---

UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION 
WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) 
OF THE SECURITIES EXCHANGE ACT OF 1934. 
FOR THE QUARTER ENDED DECEMBER 31, 2005



COMMISSION FILE NO. 000-24969



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

ISSUER'S TELEPHONE NUMBER, (203) 838-2741

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           
NO

THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF
COMMON STOCK AS OF FEBRUARY 9, 2006 IS 213,181,075 SHARES, ALL OF ONE CLASS OF
$.01 STATED VALUE COMMON STOCK.

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mPHASE TECHNOLOGIES, INC. INDEX
PAGEPART I
    FINANCIAL INFORMATIONITEM 1Unaudited Consolidated
    Balance Sheets-June 30, 2005 and December 31, 2005
    3Unaudited Consolidated
    Statements of Operations-Three months ended December 31, 2004 and 2005 and
    from October 2, 1996
    4(Date of Inception) to
    December 31, 2005Unaudited Consolidated
    Statements of Operations-Six Months ended December 31, 2004 and 2005 and
    from October 2, 1996 (Date
    5of Inception) to
    December 31, 2005Unaudited Consolidated
    Statement of Changes in Shareholders Deficit Six months ended December 31,
    2005
    6Unaudited Consolidated
    Statement of Cash Flow-Six Months Ended December 31, 2004 and 2005 and from
    October 2, 1997 (Date
    7of Inception) to
    December 31, 2005Notes to Consolidated
    Financial Statements
    8ITEM 2
    Management's
    Discussion and Analysis of Financial Condition and Condition and Results of
    Operations
    15ITEM 3
    Quantitative and
    Qualitative Disclosures about market risk
    26ITEM 4
    CONTROLS AND
    PROCEDURES
    26PART II
    OTHER INFORMATIONItem 1.
    Legal Proceedings
    27Item 2.
    Changes in Securities
    27Item 3.
    Defaults Upon Senior
    Securities
    27Item 4.
    Submission of Matters
    to a Vote of Security Holders
    27Item 5.
    Other Information
    27Item 6.
    Exhibits and Reports
    on Form 8-K
    28Signature Page
    
    29

2

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

|                                                                                      |   | June 30,      |   | December 31, 
|------------------------------------------------------------------------------------- | - | ------------- | - | -------------
|                                                                                      |   | 2005          |   | 2005         
|ASSETS                                                                                |   |               |   |              
|CURRENT ASSETS                                                                        |   |               |   |              
|Cash and cash equivalents                                                             | $ | 351,185       | $ | 1,172,757    
|Accounts receivable, net of bad debt reserve
    of $0 for each period                |   | 533,841       |   | 158,594      
|Stock subscription receivable                                                         |   | 460,000       |   | -            
|Inventories, net                                                                      |   | 490,142       |   | 447,943      
|Prepaid expenses and other current assets                                             |   | 25,622        |   | 57,735       
|TOTAL CURRENT ASSETS                                                                  |   | 1,860,790     |   | 1,837,029    
|Property and equipment, net                                                           |   | 162,692       |   | 303,175      
|Patents and licensing rights, net                                                     |   | 141,451       |   | 108,803      
|Other Assets                                                                          |   | 67,250        |   | 50,000       
|TOTAL ASSETS                                                                          |   | 2,232,183     |   | 2,299,007    
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                  |   |               |   |              
|CURRENT LIABILITIES                                                                   |   |               |   |              
|Accounts payable                                                                      |   | 1,691,338     |   | 1,990,485    
|Accrued expenses                                                                      |   | 431,765       |   | 429,866      
|Due to related parties                                                                |   | 721,569       |   | 84,940       
|Notes payable, related parties                                                        |   | 277,000       |   | 417,000      
|Current portion of long term debt                                                     |   | 413,537       |   | 370,493      
|TOTAL CURRENT LIABILITIES                                                             |   | 3,535,208     |   | 3,292,784    
|                                                                                      |   |               |   |              
|Long-term debt, net of current portion                                                |   | 100,000       |   | -            
|Other Liabilities                                                                     |   | 214,709       |   | 360,408      
|                                                                                      |   |               |   |              
|COMMITMENTS AND CONTINGENCIES (Note 10)                                               |   | -             |   | -            
|                                                                                      |   |               |   |              
|STOCKHOLDERS' DEFICIT                                                                 |   |               |   |              
|Common stock, stated value $.01, 500,000,000
    shares authorized; 145,048,832 and   |   |               |   |              
|212,374,047 shares issued and outstanding at
    June 30, 2005 and December 31, 2005, |   |               |   |              
|respectively                                                                          |   | 1,450,489     |   | 2,123,741    
|Additional paid in capital                                                            |   | 123,949,156   |   | 134,933,508  
|Deficit accumulated during development stage                                          |   | (127,009,407) |   | (138,403,461)
|Less-Treasury stock, 13,750 shares at cost                                            |   | (7,973)       |   | (7,973)      
|TOTAL STOCKHOLDERS' DEFICIT                                                           |   | (1,617,735)   |   | (1,354,185)  
|TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT                                           | $ | 2,232,183     | $ | 2,299,007    
|                                                                                      |   |               |   |              

