming content over the Traverser(TM) product.

From mPhase's inception, the operating activities related primarily to research
and development, establishing third-party manufacturing relationships and
developing product brand recognition among telecommunications service providers.
These activities included establishing trials and field tests of the
Traverser(TM) product with Hart Telephone Company in Georgia and establishing a
core administrative and sales organization.

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

                                       28

<PAGE>

telecommunications companies. mPhase believes that future revenues are difficult
to predict because of the length and variability of the controlled roll-out of
the Traverser(TM) to various telecommunications service providers. Since the
Company believes that there may be a significant international market for the
Traverser(TM), 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.

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 Janifest Corporation, 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(TM) product will consist primarily
of payments to manufacturers to acquire the necessary components and assemble
the products and future patent royalties payable to Georgia Tech Research
Corporation, or GTRC.

Research and development.  Research and development expenses consist
principally of payments made to GTRC and Microphase Corporation for development
of the Traverser(TM) product. 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 Traverser(TM), 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.

Litigation.  mPhase has not incurred any material expenses due to litigation
since its inception.

Non-cash compensation charge. mPhase incurred non-cash compensation charges of
$10,343,114 and $1,170,903, for the fiscal years ended 2000 and 2001,
respectively. The Company makes extensive use of stock options and warrants as a
form of compensation to employees, directors and outside consultants.

TWELVE MONTHS ENDED JUNE 30, 2001 VS. JUNE 30, 2000

Revenues. Total revenues for the year ended June 30, 2001 increased to
$10,524,134 from $279,476 for the year ended June 30, 2000. The increase was
primarily attributable to sales of POTS Splitter Shelves and other DSL component
products.

Cost of revenues. Total cost of revenues increased to $5,804,673 for the year
ended June 30, 2001 from $131,756 for the year ended June 30, 2000 due to the
commencement of sales of POTS Splitter Shelves and other DSL component products.
Operating margins for the period ended June 30, 2001 were 45% based on the
limited number of sales achieved. During the year ended June 30, 2001 there was
a general shortage of POTS Splitter Shelves and other DSL component products as
telecommunication companies worldwide have been aggressively deploying DSL
technology. Such margins may be materially smaller in the future as a result of
a greater market balance of supply and demand for such products.

                                       29

<PAGE>

Research and development. Research and development expenses increased from
$10,156,936 in the year ended June 30, 2000 to $10,779,570 for the year ending
June 30, 2001. Such amount includes $4,564,000 incurred with GTRC for such
twelve-month period ended in 2000 as compared to $3,814,000 during the
comparable period in 2001. Research and development expenses incurred primarily
with respect to Microphase Corporation and Flextronics increased from $3,328,443
to $3,405,975 for the twelve-month period ended June 30, 2000 as compared to the
twelve-month period ended June 30, 2001. Research expenditures incurred with
Flextronics are due to our increased efforts in the deployment of the
Traverser(TM), including the design and manufacture of prototypes of the set-top
box and the Central Office POTS Splitter Shelf. Increased research and
development expenditures incurred with Microphase Corporation and Janifest
Corporation; results are related primarily to the POTS Splitter Shelves and
other DSL component products.

General and administrative expenses. General and administrative expenses were
$16,150,711 for the twelve-month period ended on June 30, 2001 as compared to
$17,516,216 for the same period ended June 30, 2000. The decrease in
administrative costs is a result of the decrease of non-cash charges for the
issuance of options to consultants which totaled $6,227,552 for the year ended
June 30, 2001 as compared to $9,078,311 during the comparable period in 2000,
offset by an increase in salaries and marketing expenses.

Net loss. mPhase recorded a net loss of $23,998,734 for the year ended
June 30, 2001 as compared to a loss of $38,161,542 for the same period ended
June 30, 2000. This represents a loss per common share of $(.72) in 2001 as
compared to $(1.41) in 2000.

TWELVE MONTHS ENDED JUNE 30, 2000 VS. JUNE 30, 1999

Revenues. Total revenues for the year ended June 30, 2000 increased to $279,476
from $0 for the year ended June 30, 1999. The increase was primarily
attributable to the initial sales of POTS Splitter Shelves and other DSL
component products.

Research and development. Research and development expenses rose to $10,288,692
for the year ended June 30, 2000, including a $1,010,375 non-cash charge for
options granted to Hart Telephone, increased expenditures with Flextronics in
connection with their efforts in assisting in our completion of the
Traverser(TM) Version 1.1 and increased expenditures with Microphase Corporation
for the completion of the first generation of component products. This includes
approximately $4,560,000 incurred with GTRC in 2000 compared to approximately
$2,450,000 in 1999. This represents an increase of $6,725,791 from the fiscal
1999 balance of $3,562,901.

General and administrative expenses. General and administrative expenses rose to
$17,516,216 for the year ended on June 30, 2000 from $4,683,109 for the same
period ended June 30, 1999. The increase in the administrative costs relate to
several factors. mPhase increased its marketing and public relation efforts in
anticipation of the deployment of its initial sales of component products and
services. The Company also incurred substantial non-cash charges for grants of
options and common stock to consultants totaling $9,078,311 in 2000, including
$2,633,400 to minority co-venturers of mPhaseTelevision.Net, Inc., Alpha Star,
$796,350 to a consultant for services with respect to strategic advisory
services and a $1,808,086 charge recorded for the issuance of common stock in
May to recent investors due to a market value adjustment, as compared to a total
of $2,765,453 of such charges for 1999.

                                       30

<PAGE>

Net Loss. mPhase recorded a net loss of $38,161,542 for the twelve months ending
June 30, 2000 as compared to a net loss of $ 22,838,344 for the same period
ended June 30, 1999. This represents a loss per common share of $(1.41) for 2000
as compared to $(1.42) for the same period in 1999.



                               PLAN OF OPERATIONS

RESEARCH AND DEVELOPMENT ACTIVITIES

As noted above, Georgia Tech conducts a significant amount of research and
development for mPhase pursuant to a basic ordering 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 Traverser(TM) product lines. After the development of the Traverser(TM)
Digital Video and Data Delivery System(TM) (DVDDS(TM)) version 1.1, the Company
expects Georgia Tech to continue research and development of the Traverser(TM)
product to enhance features and functionality, as well as to coordinate the
effort to develop the Traverser(TM), version 2.0 and support the deployment of
additional products utilizing Traverser(TM) technology.

For the years ended June 30, 2000 and 2001 and for the period since inception
(October 2, 1996) to June 30, 2001, approximately $4,564,000, $3,814,000 and
$12,974,000 respectively, has been billed to mPhase for research and development
conducted by Georgia Tech, of which approximately $1,870,480 was included in
accounts payable and accrued expenses as of June 30, 2001. mPhase is the sole,
worldwide licensee of the technology developed by Georgia Tech in conjunction
with the Traverser(TM) product line. Upon completion of the commercial product,
Georgia Tech will receive a royalty of 5% of product sales.

The amount of research and development costs the Company has expended from
October 2, 1996, its inception date, through June 30, 2001 was approximately
$26,989,191. During the year ended June 30, 2001, the Company incurred research
and development expenses of approximately $10,779,570 related to the
continued development of its current DSL products and services.

STRATEGIC ALLIANCES IMPLEMENTED

On January 21, 2000 Alcatel S.A., formerly Newbridge Networks Corporation (NYSE:
NN), a leading provider of networking solutions, agreed to re-sell mPhase's POTS
Splitter Shelf and Splitter card. mPhase provides Newbridge Networks with filter
products, which are its first products sold and utilized. The filter products
enable Newbridge Networks customers, which include 350 of the world's largest
telecommunication services providers, to provide quality, cost efficient voice,
video and Internet access applications. In March of 2000, mPhase shipped its
initial orders and recorded its initial operating

                                       31

<PAGE>

revenue from these products.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2001 mPhase had a working capital deficit of $1,458,227 as compared
to working capital of $3,556,587 at June 30, 2000.

Historically, mPhase had funded its operations and capital expenditures
primarily through private placements of common stock. However, the Company
believes that the recent increase in sales of its POTS Splitter Shelves will
provide some offset to cash flows used in operations, although there can be no
assurance as to the level and growth rate of such sales in future periods as
seen with quarter to quarter fluctuations in components sales due to an overall
volatile telephone equipment market. At June 30, 2001, the Company had cash and
cash equivalents of $31,005 compared to $6,432,417 at June 30, 2000. A major use
of cash was the increased level of inventory and accounts receivable. At June
30, 2001, the Company had accounts receivable and inventory of approximately
$0.3 million and $4.3 million, respectively. This compared to approximately
$151,000 of accounts receivable and no inventory at June 30, 2000. The increase
in both accounts receivable and inventory was primarily due to the commencement
of the Company's sales of its POTS Splitter Shelves, which comprised purchasing
inventory to make its products and recording accounts receivable upon the sales
of the products.

Cash used in operating activities was $13.7 million. The cash used by operating
activities principally consists of the net loss, the net increase in inventory
and accounts receivable offset by a net increase in depreciation and
amortization, non-cash charges for common stock options and warrants issued for
services and increased accounts payable relating to increased levels of
inventory. In the year ended June 30, 2001, net cash of approximately $854,000
used in investing activities consisted of purchases of property and equipment
and costs associated with the Company's licensing of the patents recently
granted to GTRC. The Company has entered into various agreements with GTRC,
pursuant to which the Company receives technical assistance in developing the
commercialization of its Digital Video and Data Delivery System(TM). The Company
has incurred expenses in connection with technical assistance from GTRC totaling
approximately $2,450,253, $4,563,560, and $3,813,683 for the years ended 1999,
2000 and 2001, respectively, and $12,974,300 from the period from inception
through June 30, 2001, of which approximately $1,870,480 was included in
accounts payable and accrued expenses as of June 30, 2001. If and when sales
commence utilizing this technology, the Company will be obligated to pay GTRC a
royalty of 5% of product sales.

The Company plans to continue to invest in technology and telecommunications
hardware and software in connection with the full commercial production of the
Traverser(TM) and the joint venture in mPhaseTelevision.Net, Inc. Such continued
investment is dependent upon the Company's ability to raise sufficient capital.