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

3

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

|                                                                      |   |                        |   |                 |   | October 2, 1996    
|--------------------------------------------------------------------- | - | ---------------------- | - | --------------- | - | -------------------
|                                                                      |   | Three Months
    Ended |   |                
|                                                                      |   |                        |   |                 |   | (Date of Inception)
|                                                                      |   | December 31,           |   | to December 31,
|                                                                      |   |                        |   |                 |   |                    
|                                                                      |   | 2004                   |   | 2005            |   | 2005               
|REVENUES                                                              | $ | 295,524                | $ | 168,208         | $ | 21,868,927         
|COSTS AND EXPENSES                                                    |   |                        |   |                 |   |                    
|Cost of Sales                                                         |   | 245,124                |   | 135,098         |   | 15,832,429         
|Research and development                                              |   |                        |   |                 |   |                    
|(including non-cash stock
    related charges of $385,495, $1,133,075 |   | 1,054,761              |   | 1,746,527       |   | 47,152,185         
|and $3,250,744, respectively)                                         |   |                        |   |                 |   |                    
|General and Administrative                                            |   |                        |   |                 |   |                    
|(including non-cash stock
    related charges of $1,127,833, $33,550  |   | 2,071,396              |   | 6,713,083       |   | 93,440,233         
|and $50,512,775, respectively)                                        |   |                        |   |                 |   |                    
|Depreciation and amortization                                         |   | 127,485                |   | 46,518          |   | 3,019,373          
|TOTAL COSTS AND EXPENSES                                              |   | 3,498,766              |   | 8,641,226       |   | 159,444,220        
|LOSS FROM OPERATIONS                                                  |   | (3,203,242)            |   | (8,473,018)     |   | (137,575,293)      
|OTHER INCOME (EXPENSE)                                                |   |                        |   |                 |   |                    
|Gain (Loss) on extinguishments                                        |   | -                      |   | 42,583          |   | 802,824            
|Minority interest loss in
    consolidated subsidiary                 |   | -                      |   | -               |   | 20,000             
|Capital losses                                                        |   | (36,911)               |   | -               |   | (48,669)           
|Loss from unconsolidated
    subsidiary                               |   | -                      |   | -               |   | (1,466,467)        
|Interest Income (expense), net                                        |   | (65,777)               |   | (6,083)         |   | (135,856)          
|TOTAL OTHER INCOME (EXPENSE)                                          |   | (102,688)              |   | 36,500          |   | (828,168)          
|NET LOSS                                                              | $ | (3,305,930)            | $ | (8,436,518)     | $ | (138,403,461)      
|                                                                      |   |                        |   |                 |   |                    
|LOSS PER COMMON SHARE, basic and diluted                              | $ | (.04)                  | $ | (.05)           |   |                    
|WEIGHTED AVERAGE COMMON                                               |   |                        |   |                 |   |                    
|SHARES OUTSTANDING, basic and diluted                                 |   | 93,388,584             |   | 174,998,048     |   |                    

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

4

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

|                                                                  |   |                  |   |              |              |                
|----------------------------------------------------------------- | - | ---------------- | - | ------------ | ------------ | ---------------
|                                                                  |   |                  |   |              |              | October 2, 1996
|                                                                  |   | Six Months Ended |   |              |             
|                                                                  |   |                  |   |              |              | (Date
    of   
|                                                                  |   |                  |   |              |              | Inception) to  
|                                                                  |   | December 31,     |   |              | December 31,
|                                                                  |   |                  |   |              |              |                
|                                                                  |   |                  |   |              |              |                
|                                                                  |   | 2004             |   | 2005         |              | 2005           
|REVENUES                                                          | $ | 474,687          | $ | 548,802      | $            | 21,868,927     
|COSTS AND EXPENSES                                                |   |                  |   |              |              |                
|Cost of Sales                                                     |   | 374,905          |   | 473,071      |              | 15,832,429     
|Research and
    development                                      |   |                  |   |              |              |                
|(including non-cash stock related charges of $385,495, $1,133,075 |   | 2,156,161        |   | 3,607,947    |              | 47,152,185     
|and
    $3,250,744, respectively)                                 |   |                  |   |              |              |                
|General and
    Administrative                                    |   |                  |   |              |              |                
|(including non-cash stock related charges of $1,127,833, $132,550 |   | 2,780,291        |   | 7,805,375    |              | 93,440,233     
|and
    $50,512,775, respectively)                                |   |                  |   |              |              |                
|Depreciation and
    amortization                                 |   | 128,506          |   | 66,787       |              | 3,019,373      
|TOTAL COSTS AND
    EXPENSES                                      |   | 5,439,862        |   | 11,953,180   |              | 159,444,220    
|LOSS FROM OPERATIONS                                              |   | (4,965,176)      |   | (11,404,378) |              | (137,575,293)  
|OTHER INCOME (EXPENSE)                                            |   |                  |   |              |              |                
|Gain
    (Loss) on extinguishments                                |   | (40,500)         |   | 30,608       |              | 802,824        
|Minority
    interest loss in consolidated subsidiary             |   | -                |   | -            |              | 20,000         
|Capital
    losses                                                |   | (36,911)         |   | -            |              | (48,669)       
|Loss from
    unconsolidated subsidiary                           |   | -                |   | -            |              | (1,466,467)    
|Interest
    Income (expense), net                                |   | (95,205)         |   | (20,284)     |              | (135,856)      
|TOTAL OTHER INCOME
    (EXPENSE)                                  |   | (172,616)        |   | 10,324       |              | (828,168)      
|NET LOSS                                                          | $ | (5,137,792)      | $ | (11,394,054) | $            | (138,403,461)  
|                                                                  |   |                  |   |              |              |                
|LOSS PER COMMON SHARE,
    basic and diluted                      | $ | (.06)            | $ | (.07)        |              |                
|WEIGHTED AVERAGE
    COMMON                                       |   |                  |   |              |              |                
|SHARES OUTSTANDING,
    basic and diluted                         |   | 91,474,828       |   | 163,613,560  |              |                
|                                                                  |   |                  |   |              |              |                

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

5

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mPHASE TECHNOLOGIES, INC. 
(A Development Stage Company) Consolidated Statement of Changes in Shareholders' Deficit 
(Unaudited)

|                                       |             |   |                 |   |          |   |                    |   |               |   | Total           
|-------------------------------------- | ----------- | - | --------------- | - | -------- | - | ------------------ | - | ------------- | - | ----------------
|                                       |             |   | $.01
    Stated |   | Treasury |   | Additional Paid-in |   | Accumulated   |   | Shareholders    
|                                       | Shares      |   | Value           |   | Stock    |   | Capital            |   | Deficit       |   | (Deficit) Equity
|                                       |             |   |                 |   |          |   |                    |   |               |   |                 
|Balance June 30, 2005                  | 145,048,832 | $ | 1,450,489       | $ | (7,973)  | $ | 123,949,156        | $ | (127,009,407) | $ | (1,617,735)     
|                                       |             |   |                 |   |          |   |                    |   |               |   |                 
|Issuance of common
    stock           |             |   |                 |   |          |   |                    |   |               |   |                 
|pursuant to exercise
    of warrants   | 200,000     |   | 2,000           |   | -        |   | 43,000             |   | -             |   | 45,000          
|Issuance of common
    stock           |             |   |                 |   |          |   |                    |   |               |   |                 
|for services                           | 450,000     |   | 4,500           |   | -        |   | 94,500             |   | -             |   | 99,000          
|Issuance of common                     |             |   |                 |   |          |   |                    |   |               |   |                 
|stock with warrants in                 |             |   |                 |   |          |   |                    |   |               |   |                 
|private placements,
    net of         |             |   |                 |   |          |   |                    |   |               |   |                 
|cash expenses of
    $158,315          | 14,525,625  |   | 145,256         |   | -        |   | 2,794,895          |   | -             |   | 2,940,751       
|Net Loss                               | -           |   | -               |   | -        |   | -                  |   | (2,957,536)   |   | (2,957,536)     
|Balance, September 30,
    2005        | 160,224,457 |   | 1,602,245       |   | (7,973)  |   | 126,882,551        |   | (129,966,943) |   | (1,490,520)     
|Issuance of common
    stock with      |             |   |                 |   |          |   |                    |   |               |   |                 
|warrants in private
    placements,    |             |   |                 |   |          |   |                    |   |               |   |                 
|net of cash expenses
    of $167,608   | 13,180,685  |   | 131,807         |   | -        |   | 2,107,166          |   | -             |   | 2,238,973       
|Issuance of common
    stock           |             |   |                 |   |          |   |                    |   |               |   |                 
|through exercise of
    warrants       | 772,128     |   | 7,721           |   | -        |   | 184,279            |   | -             |   | 192,000         
|Stock options awarded
    to           |             |   |                 |   |          |   |                    |   |               |   |                 
|employees and officers                 | -           |   | -               |   | -        |   | 1,166,625          |   | -             |   | 1,166,625       
|Issuance of additional
    shares and  |             |   |                 |   |          |   |                    |   |               |   |                 
|warrants to effect
    revised pricing |             |   |                 |   |          |   |                    |   |               |   |                 
|on previous private
    offering       | 35,196,777  |   | 351,968         |   | -        |   | 4,082,826          |   | -             |   | 4,434,794       
|Conversion of related
    party debt   |             |   |                 |   |          |   |                    |   |               |   |                 
|to common stock and
    warrants       | 3,000,000   |   | 30,000          |   | -        |   | 510,061            |   | -             |   | 540,061         
|Net loss                               | -           |   | -               |   | -        |   | -                  |   | (8,436,518)   |   | (8,436,518)     
|Balance, December 31,
    2005         | 212,374,047 | $ | 2,123,741       | $ | (7,973)  | $ | 134,933,508        | $ | (138,403,461) | $ | (1,354,185)     
|                                       |             |   |                 |   |          |   |                    |   |               |   |                 

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

6

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

|                                                                                |   | Six Months Ended | October 2, 1996 (Date
|------------------------------------------------------------------------------- | - | ---------------- | ---------------------
|                                                                                |   | December 31,     |                      
|                                                                                |   |                  |                      
|                                                                                |   |                  |                      
|                                                                                |   | 2004             |                      
|Cash Flow From
    Operating Activities:                                        |   |                  |                      
|Net Loss                                                                        | $ | (5,137,792)      | $                    
|Adjustments to
    reconcile net loss to net cash used in operating activities: |   |                  |                      
|Depreciation and
    amortization                                               |   | 128,506          |                      
|Book Value of fixed
    assets disposed                                         |   | -                |                      
|Provision for doubtful
    accounts                                             |   | -                |                      
|Gain on debt
    extinguishments                                                |   | 40,500           |                      
|Loss on unconsolidated
    subsidiary                                           |   | -                |                      
|Impairment of note
    receivable                                               |   | -                |                      
|Loss on securities                                                              |   | -                |                      
|Non-cash charges
    relating to issuance of common stock, common               |   | 1,122,054        |                      
|stock options and
    Warrants                                                  |   | -                |                      
|Changes in assets and
    liabilities:                                          |   |                  |                      
|Accounts receivable                                                             |   | (141,969)        |                      
|Inventories                                                                     |   | 237,251          |                      
|Prepaid expenses and
    other current assets                                   |   | (165,447)        |                      
|Other non-current
    assets                                                    |   | (20,000)         |                      
|Accounts payable                                                                |   | 564,705          |                      
|Accrued expenses                                                                |   | 467,221          |                      
|Due to/from related
    parties                                                 |   |                  |                      
|Microphase                                                                      |   | (96,437)         |                      
|Janifast                                                                        |   | (64,636)         |                      
|Officers                                                                        |   | 181,970          |                      
|Lintel                                                                          |   | -                |                      
|Others                                                                          |   | (50,000)         |                      
|Receivables from
    Subsidiary                                                 |   | -                |                      
|Deferred revenue                                                                |   | (113,885)        |                      
|Net cash used in
    operating activities                                       |   | (3,037,959)      |                      
|Cash Flow from
    Investing Activities:                                        |   |                  |                      
|Payments related to
    patents and licensing rights                            |   | (64,902)         |                      
|Purchase of fixed
    assets                                                    |   | (105,973)        |                      
|Net Cash used in
    investing activities                                       |   | (170,875)        |                      
|Cash Flow from
    Financing Activities:                                        |   |                  |                      
|Proceeds from issuance
    of common stock and exercises of options             |   |                  |                      
|and warrants                                                                    |   | 3,945,190        |                      
|Payments of notes
    payable                                                   |   | (105,498)        |                      
|Advances from
    Microphase Corporation                                        |   | -                |                      
|Proceeds from notes
    payable-officers                                        |   | 600,000          |                      
|Repayments of notes
    payable-officers                                        |   | (300,000)        |                      
|Repurchase of treasury
    stock at cost                                        |   | -                |                      
|Net cash provided by
    financing activities                                   |   | 4,138,692        |                      
|Net increase
    (decrease) in cash                                             |   | 920,858          |                      
|CASH AND CASH
    EQUIVALENTS, beginning of period                              |   | 90,045           |                      
|CASH AND CASH
    EQUIVALENTS, end of period                                    | $ | 1,010,903        | $                    