During the twelve-month period ended June 30, 2001, the Company had three
separate private placements: 1) The Company sold 510,000 shares of its common
stock generating gross proceeds of $2,550,000; 2) The Company sold 2,342,500
shares of its common stock and a like amount of warrants each to purchase one
share of its common stock at an exercise price of $3.00 per share generating
gross proceeds of $4,685,000; 3) The Company sold $1,087,000 shares of its
common stock and a like amount of warrants each to purchase one share of its
common stock at an exercise price of $3.00 per share generating gross proceeds
of $1,087,000. The Company incurred aggregate cash expenses of $512,195 and
issued 390,350 shares of its common stock and 162,600 warrants each to purchase
one share of its common stock at $3.00 per share to finders, consultants and
investment banking firms in connection with these private placements.

                                       32

<PAGE>

As of June 30, 2001, mPhase had no material commitments for capital
expenditures.

LOSSES DURING THE DEVELOPMENT STAGE AND MANAGEMENT'S PLANS

Through June 30, 2001, the Company had incurred development stage losses
totaling approximately $92,120,925, and at June 30, 2001 was in a working
capital deficit position of $1,458,227. At June 30, 2001, the Company had
approximately $31,005 of cash, cash equivalents and approximately $292,400 of
trade receivables to fund short-term working capital requirements. The Company
has recorded additional revenues of approximately $520,000 through September 30,
2001 related to its POTS splitter shelves and DSL component products. 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 2002 and continue its
development and commercialization efforts. Management's plans in this regard
include, but are not limited to, the following:

     Subsequent to year end, the Company has secured $1,000,000 of subscriptions
     to purchase common stock from certain officers and directors. To date,
     $675,000 of such subscriptions have been collected. The Company presently
     has ongoing discussions and negotiations with a number of additional
     financing alternatives, one or more of which it believes will be able to
     successfully close to provide necessary working capital, while maintaining
     sensitivity to shareholder dilution issues.

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 in negotiation with certain strategic vendors to convert
     outstanding current liabilities into equity.
     The Company is currently negotiating with several organizations for the
     commencement of commercial sales of its Traverser products, including
     deployment at existing test sites.
     The Company has had discussions with certain companies for increasing sales
     of its POTS splitter and component products.

Management believes that actions presently being taken to complete the Company's
development stage through the introductory roll-out of its Traverser (TM)
Digital Video and Data Delivery System (TM) will be successful. 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 financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

The Company's current planned cash requirements for fiscal 2002 are based upon
certain assumptions, including its ability to raise additional financing and
increased sales of its POTS Splitter Shelf. mPhase has made significant
reductions in expenses including marketing and research and development
expenses. Should these cash flows not be available, mPhase believes it would
have the ability to revise its operating plan and make further reductions in
expenses.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item is set forth on pages F1-F23 attached
hereto.

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

                  None.


                                       33

<PAGE>

                                    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, 2001 are as follows:

NAME                                  AGE         POSITION(S)
----                                  ---         -----------

Necdet F. Ergul                       77          Chairman of the Board and
                                                  Director
Ronald A. Durando                     44          Chief Executive Officer and
                                                  Director

Gustave T. Dotoli (2)                 65          Chief Operating Officer and
                                                  Director

David Klimek                          48          Chief Technology Officer and
                                                  Director
Martin Smiley                         54          Executive Vice President,
                                                  General Counsel and Chief
                                                  Financial Officer

OUTSIDE DIRECTORS
J. Lee Barton                         47          Director
Anthony H. Guerino (1)(2)             55          Director
J. Allen Layman (1)                   48          Director
Craig Vickers (2)                     55          Director
Abraham Biderman (1)                  52          Director
---------------------------------------------------------
   (1)      Member of the Audit Committee
   (2)      Member of the Compensation Committee

All of the directors were elected by the shareholders on May 30, 2001. The
current executive officers and directors, along with their backgrounds, are set
forth below:

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 President
and Chief Executive Officer of Microphase Corporation, 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 Chief Operating Officer 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. and President and CEO of
PacketPort.Com Inc.

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. 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.

DAVID KLIMEK is a co-founder of mPhase and has served as the Company's Chief

                                       34

<PAGE>

Technology Officer since June 1997 and as Director of Engineering since its
inception in October 1996. Mr. Klimek joined the Board of Directors in October
1996. From 1990-1996, Mr. Klimek owned and operated Mashiyach Design, Inc., an
engineering consulting firm. He has more than 18 years of technical engineering
and design expertise and presently holds 14 individual or co-authored U.S.
patents. From 1982 to 1990, Mr. Klimek was the R&D manager of Digital Controls,
Inc. Mr. Klimek holds a B.S. in Electrical Engineering from Milwaukee School of
Engineering, Milwaukee, Wisconsin.

J. LEE BARTON has served as one of mPhase's directors since February 1999. Mr.
Barton also serves as President and Chief Executive Officer of Lintel, Inc., a
holding company that owns Hart Telephone Company, a 10,000-line local exchange
carrier in northeast Georgia; Hart Communications, an interconnect, carriers'
carrier and long distance company; Hart Cellular, a partnership in two RSA's in
north Georgia; Hart Cable, a recently formed cable television company and Hart
GlobalNet.

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.

J. ALLEN LAYMAN has been a member of the Board since February 23, 2000. Mr.
Layman is the President and Chairman of the Board of NETOLOS, which provides
services in the telecommunications industry, and has been employed by R&B
Telephone in various capacities since 1974. Mr. Layman is a member of several
boards of directors, including The Bank of Fincastle, the United States
Telephone Association, the Organization for the Promotion and Advancement of
Small Telecommunications Companies, Virginia Telephone Industry Association,
Valley Network Partnership, Layman Development Corporation, Botetourt County
Public Schools Education Foundation, Inc., Virginia PCS Alliance, West Virginia
PCS Alliance and the Blue Ridge Mountains Council, Boy Scouts of America.

CRAIG VICKERS has been a member of the Board since March 4, 2000. From 1995 to
the present, Mr. Vickers has been a principal of Convergence Capital, a firm
that provides advisory services in international and domestic investment
banking, in corporate finance and in the industry sectors of media, information
communications and entertainment. Mr. Vickers is responsible for advising
management of mid-stage companies on strategic relationships, mergers and
acquisition matters. Prior to his position at Convergence Capital, to Mr.
Vickers served as the Director, Business Development, Sports Information
Services at Infotechnology. Mr. Vickers is a member of the Internet Society, the
MIT Enterprise Forum, the New York Media Association, the New York Venture
Group, ABANA and the US/Arab Chamber of Commerce.

ABRAHAM BIDERMAN has been a member of the Board since August 3, 2000. Mr.
Biderman is Executive Vice President of Lipper & Company; Executive Vice
President, Secretary and Treasurer of The Lipper Funds; and Co-Manager of Lipper
Convertibles, L.P. Prior to joining Lipper & Company 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

                                       35

<PAGE>

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 joined mPhase as Executive Vice President, Chief Financial Officer
and General Counsel in September 2000. With over twenty years experience as a
corporate finance and securities attorney and as an investment banker, Mr.
Smiley serves as mPhase's strategic financial leader. 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.

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 2001, and based also on written
representations from those persons, the Company believes that there was
compliance with Section 16(a) filing requirements for 2001. All the officers and
directors filed all of the required forms, but in certain instances the
directors were late with respect to the filing of Form 5s and David Klemek was
late in the filing of a Form 4.

                                       36

<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth, for the fiscal year ended June 30, 2001 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, 2001.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                       LONG-TERM COMPENSATION
                                                                       ----------------------
                                                 ANNUAL COMPENSATION  RESTRICTED   SECURITIES
                                                 ------ ------------     STOCK     UNDERLYING
                                       YEAR       SALARY       BONUS    AWARD(S)  OPTIONS/SARS
                                       ----       ------       -----    --------  ------------

<S>                                    <C>       <C>         <C>       <C>        <C>
Ronald A. Durando (1) -                2001      $395,004             -        -   1,225,000
Chief Executive Officer                2000       312,920    $2,398,032  157,500     250,000
and President                          1999       250,000    $  275,000  400,000     562,500


Gustave Dotoli (1)                     2001       342,917             -        -     860,000
Chief Operating Officer                2000       231,670       362,000  232,500     175,000
                                       1999       175,000       100,000  175,000     300,000


Susan E. Cifelli(2)                    2001       157,874             -        -           -
Former Executive Vice President        2000       205,850        30,000   20,000     125,000
Sales and Marketing                    1999        45,080             -        -     130,000



David Klimek(1)                        2001       175,577             -        -     110,000
Chief Technology Officer               2000       106,500        30,000        -      50,000
                                       1999        77,138        35,000  275,000     150,000

Martin Smiley (3)                      2001       163,435             -        -     670,000
Executive Vice President               2000             -             -        -           -
Chief Financial Officer                1999             -             -        -           -
General Counsel
</TABLE>

__________________________________
(1)  Includes $15,000 annual stipend as a director.


(2) Susan Cifelli is no longer employed by mPhase.

(3) Martin Smiley joined the Company in August, 2000.

No individual named above received prerequisites or non-cash compensation during
the years indicated which exceeded the lesser of $50,000 or an amount equal to
10% of such person's salary. No other executive officer received compensation
and bonuses that exceeded $100,000 during any year.

                                       37

<PAGE>

                                  STOCK OPTIONS

The following table contains information regarding options granted in the fiscal
year ended June 30, 2001 to the executive officers named in the summary
compensation table above. For the fiscal year ended June 30, 2001, mPhase
granted options to acquire up to an aggregate of shares to employees and
directors.

                        OPTION GRANTS IN LAST FISCAL YEAR
                               (INDIVIDUAL GRANTS)

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
                                                           Weighted Average   Weighted Average
        Name               Number of      % of Total       Exercise or Base    Market Price    Expiration Date
                          Securities     Options/SARS       Price ($/Share)    on Grant Dates
                          Underlying      Granted to
                          Option/SARS    Employees in
                          Granted (#)     Fiscal Year
----------------------------------------------------------------------------------------------------------------
<S>                       <C>            <C>               <C>                 <C>             <C>
Ron A. Durando             1,225,000         21.8%              $1.05            $1.05               2006
----------------------------------------------------------------------------------------------------------------
Gustave T. Dotoli            860,000         15.3%              $1.05            $1.05               2006
----------------------------------------------------------------------------------------------------------------
David Klimek                 110,000          2.0%              $1.68            $1.68               2006
----------------------------------------------------------------------------------------------------------------
Martin Smiley                670,000         11.9%              $2.20            $2.20               2006
----------------------------------------------------------------------------------------------------------------
</TABLE>


The following table sets forth information with respect to the number and value
of outstanding options held by executive officers named in the summary
compensation table above at June 30, 2001. During the fiscal year ended June 30,
2001, 320,000 options were exercised. The value realized is the difference
between the closing price on the date of exercise and the exercise price. The
value of unexercised in-the-money options is based upon the difference between
the closing price of mPhase's common stock on June 30, 2001, and the exercise
price of the options.

               AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
                          FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                        Shares      Value         NUMBER OF SECURITIES          VALUE OF UNEXERCISED
                       Acquired    Realized      UNDERLYING UNEXERCISED       IN-THE-MONEY OPTIONS AT
                      on Exercise     $          OPTIONS AT YEAR END (#)            YEAR END ($)
                      ----------  -----------  --------------------------   ---------------------------
                                               EXERCISABLE  UNEXERCISABLE    EXERCISABLE  UNEXERCISABLE
                                               -----------  -------------   ------------  -------------
<S>                   <C>         <C>          <C>          <C>             <C>           <C>
Ronald A. Durando         --          --        2,975,000     3,000,000       $604,900     $1,800,000
Gustave T. Dotoli       140,000    $857,500     1,810,000     1,500,000       $508,500     $  900,000
David Klimek              --          --          497,500       150,000       $ 75,800     $   90,000
Martin Smiley             --          --          599,687        70,313          --            --
</TABLE>

                                       38

<PAGE>

Compensation of Directors

mPhase pays each of the directors $15,000 annually for their services as a
director and for their attendance of Board and committee meetings. Additionally,
some of the directors have been granted options under the Company's Stock
Incentive Plan and the Company has included those grants in the table entitled
"Security Ownership of Certain Beneficial Owners and Management" and the notes
thereto.

Employment Agreements

mPhase has an employment agreement with Ronald A. Durando, the President, Chief
Executive Officer and Director. The agreement, executed June 24, 1999, is for a
term of thirty-six months expiring on June 30, 2002. Under the terms of the
agreement, Mr. Durando receives a base annual salary of $275,000, a bonus and a
salary increase based upon performance review every six months, beginning six
months from the effective date of the agreement, as well as health benefits,
vacation and such other fringe benefits as would be paid to our similarly
situated senior management. In consideration of devoting such time as would be
required of the Chief Executive Officer to mPhase's business and specifically to
his duties under the agreement to provide investor relations, Mr. Durando is
entitled to a bonus at the end of each year equal to five percent (5%) of the
increase in the market value of the issued and outstanding shares, of which
bonus twenty-five percent (25%) shall be payable in cash and the remaining
balance in shares.

Such agreement is terminable upon Mr. Durando's death, permanent disability, or
for "just cause" (defined below) and is renewable within two months of the
expiration date of the agreement upon the mutual terms agreed to by Mr. Durando
and mPhase. Mr. Durando shall be deemed "permanently disabled" under the
agreement if he shall fail to render and perform the executive services required
under the agreement for a continuous period of three consecutive months. "Just
cause" is defined under the agreement as the commission of acts constituting
theft, embezzlement, the receipt of funds or property under false pretenses or
similar acts of gross misconduct with respect to our property, or the conviction
of a felony involving matters not directly related to the Company business if,
in the Board's discretion, it adversely affects his ability to perform his
executive duties.

The agreement also contains work-for-hire, confidentiality and non-disclosure
provisions. In the event that Mr. Durando breaches such provisions, mPhase is
entitled to injunctive relief restraining him from any further breach, in
addition to any other remedies that the Company may have arising out of such
breach.

Additionally, in the event of a change in control that is not approved by Mr.
Durando as one of mPhase's Directors or shareholders, he is entitled to exercise
an option to purchase 3,000,000 shares at a price of $1.00 per share.

mPhase also has an employment agreement with Gustave T. Dotoli, the Chief
Operating Officer and Director. The agreement, executed June 24, 1999, is for a
term of thirty-six months expiring June 30, 2002, and Mr. Dotoli receives a base
annual salary of $200,000, a bonus and a salary increase based upon performance
review every six months, beginning six months from the effective date of the
agreement, as well as health benefits, vacation and such other fringe benefits
as would be paid to mPhase's similarly situated senior management.

                                       39

<PAGE>

The employment agreement is terminable upon Mr. Dotoli's death, permanent
disability, or for "just cause"(defined below), and is renewable within two
months of the expiration date of the agreement upon the mutual terms agreed to
by Mr. Dotoli and mPhase. Mr. Dotoli shall be deemed "permanently disabled"
under the agreement if he shall fail to render and perform the executive
services required under the agreement for a continuous period of three
consecutive months. "Just cause" is defined under the agreement as the
commission of acts constituting theft, embezzlement, the receipt of funds or
property under false pretenses or similar acts of gross misconduct with respect
to the Company's property, or the conviction of a felony involving matters not
directly related to the Company's business if, in the Board's discretion, it
adversely affects his ability to perform his executive duties. The agreement
also contains work-for-hire, confidentiality and non-disclosure provisions.

mPhase has an employment agreement with Martin Smiley, the Executive Vice
President, Chief Financial Officer and General Counsel. The agreement executed
August 21, 2000, is for a term of twenty-four months expiring on August 20,
2002. Mr. Smiley receives a base annual salary of $175,000, a bonus and a salary
increase based upon performance review every twelve months, beginning twelve
months from the effective date of the agreement, as well as health benefits,
vacation and such other fringe benefits as would be paid to the Company's
similarly situated senior management.

mPhase has an employment agreement with David Klimek, the Chief Technical
Officer and a Director. The Agreement dated as of April 1, 2001 is for a term of
twelve months. Mr. Klimek receives an annual salary of $170,000 per annum and a
bonus based upon performance as well as health benefits, vacation and such other
fringe benefits as would be paid to the Company's similarly situated senior
management. In addition, in the event of a change of control that is not
approved by Mr. Klimek as one or the Company's directors or shareholders, he is
entitled to exercise an option to purchase 150,000 shares at $1.00 per share.

Both Mr. Smiley's and Mr. Klimek's agreements are terminable upon death,
significant disability, or for good cause, and are renewable within one month of
the expiration date of such agreements upon the mutual terms agreed to by such
employees and mPhase. Such employees shall be deemed "significantly disabled"
under their respective agreements for a continuous period of six months. "Good
cause" is defined under each of the agreements as the commission of acts
constituting a felony or crime; fraud or misappropriation of funds; personal
dishonesty, incompetence or, gross negligence; willful misconduct; repeated use
of drugs, alcohol or similar substance; or breach by such employee of his
agreement. Such agreements also contain confidentiality and non-disclosure
provisions.

Susan E. Cifelli is no longer employed with the Company.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of the Compensation Committee during fiscal 2001 were Messrs.
Dotoli, Vickers and Guerino. Mr. Dotoli is the Chief Operating Officer. Neither
Messrs. Vickers nor Guerino has 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 2001 that has a director or executive officer serving on
mPhase's Board of Directors, except that Mr. Dotoli is also a member of the
Board of Directors of PacketPort.com, Inc., a

                                       40

<PAGE>

company in which Mr. Durando serves as Chief Executive Officer. Mr. Dotoli,
together with Mr. Durando, is a controlling shareholder of Janifast and is also
a director. Janifast has produced components for the Traverser(TM), and may
produce such components for mPhase in the future.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of October 5, 2001 certain information
regarding the beneficial ownership of shares of our common stock:

    - by each of mPhase's directors;
    - by each person who is known by the Company to beneficially own 5% or more
of the outstanding shares of common stock;
    - by each of the Company's executive officers named in the summary
compensation table; and
    - by all of the Company's executive officers and directors as a group.

                                                         OPTIONS
                                                        AMOUNT AND
                                                        NATURE OF    PERCENTAGE
                                                        BENEFICIAL   OF COMMON
NAME AND ADDRESS OF BENEFICIAL OWNER(1)                 OWNERSHIP     STOCK(2)
---------------------------------------                 ----------   ----------
Necdet F. Ergul .....................................   1,347,500      1.9
Ronald A. Durando(3)(8)..............................   5,485,363      5.7
Gustave Dotoli (6)...................................   2,984,700      2.7
J. Lee Barton(4) ....................................   5,559,000      3.1
David Klimek ........................................   1,177,500       .9
Craig Vickers .......................................     134,000       --
Lintel, Inc.(6) .....................................   4,049,000      9.2
Abraham Biderman (5) ................................      85,000       --
J. Allen Layman (7) .................................      55,000       --
Anthony Guerino (7) .................................      55,000       --
Martin Smiley .......................................     977,500       .6
All executive officers and directors as a group
(ten people) ........................................  17,860,563     14.9

___________________

*   Less than 1%

(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 43,898,367 shares outstanding on October 5, 2001,
2001 and, with respect to each such person holding options or warrants to
purchase shares that are exercisable within 60 days after October 5, 2001, 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. The number of shares indicated in the
table include the following number of shares issuable upon the exercise of
warrants or options: Necdet F. Ergul--497,500; Ronald A. Durando--2,975,000;
Gustave Dotoli--1,810,000; J. Lee Barton--170,000; David Klimek--785,000; and
Martin Smiley--695,250. J. Allen Layman--55,000; Craig Vickers--134,000;,
Abraham Biderman--80,000; and Anthony Guerino--55,000.

(3) Includes 1,622,863 shares held by Durando Investment LLC which Mr. Durando
controls and 50,000 shares held by Nutley Securities, Inc., a company
wholly-owned by Mr. Durando.

(4) Includes 100,000 shares owned by Kim Barton, his wife and 100,000 shares
owned by Betty Barton, his daughter; and 4,049,000 shares owned by Lintel, Inc.,
a company in which Mr. Barton is the President and Chief Executive Officer, and
700,000 shares owned by Barton Investment.

                                       41

<PAGE>

(5) Includes 5,000 shares of common stock and options for 80,000 shares of
common stock. Does not include 665,225 shares held by Lipper & Co, a company
Mr. Biderman is a director of.