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

7

---



mPHASE TECHNOLOGIES, INC. 
(A DEVELOPMENT STAGE COMPANY) 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(UNAUDITED)

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

mPhase Technologies, Inc. (the "Company") was organized on
October 2, 1996. On February 17, 1997, the Company 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"),
through the issuance of 2,500,000 shares of its common stock in exchange for all
the issued and outstanding shares of MicroTel. The assets acquired in this
acquisition were patents related to the mPhase line of DSL component products
(e.g., POTS Splitters) and patent applications utilized in the Company's legacy
Traverser(TM) Digital Video Data Delivery System ("Traverser"). The primary
business of the company is to design, develop, manufacture and market its
software/middleware solution that enables telephone service providers to deliver
feature rich broadcast television, high-speed internet and voice over any
infrastructure that utilizes internet protocol (the IPTV solution.).
Additionally, the Company sells digital subscriber line (DSL) component products
that include its new Broadband Loop Watch product that enables telephone service
providers to perform loop diagnostic testing of its system for deployment and
maintenance of DSL data as well as microfilters and pots splitters. Since
February of 2004, the Company has also engaged Lucent Technologies Inc. to
develop a new generation of power cells with an extremely long shelf life using
the science of nanotechnology . In March of 2005 the Company engaged Lucent
Technologies to develop a magnetometer or electronic sensor using the science of
nanotechnology. The Company believes that both products being developed using
the science of nanotechnology will initially have military applications.

The Company is in the development stage, as defined by
Statement of Financial Accounting Standards ("SFAS") No. 7, "Accounting and
Reporting by Development Stage Enterprises." and its present activities are
focused on the commercial deployment of its proprietary IPTV or TV+ solution and
DSL component products. The Company is also engaged in exploratory research
though the Bell Labs division of Lucent technologies Inc. of electronic sensors
and power cells. Since mPhase is in the development stage, the accompanying
consolidated financial statements should not be regarded as typical for normal
operating periods.

BASIS OF PRESENTATION - The accompanying unaudited
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
pursuant to the regulations of the Securities Exchange Commission. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the six months ending December 31, 2005 are not necessarily
indicative of the results that may be expected for a full fiscal year. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended June 30, 2005.

Through December 31, 2005, the Company had incurred
cumulative (a) development stage losses totaling approximately $138,403,461, (b)
an accumulated deficit of $1,354,185, and (c) negative cash flow from operations
equal to $61,004,109. At December 31, 2005, the Company had $1,172,757 of cash,
cash equivalents and $158,594 of trade receivables to fund short-term working
capital requirements. The Company's ability to continue as a going concern and
its future success is dependent upon its ability to raise capital in the near
term to: (1) satisfy its current obligations, (2) continue its research and
development efforts, and (3) allow the successful wide scale development,
deployment and marketing of its products.

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 periods. Actual results could differ from those estimates.

8

---

mPHASE TECHNOLOGIES, INC. 
(A DEVELOPMENT STAGE COMPANY) 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(UNAUDITED)RECLASSIFICATIONS - Certain reclassifications have been made in the prior
period consolidated financial statements to conform to the current period
presentation.
LOSS PER COMMON SHARE, BASIC AND DILUTED - The Company
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
for all periods presented since their affect is antidilutive.
RESEARCH AND DEVELOPMENT - Research and development costs are charged to
operations as incurred.
REVENUE RECOGNITION - All revenue included in the
accompanying consolidated statements of operations for all periods presented
relates to sales of mPhase's line of POTS Splitter products and other related
DSL component products. As required, the Company adopted the Securities and
Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 101, REVENUE
RECOGNITION IN FINANCIAL STATEMENTS, which provides guidance on applying
generally accepted accounting principles to revenue recognition based on the
interpretations and practices of the SEC. The Company recognizes revenue for its
line of POTS Splitter products 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 and the related expenses of
shipping and handling costs is included in cost of sales.
STOCK-BASED COMPENSATION: On July 1, 2005, the Company
adopted the provisions of Financial Accounting Standards Board Statement No.
123R, "Share-Based Payment"(SFAS 123R). SFAS 123R revised SFAS 123,
"Accounting for Stock Based Compensation" and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees." SFAS 123R requires companies to
measure and recognize compensation expense for all employee stock-based payments
at fair value over the service period underlying the arrangement. Therefore, the
Company is now required to record the grant-date fair value of its stock-based
payments (i.e., stock options and other equity-based compensation) in the
statement of operations. The Company adopted FAS 123R using the "modified
prospective" method, whereby fair value of all previously-granted employee
stock-based arrangements that remained unvested at July 1, 2005 and all grants
made on or after July 1, 2005 have been included in the Company's determination
of stock-based compensation expense for the three and six months ended December
31, 2005. The Company has not restated its operating results for the three and
six months ended December 31, 2004 to reflect charges for the fair value of
employee stock-based arrangements.