(6) The address for J. Lee Barton and Lintel, Inc. is 196 North Forest Avenue,
P.O. Box 388, Hartwell, GA 30643.

(7) Includes options for 25,000 shares of common stock received as compensation
for participation on the Board of Directors.

(8) Does not include contingent options execisable only upon a change in control
of our Company, not voted for by such person as a stockholder or director,
Ronald Durando--3,000,000; Gustave Dotoli--1,500,000; David Klimek--150,000.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

mPhase's management is affiliated by employment at and/or ownership of a related
group of companies, including Microphase Corporation, Complete
Telecommunications, Inc. (which was dissolved subject to a settlement dated
August 16, 1999), Packet Port, Inc. and PacketPort.com and Janifast
Holdings,Ltd., which may record material transactions with mPhase. As a result
of such affiliations, the Company's management in the future may have
conflicting interests with these affiliated companies.

Necdet F. Ergul, Ronald A. Durando and Gustave T. Dotoli, mPhase's Chairman,
Chief Executive Officer and Chief Operating Officer, respectively, are executive
officers and shareholders of Microphase.

    - The Company reimburses Microphase $51,050 per month for research and
      development services and administrative expenses incurred for the use of
      Microphase's office space, lab facilities and administrative staff.

One of mPhase's directors, J. Lee Barton, is the President and Chief Executive
Officer of Lintel Inc. Lintel is the parent corporation of Hart Telephone
Company, our beta customer located in Hartwell, Georgia, where the Company has
installed its prototype product and commenced beta testing. In December 1998,
mPhase issued 3,115,000 shares in a private placement to J. Lee Barton, several
members of his family, Lintel, several employees of Lintel and two employees of
Microphase for a purchase price of approximately $1.03 per share, or an
aggregate purchase price of $3,197,416. In fiscal year 1999, J. Lee Barton
received 75,000 shares and an option for 100,000 shares. In fiscal year 2000, J.
Lee Barton received $285,000 bonus, a stock award of 140,000 shares and options
for 225,000 shares, which includes options to Hart Telephone. In fiscal year
2001, mPhase awarded J. Lee Barton options for 120,000 shares.

Janifast Holdings, Ltd., a Delaware corporation, is the parent corporation of
the manufacturer, which has produced components for mPhase's prototype
Traverser(TM) DVDDS(TM) product, and will produce such components for the
Company in the upcoming fiscal year. Necdet F. Ergul, Ronald A. Durando and
Gustave T. Dotoli are controlling shareholders of Janifast with an aggregate
ownership interest of greater than 75% of Janifast. Mr. Durando is chairman of
the Board of Directors and each of Messrs. Dotoli and Ergul are directors of
Janifast.

                                       42

<PAGE>

On November 26, 1999, Mr. Durando acquired, via a 100% ownership of Packet Port,
Inc., a controlling interest in Linkon Corporation, now known as PacketPort.com,
Inc. On November 26, 1999, Packet Port, 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 mPhase's common stock to Packet Port,
Inc. Mr. Durando and Mr. Dotoli are president and vice president of
PacketPort.com, Inc. respectively.

Abraham Biderman became a member of mPhase's Board in August, 2000. Mr. Biderman
is the Executive Vice President of Lipper & Company, L.P., which received a
total of 665,225 shares of common stock for its services as a placement agent
for mPhase's May/June 1999 May 2000, September 2000 and January 2001, private
placements and the company recorded $69,000 in fees for the May/July 2001
private placements.

                                       43

<PAGE>

ITEM 14. 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 STATEMENTS

                                                                         PAGES
                                                                         -----
Report of Arthur Andersen LLP                                             F-1
Report of Schuhalter, Coughlin & Suozzo, LLC                              F-2
Consolidated Balance Sheets as of June 30, 2000 and 2001                  F-3
Consolidated Statements of Operations for the years ended
  June 30, 1999, 2000 and 2001 and for the period from inception
  (October 2, 1996) through June 30, 2001                                 F-4
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 four years in
  the period ended June 30, 2001                                          F-5
Consolidated Statements of Cash Flows for the years ended
  June 30, 1999, 2000 and 2001 and for the period from inception
  (October 2, 1996) through June 30, 2001                                 F-8
Notes to Consolidated Financial Statements                                F-9

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)).

          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)).

          10.5*               Employment Agreement between Martin S. Smiley and
                              the Company, dated as of August 15, 2000
                              (incorporated by reference to Exhibit 10.5 to our
                              registration statement on Form S-1 filed on June
                              18, 2001 (file no. 33-63262)).

          10.6*               Employment Agreement between David C. Klimek and
                              the Company, dated as of April 1, 2001
                              (incorporated by reference to Exhibit 10.6 to our
                              registration statement on Form S-1 filed on June
                              18, 2001 (file no. 33-63262)).

          10.7*               Manufacturing Services Agreement, dated March 14,
                              2001, by and between the Company and Flextronics
                              International USA, Inc (incorporated by reference
                              to Exhibit 10.7 to our registration statement on
                              Form S-1 filed on June 18, 2001 (file no.
                              33-63262)).

          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*              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)).

          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 Mauriello, Franklin &
                              LoBrace, P.C. dated August 31, 1998 (incorporated
                              by 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 on Form 10SB-12G filed on May 6, 1999
                              (file no. 000-24969)).

          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 Arthur Andersen LLP (incorporated by
                              reference to our registration statement, Amendment
                              No. 2 filed on Aug. 15, 2001.

          23.5*               Consent of Schuhalter, Coughlin & Suozzo, LLC
                              (incorporated by reference to our registration
                              statement, Amendment No. 2 filed on Aug. 15, 2001.

          23.6*               Consent of Piper Marbury Rudnick & Wolfe LLP
                              (included in Exhibit 6.1) (incorporated by
                              reference to our registration statement, Amendment
                              No. 2 filed on Aug. 15, 2001.


* Incorporated by reference.

                                       44

<PAGE>

                    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

                                       F-1

<PAGE>

               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, LLC

Raritan, New Jersey
January 28, 1999

                                       F-2

<PAGE>

                            mPHASE TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                           CONSOLIDATED BALANCE SHEETS
                                  JUNE 30, 2001

<TABLE>
<CAPTION>
                                                                     JUNE 30,
                                                              2000            2001
                                                          ------------    ------------
<S>                                                       <C>             <C>
                                     ASSETS
Current assets:
Cash and cash equivalents                                 $  6,432,417    $     31,005
Accounts receivable, net of bad debt reserve of $0
and $29,218, respectively                                      151,186         292,434
Due from officer                                                     -         100,000
Inventory                                                            -       4,303,895
Prepaid expenses and other current assets                      828,726         856,979
                                                          ------------    ------------

  Total current assets                                       7,412,329       5,584,313
                                                          ------------    ------------

Production advances-related parties                          1,109,641               -
Property and equipment, net                                  1,323,756       2,198,845
Patents and licenses, net                                    1,338,520       1,026,524
Other assets                                                         -         187,500
                                                          ------------    ------------

  Total assets                                            $ 11,184,246    $  8,997,182
                                                          ============    ============

                   LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable                                             1,520,505       5,116,029
Accrued expenses                                             1,837,532       1,742,138
Due to related parties                                         497,705         184,373
                                                          ------------    ------------

  Total current liabilities                                  3,855,742       7,042,540
                                                          ------------    ------------

Other liabilities                                                    -          90,000

COMMITMENTS AND CONTINGENCIES (Note 12)

STOCKHOLDERS' EQUITY:
Common Stock, stated value $.01, 150,000,000 shares
  authorized; 31,404,540 in 2000 and 41,344,467 in 2001
  shares issued and outstanding, respectively                  314,045         413,445
Additional paid-in capital                                  74,370,291      92,293,370
Deferred compensation                                       (1,225,668)       (713,275)
Deficit accumulated during development stage               (66,122,191)    (90,120,925)
Less-treasury stock, 13,750 shares, at cost                     (7,973)         (7,973)
                                                          ------------    ------------

  Total stockholders' equity                                 7,328,504       1,864,642
                                                          ------------    ------------

  Total liabilities and stockholders' equity              $ 11,184,246    $  8,997,182
                                                          ============    ============
</TABLE>

              The accompanying notes are an integral part of these
                          consolidated balance sheets.

                                       F-3

<PAGE>

                            mPHASE TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                      From
                                                                                   Inception
                                                                                 (October 2,
                                                    For the Years Ended             1996) to
                                                          June 30,
                                                                                    June 30,
                                      1999            2000           2001             2001
                                  ------------   -------------   -------------   -------------
<S>                               <C>            <C>             <C>             <C>
TOTAL NET REVENUES                $          -    $    279,476   $ 10,524,134    $ 10,803,610
                                  ------------   -------------   -------------   -------------

COSTS AND EXPENSES:
Cost of Sales                                -         131,756       5,804,673       5,936,429
Research and development             3,562,901      10,156,936      10,779,570      26,989,191
 (including non-cash stock
 related charges of $382,461,
 $1,010,375, $0 and
 $1,392,836, respectively)
General and administrative           4,683,109      17,516,216      16,150,711      40,638,057
 (including non-cash stock
 related charges of $2,364,910,
 $9,078,311, $6,227,552 and
 $17,840,773 respectively)
Depreciation and amortization          410,303         471,101         660,372       1,581,429
Non-cash charges for stock-
  based employee compensation       13,002,605      10,343,114       1,170,903      24,516,622
                                  ------------   -------------   -------------   -------------

  Total costs and expenses          21,658,918      38,619,123      34,566,229      99,661,728
                                  ------------   -------------   -------------   -------------

Loss from operations               (21,658,918)    (38,339,647)    (24,042,095)    (88,858,118)
                                  ------------   -------------   -------------   -------------

OTHER (EXPENSE) INCOME:
Minority interest loss in
 consolidated subsidiary                     -          20,000               -          20,000
Loss from unconsolidated
 subsidiary                         (1,161,622)              -               -      (1,466,467)
Interest (expense) income, net         (17,804)        158,105          43,361         183,660
                                  ------------   -------------   -------------   -------------

  Total other (expense) income      (1,179,426)        178,105          43,361      (1,262,807)
                                  ------------   -------------   -------------   -------------

  Net loss                        $(22,838,344)  $ (38,161,542)  $ (23,998,734)  $ (90,120,925)
                                  ============   =============   =============   =============

LOSS PER COMMON SHARE, basic
  and diluted                     $      (1.42)  $       (1.41)  $       (0.72)
                                  ============   =============   =============
WEIGHTED AVERAGE COMMON
 SHARES OUTSTANDING, basic
  and diluted                       16,038,009      26,974,997      33,436,641
                                  ============   =============   =============
</TABLE>



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


                                       F-4

<PAGE>



                            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 FOUR YEARS
                        IN THE PERIOD ENDED JUNE 30, 2001

<TABLE>
<CAPTION>

                                              Common Stock                                                               TOTAL
                                       -------------------------              Additional                              STOCKHOLDERS'
                                                        $ .01      Treasury     Paid-In     Deferred    Accumulated     EQUITY
                                          Shares    Stated Value     Stock      Capital   Compensation     Deficit     (DEFICIT)
<S>                                     <C>         <C>           <C>          <C>        <C>           <C>           <C>
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)
</TABLE>

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

                                       F-5

<PAGE>

                            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 FOUR YEARS
                        IN THE PERIOD ENDED JUNE 30, 2001

<TABLE>
<CAPTION>

                                              Common Stock                                                                 TOTAL
                                         -----------------------               Additional                              STOCKHOLDERS'
                                                        $.01       Treasury     Paid-In     Deferred      Accumulated    EQUITY
                                           Shares    Stated Value    Stock      Capital   Compensation      Deficit     (DEFICIT)
<S>                                     <C>          <C>           <C>       <C>          <C>            <C>           <C>
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 costs of $107,000       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
  costs of $45,353                          642,000         6,420         -     1,553,227             -             -     1,559,647
Issuance of common stock in private
  placement, net of offering costs
  of $679,311                             4,426,698        44,267         -    10,343,167             -             -    10,387,434
Issuance of stock options for services            -             -         -     7,129,890             -             -     7,129,890
Issuance of warrants for services                 -             -         -        16,302             -             -        16,302
Deferred employee stock option
  compensation                                    -             -         -             -      (140,000)            -      (140,000)
Net loss                                          -             -         -             -             -   (22,838,344)  (22,838,344)
                                        -----------  ------------  --------  ------------  ------------  ------------  ------------

BALANCE, JUNE 30, 1999                   23,367,741       233,677  $ (7,973) $ 34,848,951  $   (140,000) $(27,960,649) $  6,974,006
Issuance of common stock and options
  in settlement                              75,000           750         -       971,711             -             -       972,461
Issuance of common stock upon exercise
  of warrants and options                 4,632,084        46,321         -     5,406,938             -             -     5,453,259
Issuance of common stock in private
  placement, net of cash offering
  costs of $200,000                       1,000,000        10,000         -     3,790,000             -             -     3,800,000
Issuance of common stock in private
  placement, net of cash offering
  costs of $466,480                       1,165,500        11,655         -     9,654,951             -             -     9,666,606
Issuance of common stock for services     1,164,215        11,642         -     8,612,265             -             -     8,623,907
Issuance of options for services                  -             -         -     9,448,100             -             -     9,448,100
Deferred employee stock option
  compensation                                    -             -         -     1,637,375    (1,637,375)            -             -
Amortization of deferred employee
 stock option compensation                        -             -         -             -       551,707             -       551,707
Net loss                                          -             -         -             -             -   (38,161,542) (38,161,542)
                                        -----------  ------------  --------  ------------  ------------  ------------  ------------
BALANCE, JUNE 30, 2000                   31,404,540  $    314,045  $ (7,973) $ 74,370,291  $ (1,225,668) $(66,122,191) $  7,328,504
</TABLE>


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


                                       F-6

<PAGE>

                            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 FOUR YEARS
                        IN THE PERIOD ENDED JUNE 30, 2001

<TABLE>
<CAPTION>
                                          Common Stock                                                                    TOTAL
                                    --------------------------              Additional                  Accumulated   STOCKHOLDERS'
                                                      $.01       Treasury    Paid-In       Deferred       Deficit       EQUITY
                                      Shares      Stated Value     Stock     Capital     Compensation                  (DEFICIT)
<S>                                  <C>          <C>            <C>       <C>           <C>
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
                                    ===========   ============   ========  ============  ============  ============   ============
</TABLE>

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

                                       F-7

<PAGE>
                            MPHASE TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                                 Inception
                                                                                                (October 2,
                                                              For the Years Ended                 1996) to
                                                                  June 30,                        June 30,
                                                    1999            2000            2001            2001
                                                ------------    ------------    ------------    ------------
<S>                                             <C>             <C>             <C>             <C>
CASH FLOWS FROM OPERATING  ACTIVITIES:
Net loss                                        $(22,838,344)   $(38,161,542)   $(23,998,734)   $(90,120,925)
Adjustments to reconcile net loss to
  net cash used in operating activities:
  Depreciation and amortization                      454,494         756,055       1,235,213       2,514,842
  Book value of fixed assets disposed                  7,062           5,796          61,414          74,272
  Loss on unconsolidated subsidiary                1,161,622               -               -       1,466,467
  Provision for doubtful accounts                          -               -          29,218          29,218
  Impariment of note receivable                            -               -         212,500         212,500
  Non-cash common stock, common stock
  option and warrant expense                      15,768,058      20,431,800       7,398,455      43,748,313
  Changes in operating assets and liabilities:
  Accounts receivable                                      -        (151,186)       (170,466)       (321,652)
  Increase in inventory                                    -               -      (4,303,895)     (4,303,895)
  Prepaid expenses and other
   current assets                                    (82,100)       (730,626)         88,280        (740,446)
  Production advances-related parties                      -      (1,109,641)      1,109,641               -
  Increase in other assets                                 -               -        (150,000)       (150,000)
  Cash overdraft                                      (8,432)              -               -               -
  Receivables from subsidiary                              -               -               -        (150,000)
  Due from officer                                         -               -        (100,000)       (100,000)
  Accounts payable                                (1,272,815)      1,086,736       2,802,008       4,322,513
  Accrued expenses                                 1,400,779        (391,997)         (5,394)      1,682,766
  Due to related parties                            (511,394)        483,365       2,106,707       2,168,737
                                                ------------    ------------    ------------    ------------
    Net cash used in operating
      activities                                  (5,921,070)    (17,781,240)    (13,685,053)    (39,667,290)
                                                ------------    ------------    ------------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Investment in patents and licensing rights         (59,907)        (38,272)       (148,127)       (301,071)
  Purchase of property and equipment                (280,744)     (1,348,210)       (705,577)     (2,432,355)
                                                ------------    ------------    ------------    ------------

    Net cash used in investing
      activities                                    (340,651)     (1,386,482)       (853,704)     (2,733,426)
                                                ------------    ------------    ------------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Repayment of loan payable                         (210,000)              -               -               -
  Net proceeds from private placement
   of common stock and exercise of
   options and warrants                           14,449,581      17,622,279       8,137,345      42,439,694
  Repurchase of treasury stock
   at cost                                                 -               -               -          (7,973)
                                                ------------    ------------    ------------    ------------
    Net cash provided by financing
      activities                                  14,239,581      17,622,279       8,137,345      42,431,721
                                                ------------    ------------    ------------    ------------

Net increase (decrease) in cash                    7,977,860      (1,545,443)     (6,401,412)         31,005
CASH AND CASH EQUIVALENTS,
  beginning of period                                      -       7,977,860       6,432,417               -
                                                ------------    ------------    ------------    ------------
CASH AND CASH EQUIVALENTS,
  end of period                                 $  7,977,860    $  6,432,417    $     31,005    $     31,005
                                                ============    ============    ============    ============


         The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                       F-8

<PAGE>

                            mPHASE TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2001

1. 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 proprietary Traverser(TM) System, which delivers MPEG2 native
non-Internet Protocol based video utilizing existing twisted pair copper wire
infrastructure in "plain old telephone systems" ("POTS") and other related
component products and services.

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(TM) Digital
Video and Data Deliver System(TM) ("Traverser(TM)").

On August 21, 1998, the Company incorporated a 100% wholly-owned subsidiary
called mPhaseTV.net, Inc., a Delaware corporation. The Company intends for this
subsidiary to be the marketing vehicle for its video services over the Internet.

On March 2, 2000 the Company acquired a 50% interest in mPhaseTelevision.Net,
Inc. , an incorporated joint venture with AlphaStar International, Inc.
(Note 8). 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 proprietary Traverser(TM) and associated DSL
component products. 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, 2001, the Company had incurred development stage losses
totaling approximately $92,120,925, and at June 30, 2001 was in a working
capital deficit position of $1,458,227. At June 30, 2001, the Company had
approximately $31,005 of cash, cash equivalents and approximately $292,400 of
trade receivables to fund short-term working capital requirements. The Company
has recorded additional revenues of approximately $520,000 through September 30,
2001 related to its POTS splitter shelves and DSL component products. 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 2002 and continue its
development and commercialization efforts. Management's plans in this regard
include, but are not limited to, the following:

         Subsequent to year end, the Company has secured $1,000,000 of
         subscriptions to purchase common stock from certain officers and
         directors. To date, $675,000 of such subscriptions have been collected.
         The Company presently has ongoing discussions and negotiations with a
         number of additional financing alternatives, one or more of which it
         believes will be able to successfully close to provide necessary
         working capital, while maintaining sensitivity to shareholder dilution
         issues.

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 in negotiation with certain strategic vendors to convert
         outstanding current liabilities into equity. The Company is currently
         negotiating with several organizations for the commencement of
         commercial sales of its Traverser products, including deployment at
         existing test sites. The Company has had discussions with certain
         companies for increasing sales of its POTS splitter and component
         products.

Management believes that actions presently being taken to complete the Company's
development stage through the introductory roll-out of its Traverser (TM)
Digital Video and Data Delivery System (TM) will be successful. 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 financial statements doe not include any adjustments that might
result from the outcome of this uncertainty.

                                      F-9

<PAGE>

                            mPHASE TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2001


3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES 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.

CASH AND CASH EQUIVALENTS

mPhase considers all highly liquid investments with original maturities of three
months or less to be cash equivalents.