9

---

mPHASE TECHNOLOGIES, INC. 
(A DEVELOPMENT STAGE COMPANY) 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(UNAUDITED)RECENT ACCOUNTING PRONOUNCEMENTS

FASB 150 - Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity
In May 2003, the FASB issues SFAS statement No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity". This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). This statement is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003, except for mandatory
redeemable financial instruments of nonpublic entities, if applicable. It is to
be implemented by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of the
Statement and still existing at the beginning of the interim period of adoption.
The adoption of this statement beginning with the quarter commencing August 1,
2003 did not have a significant impact of the Company's results of operations or
financial position.
FASB 151 - Inventory Costs
In November 2004, the FASB issued FASB Statement No. 151,
which revised ARB No. 43, relating to inventory costs. This revision is to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs and wasted material (spoilage). This Statement requires that
these items be recognized as a current period charge regardless of whether they
meet the criterion specified in ARB 43. In addition, this Statement requires the
allocation of fixed production overheads to the costs of conversion be based on
normal capacity of the production facilities. This Statement is effective for
financial statements for fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years
beginning after the date of this Statement is issued. Management believes this
Statement will have no impact on the financial statements of the Company once
adopted.
FASB 152 - Accounting for Real Estate Time-Sharing Transactions
In December 2004, the FASB issued FASB Statement No. 152,
which amends FASB Statement No. 66, Accounting for Sales of Real Estate, to
reference the financial accounting and reporting guidance for real estate
time-sharing transactions that is provided in AICPA Statement of Position (SOP)
04-2, Accounting for Real Estate Time-Sharing Transactions. This Statement also
amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations
of Real Estate Projects, to state that the guidance for (a) incidental
operations and (b) costs incurred to sell real estate projects does not apply to
real-estate time sharing transactions. The accounting for those operations and
costs is subject to the guidance in SOP 04-2. This Statement is effective for
financial statements for fiscal years beginning after June 15, 2005. Management
believes this Statement will have no impact on the fiscal statements of the
Company once adopted.
FASB 153 - Exchange of Nonmonetary Assets
In December 2004, the FASB issued FASB Statement No. 153.
This Statement addresses the measurement of exchanges of nonmonetary assets. The
guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is
based on the principle that exchanges of nonmonetary assets should be measured
based on the fair value of the assets exchanged. The guidance in that Opinion,
however, included certain exceptions to that principle. This Statement amends
Opinion 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. This Statement is effective
for financial statements for fiscal years beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges incurred during fiscal
years beginning after the date of this Statement is issued. Management believes
this Statement will have no impact on the financial statements of the Company
once adopted.
FASB 123 (revised 2004) - Share-Based Payments
In December, 2004, the Financial Accounting Standards Board
("FASB") issued SFAS No. 123(R), "Share-Based Payment". Among other things, SFAS
No. 123 (R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statements based on their
fair values. The Company is required to adopt the provisions of Statement No.
123(R) in its interim period beginning February 1, 2006. The Company elected
early adoption of Standard No. 123(R).
10

---



mPHASE TECHNOLOGIES, INC. 
(A DEVELOPMENT STAGE COMPANY) 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(UNAUDITED)

STATEMENT OF CASH FLOW SUPPLEMENTAL INFORMATION

|                                                                         |   | Six Months Ended December 31,
|------------------------------------------------------------------------ | - | -----------------------------
|                                                                         |   | 2004                         
|                                                                         |   |                              
|Interest Paid                                                            | $ | -                            
|Taxes Paid                                                               | $ | -                            
|                                                                         |   |                              
|                                                                         |   |                              
|Schedule of Non-Cash
    Activities:                                     |   |                              
|Conversion of accounts
    payable and accrued expenses to equity        | $ | 470,000                      
|Conversion of interest
    accrued to equity                             |   | 26,725                       
|Conversion of notes
    payable to equity                                |   | 88,954                       
|Total liability to equity conversions                                    | $ | 585,679                      
|                                                                         |   |                              
|Private placement
    reparation expense - additional issuance of shares | $ | 185,721                      
|                                                                         |   |                              
|Non-cash compensation
    of consultants                                 | $ | 936,333                      
|                                                                         |   |                              
|Non-cash compensation
    to employees and officers                      | $ | -                            

2. RELATED PARTY TRANSACTIONS

MICROPHASE CORPORATION

mPhase's President, Chief Operating Officer and Chairman of
the Board of the Company are also officers of Microphase and mPhase's president
and chairman of the board are shareholders of Microphase. On May 1, 1997, the
Company entered into an agreement with Microphase, whereby it will use office
space as well as the administrative services of Microphase, including the use of
accounting personnel. This agreement 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, in January 2000 to $11,050 per month, in July 2001 to $11,340 per
month, in July 2002 to $12,200 per month, in January 2003 to $10,000 per month,
and in July 2003 to $18,000 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. In January 2003 the
technical research and development agreement was revised to $20,000 per month,
and in July 2003 it was further revised to $5,000 per month for technical and
research development, $5,000 per month for administrative services and $5,000
per month under the office space agreement.

Microphase also charges fees for specific projects on a
project-by-project basis. During the six months ended December 31, 2004 and 2005
and from inception (October 2, 1996) to December 31, 2005 $0, $90,000 and
$7,314,526, respectively, have been charged to expense or inventory under these
Agreements and is included in operating expenses in the accompanying
consolidated statements of operations.

The Company is obligated to pay a 3% royalty to Microphase on revenues from
its proprietary Traverser Digital Video and Data Delivery System and DSL
component products. For the six months ended December 31, 2004 and 2005, mPhase
recorded royalties to Microphase totaling $11,784 and $16,409, respectively.

On December 31, 2005, Microphase agreed to convert all amounts charged to the
Company under the terms of these agreements into 2,050,000 shares of common
stock and a 5 year warrant to purchase a like amount of shares at $.18.

As a result of the foregoing transactions as of December 31, 2005, the
Company had a $0 payable to Microphase. Additionally, at December 31, 2005,
there are no undelivered purchase orders that remain outstanding to Microphase.

JANIFAST LTD.

The Company purchases products and incurs certain research
and development expenses with Janifast Ltd., which is owned by U.S. Janifast
Holdings, Ltd., a company in which three directors of mPhase are significant
shareholders and one is an officer, in connection with the manufacturing of POTS
Splitter shelves and component products including cards and filters sold by the
Company.

11

---



mPHASE TECHNOLOGIES, INC. 
(A DEVELOPMENT STAGE COMPANY) 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(UNAUDITED)

During the six months ended December 31, 2004 and 2005 and the period from
inception (October 2, 1996) to December 31, 2005, $398,715, $544,449 and
$15,514,374, respectively have been charged by Janifast to inventory or expense
and is included in operating expenses in the accompanying statements of
operations.