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

All revenue included in the accompanying consolidated statements of operations
for all periods presented relates to sales of mPhase's POTS Splitter Shelves and
DSL component products.

As required, mPhase has adopted the Securities and Exchange Commission ("SEC")
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements", which provides guidelines on applying generally accepted accounting
principles to revenue recognition based on the interpretations and

                                      F-10

<PAGE>

                            mPHASE TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2001

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. In addition, the Company includes costs of shipping and handling billed
to customers in revenue with the related expense included in cost of sales.

During fiscal 1999, mPhase received a prepayment of $40,000 relating to the
future completion and sale of its Traverser(TM). As the Company's obligations
have not yet been met, this amount is recorded as deferred revenue and is
included in accrued expenses in each consolidated balance sheet presented
herein.

BUSINESS CONCENTRATIONS AND CREDIT RISK

To date the Company's products have been sold to a limited number of customers,
primarily in the telecommunications industry. The Company had revenues from two
customers representing 64% and 19% of total revenues during the year ended June
30, 2001.

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 Costs."

INCOME TAXES

mPhase accounts for income taxes using the asset and liability method in
accordance with SFAS No. 109 "Accounting for Income Taxes." Under this method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using currently enacted tax rates. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
results of operations in the period that includes the enactment date. Because of
the uncertainty as to their future realizability, net deferred tax assets,
consisting primarily of net operating loss carryforwards, have been fully
reserved for. Accordingly, no income tax benefit for the net operating loss has
been recorded in the accompanying consolidated financial statements.

Utilization of net operating losses generated through June 30, 2001 may be
limited due to changes in ownership that occurred.

COMPREHENSIVE INCOME

In 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income, which
establishes rules for the Reporting of Comprehensive Income and its components.
For each of the years ended June 30, 2001, 2000, 1999, there was no difference
between the Company's net income and comprehensive income.

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 $400,299, $442,444 and $460,121 for the years ended
June 30, 1999, 2000 and 2001, respectively.

                                      F-11

<PAGE>

                            mPHASE TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2001

INVENTORIES

Inventory is stated at the lower of cost, determined on a first-in, first-out
basis, or market. Inventory consists mainly of the Company's POTS Splitter Shelf
and Filters. At June 30, 2001, inventory is comprised of the following:

Raw materials ....................................   $  639,524
Finished goods ...................................    3,978,923
                                                     ----------
Total ............................................   $4,618,447
                                                     ----------
Less: Reserve for obsolesence                          (314,552)
                                                     ----------
                                                     $4,303,895
                                                     ==========

LONG-LIVED ASSETS

In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," the Company reviews its
long-lived assets for impairment when changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Such changes in
circumstances may include, among other factors, a significant change in
technology that may render an asset or an asset group obsolete or
noncompetitive, a significant change in the extent or manner in which an asset
is used, evidence of a physical defect in an asset or asset group or an
operating loss. If changes in circumstances indicate that the carrying amount of
an asset may not be recoverable, then the Company estimates the fair value based
on the undiscounted future cash flows expected to result from the use of the
asset and its eventual disposition, and would record an impairment loss (equal
to the amount by which the carrying amount of the asset exceeds the fair value
of the asset) if such estimated cash flows are less than the carrying amount of
the asset. Fair value would be determined, if necessary, based on an outside
appraisal.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts reported in the consolidated balance sheets for mPhase's
cash, accounts receivable, accounts payable, and accrued expenses approximate
their fair values due to the short maturities of these financial instruments.

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 antidilutive.

                                      F-12

<PAGE>

                            mPHASE TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2001

STOCK-BASED COMPENSATION

The Company follows the disclosure-only provisions of SFAS No. 123 "Accounting
for Stock-based Compensation". SFAS No. 123 encourages, but does not require
companies to record compensation expense for stock-based employee compensation
plans at fair value. As permitted, the Company has elected to continue to
account for stock-based compensation to employees using the intrinsic value
method presented in Accounting Principles Board ("APB") Opinion No. 25
"Accounting for Stock Issued to Employees" and provide pro forma net income and
pro forma earnings per share disclosures for employee stock option grants as if
the fair value-based method, as defined, had been applied. Compensation expense
is generally measured on the date of grant only if the current market price of
the underlying stock exceeded the exercise price.

The Company accounts for nonemployee stock-based awards in which goods or
services are the consideration received for the equity instruments issued based
on the fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more readily determinable.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS 141")
and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141
required all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method. Under SFAS 142, goodwill and intangible assets
with indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment. Separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives (but with no maximum life). The amortization
provisions of SFAS 142 apply to goodwill and intangible assets acquired after
June 30, 2001. With respect to goodwill and

                                      F-13

<PAGE>

                            mPHASE TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                                  JUNE 30, 2001

intangible assets acquired prior to July 1, 2001, the Company is required to
adopt SFAS 142 effective January 1, 2002. The Company is currently evaluating
the effect that the adoption of the provisions of SFAS 142 will have on its
results of operations and financial position.

4. ACQUISITION OF MICROTEL

In June 1998, mPhase issued 2,500,000 shares of common stock in exchange for all
of the issued and outstanding shares of MicroTel, a wholly-owned subsidiary of
Microphase, Inc. ("Microphase") The transaction was accounted for as a purchase
pursuant to APB Opinion No. 16 "Accounting for Business Combinations". The total
purchase price of approximately $1,870,000, which was based on the fair market
value of the shares issued, was allocated to the patents acquired and is being
amortized over an estimated useful life of five years. Pursuant to the agreement
of merger, MicroTel has become a wholly-owned subsidiary of mPhase.

5. NOTE RECEIVABLE

As consideration for a letter of settlement with a former consultant of mPhase,
the Company had loaned the former consultant $250,000 in the form of a Note (the
"Note") secured by 75,000 shares of the former consultants common stock of
mPhase. The Note was due April 7, 2001. The Company decreased the Note to
$37,500, representing the estimated value of the underlying stock at June 30,
2001. The Company charged $212,500 to administrative expense as a result of this
impairment. The Company has included the $37,500, in long-term assets in the
accompanying consolidated balance sheet for the year ended June 30, 2001.

                                      F-14

<PAGE>
                            mPHASE TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 2001

6. PROPERTY AND EQUIPMENT

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

                                            June 30
                                      2000           2001
                                 -------------  --------------

Equipment                        $   1,468,881  $    2,879,738
Office and marketing                   245,437         471,086
equipment                        -------------  --------------
                                     1,714,318       3,350,824
Less-Accumulated depreciation         (390,562)     (1,151,979)
                                 -------------  --------------
                                 $   1,323,756  $    2,198,845
                                 =============  ==============

Depreciation expense for the years ended June 30, 1999, 2000 and 2001, was
$54,195, $313,611, and $775,092 respectively of which $44,191, $284,954,
and $501,676, respectively is included in research and development expense.

7. ACCRUED EXPENSES

Accrued expenses consist of the following:

                                              June 30,
                                         2000         2001
                                         ----         ----

Accrued Bonuses                       $1,056,511            -
Georgia Tech
Research Corporation (Note 12)           445,594      400,000
Other                                    335,427    1,342,138
                                      -----------------------
                                      $1,837,532   $1,742,138
                                      =======================

                                      F-15

<PAGE>
                            mPHASE TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2001

8. JOINT VENTURE

In March 2000, mPhase acquired a 50% interest in mPhaseTelevision.Net (formerly
Telco Television Network, Inc.), an incorporated joint venture, for $20,000. The
agreement provided for the grant of warrants to the joint venture partner in
consideration of the execution of the Joint Venture Agreement, to purchase
200,000 shares of the Company's common stock for $4.00 per share (valued at
$2,633,400). This non-cash charge is included in general and administrative
expenses in the accompanying statement of operations for the year ended June 30,
2000. The fair value of the warrants granted to the joint venture partner as of
the date of grant was based on the Black-Scholes stock option pricing model,
using the following weighted average assumptions: annual expected rate of return
of 0%, annual volatility of 115%, risk free interest rate of 5.85% and an
expected option life of 3 years. The agreement also stipulates for mPhase's
joint venture partner, AlphaStar International, Inc., to provide
mPhaseTelevision.Net right of first transmission for its transmissions including
MPEG-2 digital satellite television. In addition, in March 2000, mPhase loaned
the joint venture $1,000,000 at 8% interest per annum. The loan is repayable to
the Company from equity infusions to the subsidiary, no later than such time
that mPhaseTelevision.Net qualifies for a NASDAQ Small Cap Market Listing.
During April 2000, the Company acquired an additional 6.5% interest in
mPhaseTelevision.Net for $1,500,000.

During the fiscal year ended June 30, 2001 the joint venture was charged
$1,009,420 in fees and costs by its joint venture partner and its affiliates.

9. 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 January 26, 2000 the Board of Directors of mPhase resolved that the stated
value of the common stock was $.01 for accounting purposes and, as such, the
financial statements have been retroactively restated to reflect this change.

Tecma issued 6,600,000 shares of common stock for all of the issued and
outstanding shares of the Company in the reverse acquisition (Note 1).

In October 1997, mPhase issued 250,000 shares of its common stock in connection
with its investment in Complete Telecommunications Inc.

During the year ended June 30, 1998, mPhase sold, pursuant to private
placements, 2,095,014 shares of its common stock together with 1,745,179
warrants for proceeds to the Company of $1,472,015, net of offering costs of
$205,203. The warrants were issued to purchase one share each of common stock at
an exercise price of $0.75, and exercised during the year ended June 30, 2000
generating proceeds to the Company of $1,308,884. Included in offering costs are
100,000 shares of common stock issued for services provided by a third party
valued at $0.50 per share, the fair market value on the date of grant.

                                      F-16

<PAGE>
                            mPHASE TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2001

9. STOCKHOLDERS' EQUITY (Continued)

During the year ended June 30, 1998, mPhase issued 300,000 shares of common
stock to consultants for services at $0.50 per share, its fair market value. The
Company recorded a charge to operations of $150,000 included in cummulative from
inception in the accompanying consolidated statement of operations.

On June 25, 1998, mPhase issued 2,500,000 shares of its common stock for all of
the outstanding stock of MicroTel (Note 4) for approximately $1,870,000, the
fair market value.

In November 1998, mPhase sold, 3,120,000 shares of its common stock at $1.00 per
share, together with 1,000,000 warrants, with an exercise price of $1.00 per
share, for $3,013,000 net of offering costs of approximately $107,000 in private
transactions pursuant to Rule 506 of Regulation D of the Securities Act of 1933,
as amended, with accredited investors. On June 2, 2000 these warrants were
exercised, generating proceeds to the Company of $1,000,000.

During the year ended June 30, 1999, mPhase issued 1,599,332 shares of common
stock to employees and consultants for services performed. The Company
recognized a charge to operations of $8,760,866, based upon the fair market
value of the shares.

In April, May and June of 1999, mPhase sold a total of 642,000 shares of common
stock at $2.50 per share, together with 642,000 warrants for $1,559,647, net of
offering costs of $45,353 in private transactions pursuant to Rule 506 of
Regulation D of the Securities Act of 1933, as amended, with accredited
investors. The warrants expire in June 2004. By June 30, 2000, 148,000 of these
warrants were exercised, generating proceeds to the Company of $370,000.

In June 1999, mPhase sold 4,426,698 shares of its common stock at a price of
$2.50 per share for $10,387,434, net of offering costs of $679,311, in private
transactions pursuant to Rule 506 of Regulation D of the Securities Act of 1933,
as amended, with accredited investors.

In December 1999 and January 2000, mPhase sold, pursuant to private placements,
1,000,000 shares of common stock at a price of $4.00 per share, net of cash
offering costs of $200,000, generating net proceeds to the Company of $3,800,000
in private transactions pursuant to Rule 506 of Regulation D of the Securities
Act of 1933, as amended, with accredited investors. In connection with the
private placements, the Company issued 200,000 and 50,000 warrants to purchase
common stock to the respective investors. The warrants had an exercise price of
$4.00 and $5.00, respectively. During February 2000, these warrants were
exercised, generating $1,050,000 of proceeds to the Company.

                                      F-17

<PAGE>
                            mPHASE TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2001

9. STOCKHOLDERS' EQUITY (continued)

In March 2000, mPhase sold 832,500 shares of common stock at a price of $10.00
per share, net of cash offering costs of $466,480, and issued 124,875 shares to
a transaction advisor for services, generating net proceeds to the Company of
$7,858,520 in private transactions pursuant to Rule 506 of Regulation D of the
Securities Act of 1933, as amended, with accredited investors. On May 5, 2000
the Company issued an additional 208,125 shares to these investors due to a
market value adjustment. These shares were valued at $1,808,086, which is
included in general and administrative expenses in the accompanying statement of
operations for the year ended June 30, 2000.

During the year ended June 30, 2000, mPhase issued 1,164,215 shares of common
stock to employees and consultants for services performed. The Company
recognized a charge to operations of $8,623,907, based upon the fair market
value of the common stock on the dates of grant.

In September 2000, mPhase issued 510,000 shares of its common stock, generating
net proceeds of $2,532,120, net of cash offering costs of $17,880 in private
transactions pursuant to Rule 506 of Regulation D of the Securities Act of 1933,
as amended, with accredited investors. In connection with the private placement,
the Company issued 105,750 shares of its common stock to transaction advisors.

In February 2001, mPhase sold 2,342,500 shares of its common stock and a like
amount of warrants to purchase one share each of the Company's common stock
generating gross proceeds of $4,685,000 in private transactions pursuant to Rule
506 of Regulation D of the Securities Act of 1933, as amended with accredited
investors. The attached warrants permit the investor to purchase one share each
of common stock at an exercise price of $3.00 per share. The Company incurred
cash offering costs of $425,315 and also issued 284,600 shares of its common
stock and 162,600 warrants to purchase one share each at an exercise price of
$3.00 to transaction advisors.

In May and June 2001, mPhase sold 1,087,000 shares of its common stock and a
like amount of warrants to purchase one share each of the Company's common stock
generating gross proceeds of $1,087,000 in private transactions pursuant to Rule
506 of Regulation D of the Securities Act of 1933, as amended with accredited
investors. The attached warrants permit the investor to purchase one share each
of common stock at an exercise price of $3.00. The Company incurred offering
costs of $69,000.

                                      F-18

<PAGE>
                            mPHASE TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2001

9. STOCKHOLDERS' EQUITY (continued)

During the year ended June 30, 2001, the Company issued 450,000 shares of common
stock to consultants for services performed and to be performed. The Company
recognized a charge to operations of $886,534 and deferred $121,091 for services
to be performed in the fiscal year ending June 30, 2002. Total expense of
$1,007,625, based upon the fair market value of the common stock on the date of
the grant.

STOCK INCENTIVE PLANS

On August 15, 1997, mPhase established its Long Term Stock Incentive Plan.
Included as part of the Long Term Stock Incentive Plan, is the Stock Option Plan
(the "Plan"), in which incentive stock options and nonqualified stock options
may be granted to officers, employees and consultants of the Company. On
February 23, 2000 the board of directors proposed and on May 22, 2000 the
stockholders approved an increase in the total shares eligible under this plan
to 15,000,000 shares. Vesting terms of the options range from immediately to two
years and generally expire in five years.

On May 30, 2001, mPhase established the 2001 Stock Incentive Plan (the "2001
Plan"), in which incentive stock options and non-qualified stock options may be
granted to officers, employees and consultants of the Company. The total shares
eligible under the 2001 Plan is 20,000,000 shares, in addition to the shares
previously authorized for issuance under the prior plan. Vesting terms of the
options range from immediately to two years and options generally expire in five
years. The maximum number of shares that may be granted during any one fiscal
year to any one individual under the 2001 Plan is limited to 500,000 shares.

A summary of the stock option activity for the years ended June 30, 1999,
2000 and 2001 pursuant to the terms of both plans, which include incentive stock
options and non-qualified stock options, is set forth on the below:

<TABLE>
<CAPTION>
                                                                   WEIGHTED
                                                   NUMBER OF       AVERAGE
                                                    OPTIONS     EXERCISE PRICE
                                                  ----------    --------------
<S>                                               <C>           <C>
Outstanding at July 1, 1998                        3,700,000         1.00
  Granted                                          2,457,500         1.78
  Exercised                                               --           --
  Canceled                                          (750,000)        1.00
                                                   ---------         ----

Outstanding at June 30, 1999                       5,407,500         1.35
  Granted                                          2,710,000         3.49
  Exercised                                         (655,000)        2.93
  Canceled                                                --           --
                                                   ---------         ----

Outstanding at June 30, 2000                       7,462,500        $2.09
Granted                                            5,618,000         1.56
Exercised                                           (320,000)        1.02
Canceled                                            (180,000)        2.39
                                                  ----------        -----

Outstanding at June 30, 2001                      12,580,500        $1.94
                                                  ==========        =====


Exercisable at June 30, 2001                      12,169,629        $1.79
                                                  ==========        =====
</TABLE>

The fair value of options granted in 1999, 2000 and 2001 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 90% in 1999; 115% in 2000 and 113% in 2001, risk-free interest
rate ranging from 4.85% to 6.18% and expected option life of three years.

The per share weighted average fair value of stock options granted during 1999,
2000 and 2001 was $5.01, $6.99 and $1.16 respectively. The per share weighted
average remaining life of the options outstanding at June 30, 1999, 2000 and
2001 is 3.91, 3.86 and 3.66 years, respectively.

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 granted to employees at fair market value. Had compensation
expense for stock options granted under the Plan been determined based on fair
value at the grant dates, mPhase's net loss for 1999, 2000 and 2001 would have
been increased to the pro forma amounts shown below.

                                             JUNE 30
                               -----------------------------------
                                1999          2000          2001
                                ----          ----          ----
Net Loss:
  As reported                $22,838,344   $38,161,542    $23,998,734
  Pro forma                  $24,576,165   $40,097,570    $25,243,270

Net Loss Per Share
  As reported                $     (1.42)  $     (1.41)   $      (.72)
                             ===========   ===========    ===========

  Pro forma                  $     (1.53)  $     (1.49)   $      (.75)
                             ===========   ===========    ===========


For the year ended June 30, 1999, mPhase recorded non-cash charges and deferred
compensation totaling $7,129,890 and $140,000, respectively, in connection with
the grant of 1,607,500 options to employees and 850,000 options to consultants
for services rendered.

For the year ended June 30, 2000, mPhase recorded non-cash charges and deferred
compensation totaling $9,448,100 and $1,637,375, respectively, in connection
with the grant of 2,710,000 options to employees and options to consultants for
services rendered or to be rendered.

For the year ended June 30, 2001, the Company recorded non-cash charges and
deferred compensation totaling $2,955,964 and $607,885, respectively, in
connection with the grant of 5,618,000 options to employees and options to
consultants for services rendered or to be rendered. Such charges 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.


                                      F-19

<PAGE>
                            mPHASE TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2001

9. STOCKHOLDERS' EQUITY (Continued)

WARRANTS

In January and April 1998, mPhase issued 25,000 and 50,000 warrants,
respectively, each to purchase one share of common stock at an exercise price of
$1.06 and $2.44, respectively, for consulting services. The warrants expire five
years from the date of issuance. At any time after the date of issuance, the
Company may, at its option, elect to redeem all of these warrants at $0.01,
subject to adjustment, as defined, per warrant, provided that the average
closing price of the common stock for 20 business days within any period of 30
consecutive business days exceeds $5.00 per share. As of June 30, 2001, none of
these warrants remain outstanding.

In July 1998, in connection with the private placements, mPhase issued 400,000
warrants, each to purchase one share of common stock at an exercise price of
$1.00 per share. The Company allocated the net proceeds from the sale of the
common stock to the common stock and the warrants. On July 26, 1999, pursuant to
the warrant agreement these 400,000 warrants were converted into 352,239 shares
of common stock. In accordance with the warrant agreement, the warrant holder
had the right to initiate a cashless exercise to convert the warrants into
shares of common stock in lieu of exchanging cash. The number of shares received
was determined by dividing the aggregate fair market value of the shares minus
the aggregate exercise price of the warrants by the fair market value of one
share.