On December 31, 2005, Janifast agreed to convert amounts charged to the
Company under the terms of these agreements into 950,000 shares of common stock
and a 5 year warrant to purchase a like amount of shares at $.18.

As a result of the foregoing transactions as of December 31, 2005, the
Company had $23,648 payable to Janifast, which is included in amounts due to
related parties in the accompanying balance sheet. Additionally, at December 31,
2005, approximately $343,962 of undelivered purchase orders remain outstanding
to Janifast Ltd.

OTHER RELATED PARTIES

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

1. 1. $25,000 on each of December 1, 2004, March 1, 2005, June
  1, 2005, September 1, 2005 and a $50,000 payment on December 1, 2005. All of
  the foregoing payments have been made. The Company is obligated to pay $25,000
  on each of March 1, 2006, June 1, 2006, and September 1, 2006 with a final
  payment of $75,000 on December 1, 2006.
2. 2.

As of December 31, 2005, the Company made each payment owed to Piper Rudnick
LLP.

Mr. Abraham Biderman was employed until September 30, 2003 by
our former investment-banking firm Lipper & Company. During the three months and
six months ended December 31, 2005, Mr. Biderman's current firm Eagle Advisers,
Inc. has acted as a finder of money in connection with finder's fees of $211,067
and $312,067 respectively.

During the six month period ended December 31, 2005, Mr. Durando, Mr. Dotoli
and Mr. Smiley made bridge loans to the Company in the aggregate amounts of
$50,000, $100,000 and $150,000. The loans due Mr. Ditoli and Mr. Smiley are
outstanding at December 31, 2005. All of the loans have since been repaid.

3. 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
shelves and cards. At December 31, 2005 inventory is comprised of the following:

| |                                    |   |          
| | ---------------------------------- | - | ---------
| | Raw materials                      | $ | 67,848   
| | Work in progress                   |   | 21,250   
| | Finished goods                     |   | 564,487  
| | Total                              |   | 653,585  
| | Less: Reserve for
    Obsolescence |   | (205,642)
| | Net Inventory                      | $ | 447,943  

4. INCOME TAXES

The Company 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 carry-forwards. Because
of the uncertainty as to their future realizability, net deferred tax assets,
consisting primarily of net operating loss carry-forwards, have been fully
reserved for. Accordingly, no income tax benefit for the net operating loss has
been recorded in the accompanying consolidated financial statements.

12

---

mPHASE TECHNOLOGIES, INC. 
(A DEVELOPMENT STAGE COMPANY) 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(UNAUDITED)

Utilization of net operating losses generated through December 31, 2005 may
be limited due to changes in ownership that have occurred.

5. ACCRUED EXPENSES

Accrued expenses representing accrued general and administrative expenditures
were $292,868 at December 31, 2005. At December 31, 2005 unpaid invoices for
expenses for research and development expenses incurred with Lucent
Technologies, Inc. totaling $827,700 were included in accounts payable.

6. JOINT VENTURE

In March 2000, mPhase acquired a 50% interest in
mPhaseTelevision.Net pursuant to a Joint Venture Agreement (the "Agreement") for
$20,000. The agreement stipulates for mPhase's joint venture partner, AlphaStar
International, Inc., ("AlphaStar"), 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 and presently the Company owns 56.5% of this
venture.

During the three months ended December 31, 2004 and ended December 31, 2005,
mPhaseTelevision.Net, Inc., was charged $0 and $0, respectively for fees and
costs by its joint venture partner and its affiliates.

Pursuant to an agreement dated as of June 18, 2002,
mPhaseTelevision.Net has terminated its lease of the earth station and AlphaStar
and its affiliated entity have converted certain accounts payable into shares of
the Company's common stock. Additionally, under this Agreement, mPhase is
obligated to pay AlphaStar and its affiliates $35,000, which is included in
amounts due to related parties in the accompanying consolidated balance sheet.

7. EQUITY TRANSACTIONS

During the quarter ended September 30, 2005, the Company issued 200,000
shares of its common stock pursuant to the exercise of warrants, generating net
proceeds of $45,000 to the Company and 450,000 shares of common stock for
services valued at $99,000.

Also during the quarter ended September 30, 2005, the Company
issued 14,525,625 shares of its common stock together with a like amount of 5
year warrants to purchase one share each of the Company's common stock, with an
exercise price of $.25 per share and $.20 per share respectively in two separate
private placements generating net proceeds of $2,940,751 which was collected
during the three month period ended on September 30, 2005.

During the quarter ended December 31, 2005, the Company
issued 13,180,685 shares of its common stock together with a like amount of 5
year warrants to purchase one share each of the Company's common stock, with an
exercise price of $.18 per share and $.18 per share respectively in private
placements generating net proceeds of $2,238,973 which was collected during the
three month period ended on December 31, 2005. The Company also issued
35,196,777 shares of its common stock together with a like amount of warrants to
affect revised pricing on previous private offerings.

Also during the quarter ended December 31, 2005, the Company issued 772,128
shares of its common stock pursuant to the exercise of warrants, generating net
proceeds of $192,000 to the Company. On December 31, 2005, the Company issued
stock options to employees and officers for the right to purchase 9,562,500
shares. Pursuant to the adoption of FAS 123(R), the Company recognized an
expense in the amount of $1,166,625, of which $33,550 is included in research
and development expense and $1,133,075 in general and administrative expense.
The fair value of options granted in 2005 were estimated as of the date of grant
using the Black-Scholes stock option pricing model, based on the following
weighted average assumptions: annual expected return of 0%, annual volatility of
108.5%, based on a risk-free interest rate ranging from 4.4% and expected option
life of 3 years.

During the quarter ended December 31, 2005, the Company
converted accounts payable in the amount of $189,061and a note payable in the
amount of $180,000 to Microphase, a related party, for 2,050,000 shares of
common stock and a 5 year warrant to purchase a like amount of shares at $.18.
The Company also converted to $171,000 of accounts payable to Janifast, a
related party, in exchange for 950,000 shares of common stock and a 5 year
warrant to purchase a like amount of shares at $.18 per share.

13

---

mPHASE TECHNOLOGIES, INC. 
(A DEVELOPMENT STAGE COMPANY) 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(UNAUDITED)

8. SHARE BASED COMPENSATION

Prior to July 1, 2005, the Company accounted for employee
stock-based grants under the recognition and measurement principles of APB
Opinion No. 25, "Accounting for Stock Issued to Employees"and related
Interpretations. The following table illustrates the effect on net loss and net
loss per share if the Company had applied the fair value recognition provisions
of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
for Stock-Based Compensation"for the quarter and six months ended December
31, 2004:

|                                                            |   |                        |   |                     
|----------------------------------------------------------- | - | ---------------------- | - | --------------------
|                                                            |   | Three
    Months Ended |   | Six
    Months Ended
|                                                            |   | December 31, 2004      |   | December 31, 2004   
|                                                            |   |                        |   |                     
|Net loss, as reported                                       | $ | (3,305,930)            | $ | (5,137,992)         
|Add: Stock-based employee compensation expense              |   |                        |   |                     
|included in reported net income, net of related tax effects |   | -                      |   | -                   
|Deduct: Total stock-based employee compensation             |   |                        |   |                     
|expense determined under fair value based method            |   |                        |   |                     
|for
    all awards, net of related tax effects              |   | -                      |   | -                   
|Pro
    forma net loss                                      | $ | (3,305,930)            | $ | (5,137,992)         
|                                                            |   |                        |   |                     
|Loss per share:                                             |   |                        |   |                     
|Basic and diluted-as reported                               | $ | (0.04)                 | $ | (0.06)              
|Basic and diluted-pro forma                                 | $ | (0.04)                 | $ | (0.06)              

9. DEBT CONVERSIONS AND EXTENSIONS

During the six months ending December 31, 2005, accounts
payable in the amount of $189,061 and a note payable in the amount of $180,000
owed by mPhase to Microphase Corporation were cancelled in exchange for the
2,050,000 shares of common stock and a 5 year warrant to purchase a like amount
of shares at $.18. In addition for such period, Janifast Ltd. cancelled $171,000
of accounts payable owed by mPhase in exchange for 950,000 shares of common
stock and a 5 year warrant to purchase a like amount of shares at $.18 per
share.

10. COMMITMENTS AND CONTINGENCIES

The Company 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 (DVDDS). The amounts incurred by the Company for GTRC
technical assistance with respect to its research and development activities and
included in the accompanying consolidated statement of operations for the six
months ending December 31, 2004 and 2005 and for the period from inception
through December 31, 2005 totaled approximately $0, $0 and $13,539,952
respectively.

If and when sales commence utilizing this particular technology, the Company
will be obligated to pay to GTRC a royalty of up to 5% of sales of the Traverser
DVDDS.

As of March of 2005, the Company extended for an additional 12 months a
Development Agreement with Lucent Technologies, Inc. relating to Micro-Power
Source Arrays Fabricated Using Nanotextured, Superhydrophobic Materials. The
first product expected to be completed through this exploratory research effort
is a battery with a very long shelf life for military field applications. Under
such contract the Company is obligated to pay Lucent a total of $1.2 million
payable in installments of $100,000 per month through February of 2006. In
addition in March of 2005 the Company entered into a second 12 month Development
Agreement with Lucent for the development of a magnetometer using the science of
nanotechnology at a total cost of $1.2 million payable through February of 2006.

In July of 2005, the Company entered into a 4 month extension
of a Development Agreement with Lucent Technologies, Inc. dated September 15,
2003 to complete development of Version 3.0 of its IPTV or TV+ product requiring
4 payments each of $156,000 per month for work to be completed in the months of
September through December of 2005. Such payments are payable 60 days in arrears
of completion of each of the 4 milestones set forth for such period.

11. SUBSEQUENT EVENT

Subsequent to December 31, 2005, the Company issued
17,012,222 shares of its common stock together with a like amount of 5 year
warrants to purchase one share each of the Company's common stock, with an
exercise price of $.18 per share and $.18 per share respectively in private
placements generating net proceeds of $3,062,200 which was collected during the
three month period ended on December 31, 2005.

Also subsequent to December 31, 2005, the Company issued 5,268,706 shares of
its common stock pursuant to the exercise of warrants, generating net proceeds
of $948,367 to the Company.

14

---

mPHASE TECHNOLOGIES, INC. 
(A DEVELOPMENT STAGE COMPANY) 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(UNAUDITED)

ITEM 2. MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITIONS AND RESULTS 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.

CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
LITIGATION REFORM ACT OF 1995:

Some of the statements contained in or incorporated by
reference in this Form 10-Q discuss the Company's plans and strategies for its
business or state other forward-looking statements, as this term is defined in
the Private Securities Litigation Reform Act of 1995. The words "anticipate,"
"believe," "estimate," "expect," "plan," "intend," "should," "seek," "will," and
similar expressions are intended to identify these forward-looking statements,
but are not the exclusive means of identifying them. These forward-looking
statements include, among others, statements concerning the Company's
expectations regarding its working capital requirements, gross margin, results
of operations, business, growth prospects, competition and other statements of
expectations, beliefs, future plans and strategies, anticipated events or
trends, and similar expressions concerning matters that are not historical
facts. Any forward-looking statements contained in this Quarterly Report on Form
10-Q are subject to risks and uncertainties that could cause actual results to
differ materially from those results expressed in or implied by the statements
contained herein.

RESULTS OF OPERATIONS

OVERVIEW

mPhase, a New Jersey corporation, founded in 1996 is a
publicly-held company with over 14,000 shareholders and approximately 214
million shares of common stock outstanding. The Company's common stock is traded
on the Over the Counter Bulletin Board under the ticker symbol XDSL. We are
headquartered in Norwalk, Connecticut with offices in Little Falls, NJ and New
York, N.Y. mPhase shares common office space with Microphase Corporation, a
privately held company. Microphase is a leader in the field of radio frequency
and filtering technologies within the defense and telecommunications industry.
It has been in operation for over 50 years and supports mPhase with both
engineering and administrative and financial resources as needed.

mPhase is a developer of broadband communications products,
specifically, IP TV plus a digital subscriber line (DSL) products for
telecommunications service providers around the world. In February of 2004
mPhase has entered into the new and emerging area of NanoTechnology. Since our
inception in 1996 we have been a development-stage company and operating
activities have related primarily to research and development, establishing
third-party manufacturing relationships and developing product brand recognition
among telecommunications service providers.