In September 1998, mPhase issued 6,666 warrants for services, each to purchase
one share of common stock at an exercise price of $0.75 per share. The warrants
expire five years from the date of grant. The Company determined the fair market
value of the warrants issued under the Black-Scholes Option Pricing Model to be
$16,302. This amount is included in the Company's general and administrative
expenses in the accompanying consolidated statement of operations as of June 30,
1999. These warrants were exercised during the year ended June 30, 2000
generating proceeds to the Company of $5,000.

In June 1999, in connection with the private placements, mPhase also issued
400,000 warrants each to purchase one share of common stock at an exercise price
of $1.00 per share. The warrants expire five years from the date of grant. These
warrants were exercised during the year ended June 30, 2000 generating proceeds
of to the Company of $400,000.

In January 2000, in connection with private placements, mPhase issued 200,000
and 50,000 warrants, each to purchase one share of common stock, at an exercise
price of $4.00 and $5.00, respectively. The net proceeds of the private
placement were allocated to the warrants and the common stock based on their
respective fair values. The warrants expire five years from the date of
issuance. These warrants were exercised in February 2000.

During the year ended June 30, 2001, mPhase issued 4,980,125 warrants to
investors including 1,550,625 warrants to existing investors as compensation
which resulted in a charge of $1,249,804 to operations based upon the fair value
of the warrants issued as determined under the Black-Scholes option pricing
model, and 162,600 to finders, consultants and investment banking firms, each of
these warrants to purchase one share each of the Company's common stock at
$3.00, for five years, in connection with private placements.

During the year ended June 30, 2001, mPhase granted 1,180,000 warrants to
consultants for services performed and for services to be performed at prices
ranging from $1.25 to $5.00, which resulted in a charge of $1,185,874 to
operations and deferred $457,942 for services to be performed in the fiscal year
to end June 30, 2002, totalling $1,643,816 based upon the fair value of the
warrants issued as determined under the Black-Scholes option pricing model.

As of June 30, 2001, 6,816,725 warrants remain outstanding with a weighted
average exercise price of $2.93.


                                      F-20

<PAGE>
                            mPHASE TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2001

10. RELATED PARTY TRANSACTIONS

mPhase's President, Executive Vice President and Chairman of the Board of the
Company are also employees of Microphase (Note 4). 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 was for $5,000 per month and was on a
month-to-month basis. In July 1998, the office space agreement was revised to
$10,000 and in January 2000 to $11,050 per month. Additionally, in July 1998,
mPhase entered into an agreement with Microphase, whereby mPhase reimburses
Microphase $40,000 per month for technical research and development assistance.
Microphase also charges fees for specific projects on a project-by-project
basis. During the years ended June 30, 1999, 2000 and 2001 and for the period
from inception (October 2, 1996) to June 30, 2001, $600,000, $2,547,847,
$2,128,983 and $5,363,830, respectively, have been charged to expense or
inventory under these Agreements and is included in operating expenses in the
accompanying consolidated statements of operations. Management believes that
amounts charged to the Company by Microphase are commensurate to amounts that
would be incurred if outside third parties were used.

Also, during the fiscal year ended June 30, 2000, $2,600,000 was advanced to
Microphase in the form of a note, which was repaid by Microphase during the
year. mPhase recorded $39,000 of interest income on this note for the year ended
June 30, 2000. The Company is obligated to pay a 3% royalty to Microphase on
revenues from its proprietary Traverser(TM) Digital Video and Data Delivery
System(TM) and DSL component products. During the year ended June 30, 2001,
mPhase recorded royalties to Microphase totaling $297,793. As of June 30, 2000,
amounts due from Microphase were immaterial. As of June 30, 2001, the Company
converted $639,000 of amounts payable to microphase into 1,278,000 shares of
mPhase common stock and had $70,799 payable to Microphase, which is included in
amounts due to related parties in the accompanying consolidated balance sheet.

On February 15, 1997, mPhase entered into a Technology, Patent and Trademark
License Agreement (the "Agreement") with MicroTel (Note 4). The Agreement
permits the Company to utilize the patent and trademark technology of MicroTel
under a licensing arrangement. The Company made payments of $37,500 per month,
commencing June 1, 1997 for technology development. During the period ended June
30, 1997 and 1998, $37,500 and $450,000 has been charged to expense under this
Agreement and is included in licensing fees in the accompanying consolidated
statement of operations. As of June 25, 1998, the Company acquired MicroTel and
as of that date this Agreement is no longer in effect.

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 as of June 30, 2001.

For consulting services rendered in connection with the joint venture (Note 8),
the Company agreed to pay two officers of the Company and a related party
$412,400, which was included on the June 30, 2000 consolidated balance sheet of
the Company. This amount was paid by the Company during the year ended June 30,
2001.

Due to related parties as of June 30, 2000 includes $36,120 due to Nutley
Securities, a company owned by mPhase's president and $49,180 due to affiliates
of the Company's joint venture partner, Alpha Star International, Inc. both
amounts are for various services performed.

On November 26, 1999, PacketPort, Inc., a company owned by Mr. Durando, the
President and CEO of mPhase, acquired a controlling interest in Linkon Corp.,
which subsequently changed its name to PacketPort.com, Inc. In connection with
this transaction, Mr. Durando transferred 350,000 of his own shares of mPhase's
common stock to Packet Port, Inc. Included in other current assets as of June
30, 2000 is $11,694 due from PacketPort.com for certain expenses paid by the
Company on behalf of PacketPort.com.

                                      F-21

<PAGE>
                         mPHASE TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2001

10. RELATED PARTY TRANSACTIONS (Continued)

In July 2000, mPhase added a member to the Board of Directors who is employed by
an investment-banking firm that has assisted and is expected to continue to
assist the Company in raising capital through private financing. During the year
ended June 30, 2001, the company issued 140,350 shares of common stock for
investment banking services rendered during the period and recorded an
additional $69,000 of fees which is included in accrued expenses at June 30,
2001. A member of mPhase's Board of Directors is employed by Lintel, Inc, the
parent corporation of Hart Telephone. The Company has installed its prototype
product and commenced beta testing at Hart Telephone. In addition, the Company
has entered into a supply agreement with Hart Telephone upon the completion of
beta testing and the commencement of production of the Traverser(TM). As
consideration for the execution of the agreement with Hart Telephone, in May
2000, mPhase issued Hart Telephone 125,000 options each to purchase one share of
common stock at an exercise price of $1.00 (valued at $1,010,375), which is
included in research and development expenses in the accompanying statement of
operations as of June 30, 2000.

Effective June 30, 2001 the Company converted $2,420,039 of liabilities due to
directors and related parties into 4,840,077 shares of the Company's common
stock pursuant to debt conversion agreements.

11. INCOME TAXES

No provision has been made for corporate income taxes due to cumulative losses
incurred. At June 30, 2001, mPhase has operating loss carryforwards of
approximately $55.8 million and $55.5 million to offset future federal and state
income taxes respectively, which expire through 2021. 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.

At June 30, 2001 the Company has net deferred income tax assets of approximately
$20.9 comprised principally of the future tax benefit of net operating loss
carryforwards. A full valuation reserve has been recorded against such assets
due to the uncertainty as to their future realizability.

                                      F-22

<PAGE>
                            mPHASE TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2001

12. COMMITMENTS AND CONTINGENCIES

COMMITMENTS

mPhase has entered into various agreements with Georgia Tech Research
Corporation ("GTRC"), pursuant to which the Company receives technical
assistance in developing the commercialization of its Digital Video and Data
Delivery System(TM). The amount incurred by the Company for GTRC technical
assistance with respect to its research and development activities during the
years ended June 30, 1999, 2000 and 2001 totaled $2,450,253, $4,563,560, and
$3,814,300 respectively, and $12,974,300 from the period from inception through
June 30, 2001.

If and when sales commence utilizing this particular technology, the Company
will be obligated to pay to GTRC a royalty equal to 5% of product sales, as
defined.

mPhase is a party to employee agreements with certain key executives providing
for cash commitments of $675,000 through June 30, 2002. In addition, one of the
executives is entitled to an annual bonus equal to 5% of the appreciation in
market value of mPhase's stock from year-to-year based on the change in the
Company's issued and outstanding common stock at each fiscal year end through
June 30, 2002, 25% of which is to be paid in cash and the remainder in common
stock of the Company.

CONTINGENCIES

During the year ended June 30, 2000, mPhase settled a litigation with Global
Music and Media Inc. ("Global"), which had asserted that it had the exclusive
right to market the Company's technology. This litigation was resolved in August
1999 in a settlement agreement wherein Global Music surrendered its claim to
mPhase's technology in exchange for the Company to settle claims of Hal Willis
against Global for a cash payment of $100,000, the issuance of 75,000 shares of
mPhase's common stock and options to purchase another 75,000 shares at $5.63 per
share and the payment of $90,000 to Global to settle employee claims, the cost
of which had been recorded in the consolidated financial statements as of June
30, 1999. As such, $1,161,622 is included in accrued expenses on the
consolidated balance sheet at June 30, 1999 and $1,161,622 is included in loss
from unconsolidated subsidiary on the consolidated statement of operations for
the year ended June 30, 1999 related to this settlement. The agreement also
called for the repurchase of 75,000 shares of the Company's common stock from
the owners of Global by the Company or its co-defendant, Microphase. Microphase
repurchased these shares in August 1999.

From time to time, mPhase may be involved in various legal proceedings and other
matters arising in the normal course of business. The Company currently has no
material outstanding legal proceedings.

13. SUBSEQUENT EVENTS

During July 2001, the Company received $75,000 in proceeds from the sale of
75,000 restricted shares of its common stock together with a like amount of
warrants at exercise prices of $3.00, upon the closing of a private placement
which had commenced in May, 2001.

In September, 2001 certain Board members subscribed to purchase up to 2,000,000
restricted shares of the Company's common stock for $1,000,000. As of October
12, 2001, $675,000 has been collected on this subscription, the balance of which
is due in November.

                                      F-23

<PAGE>


                                   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: October 15, 2001                       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                October 15, 2001

Ronald A. Durando  Chief Executive Officer, Director    October 15, 2001

Gustave T. Dotoli  Chief Operating Officer, Director    October 15, 2001

Martin S. Smiley   Chief Financial Officer              October 15, 2001

Anthony Guerino    Director                             October 15, 2001

Abraham Biderman   Director                             October 15, 2001