We are headquartered in Norwalk, Connecticut with offices in
Little Falls, New Jersey and New York, New York. mPhase shares common office
space and common management with Microphase Corporation, a privately-held
company. Microphase is a seller of radio frequency and filtering technologies to
the defense industry. Microphase has been in operation for almost 50 years and
supports mPhase with engineering, administrative and financial resources, as
needed.

Description of Operations

Since our inception in 1996 our primary activities through
fiscal year 2003 consisted of designing, manufacturing and testing our flagship
products designed to enable telephone service providers to deliver digital
broadcast television over DSL. Fiscal years 2004 and 2005 marked a significant
shift of the Company's focus, in response to technology advancements with
respect to the delivery of video data using internet protocol. The Company has
shifted it telecommunications solution focus from technology for the delivery of
broadcast television high speed internet and voice over DSL to the development
of middleware/software for carrier class delivery of IP TV over copper, fiber,
coax or any infrastructure representing a combination of the foregoing that is
used by a telecommunications service provider. This shift has taken place over
the past two years and has culminated in our flagship product namely Release 3.0
of our TV+ solution. This product is scheduled for final testing in the third
quarter of fiscal year 2006 as part of an initial deployment of 1000 ports with
a major telecommunications service provider in Russia. We have not, as yet,
derived any significant revenue from our TV+ solution, which is the culmination
of several earlier versions that have been changed to accommodate the latest in
technological innovation and market demand for IPTV. The Company's recent entry
into the field of nanotechnology is focused upon exploratory development of
batteries with significantly longer shelf lives and enhanced capabilities and
magnetometer sensor devices with potentially wide applicability for both
military and commercial security applications. The Company believes that such
development is consistent with its strategy of being a pioneer of high growth
technology products and potentially diversifies its product mix.

mPhase introduced its first TV over DSL platform, the
Traverser Digital Video and Data Delivery System ("DVDDS"), in 1998. The DVDDS
is a patented end to end system that enables a telecommunications service
provider to deliver up to several hundred channels of motion picture experts
group two ("MPEG-2") standard broadcast digital television, high speed internet
and voice over copper telephone lines between a central office facility of the
provider and a customer's premise. mPhase has not, as yet, derived any material
revenues from sales of the DVDDS. The DVDDS is a proprietary technology
developed in conjunction with Georgia Tech Research Corporation (GTRC) and is
one of the first systems of its kind developed. The system is the only system on
the market that utilizes non- Internet Protocol ("IP") transmission over ADSL.
The DVDDS is installed at Hart Telephone Company in Hartwell, Georgia, where a
limited user system of approximately 80 customers was tested. A DVDDS system is
also installed at the BMW manufacturing plant in Spartanburg, South Carolina for
use as a television broadcast system in a commercial setting. The new mPhase TV+
system, developed in conjunction with Bell Laboratories division of Lucent
Technologies, Inc., is also designed to allow for the simultaneous delivery of
voice, high speed data, and broadcast TV over copper telephone lines between a
telephone service provider's central office (CO) and the customer premises and
has replaced the legacy DVDDS platform.

15

---



For mPhase the alliance with Lucent marks a change in
strategy from selling a complete proprietary platform to providing an
industry-standards solution The Company believes that the demand for the TV+
system will be greatest in markets primarily outside of the United States that
do not have a hybrid fiber coaxial cable ("HFC") infrastructure necessary for
cable TV or fiber to the curb necessary for very fast DSL (VDSL).

In December of 2004, the Company announced that a major telecommunications
service provider in Russia had chosen to deploy to 1,000 of its customers
mPhase's TV+ platform. The Russian service provider has over 1 million customers
and is part of a holding company with 15 million customers.

Release 3.0 of the TV+ solution, utilizes a communications
framework based upon Internet Protocol (IP) instead of Asynchornous Transfer
Mode (ATM) that is utilized by Releases 1.0 and 2.1. ATM is an industry standard
for transportation of data based upon a packaging of information into a
fixed-size cell format for transportation across networks. Many
telecommunications service providers currently deploy equipment that handles
this protocol because it can support voice, video, data and multimedia
applications simultaneously with a high degree of reliability. IP is another
transport protocol that maintains network information and routes packets across
networks. IP packets are larger and can hold more data than ATM cells.
Historically, there have been concerns that service providers would be unable to
provide the same quality of service with IP because it is not optimized for
time-sensitive signals such as broadcast television and voice. Nevertheless,
there is a greater demand by telecommunication service providers for IP systems
for delivery of television, voice and high-speed data because such systems are
significantly more cost effective to deploy based upon greater scalability.

Release 3.0 of the TV+ solution is a system management
software/middleware product that will operate with both the Lucent Stinger as
well as the DSLAM's of other major vendors. Release 3.0 of the TV system will
also be able to send multiple TV channels over both fiber, coax as well as down
a single DSL line over copper using ADSL2 supported DSLAM's and be capable of
delivery of Video on Demand. Our TV+ solution is an open standards-based,
carrier class technology with tremendous scalability and enables a
telecommunications service provider to custom tailor the deployment of feature
rich IP television, high speed internet and voice. Such solution enables a
telecommunications service provider to significantly enhance revenue, margins
with a very high rate of return as compared to the traditional economics for
delivery of telephone voice services only. In addition, Teleco's around the
world are under increased pressure to delivery multiple converged services in
order to retain their traditional telephone voice customers. The TV+ solution
may be used in combination with any vendors set top box designed for the
delivery of IP TV and the DSLAM's of all major vendors. The solution allows a
service provider to start small and test its take rate among customers with a
maximum of flexibility of design, features and cost allowing it to enter the
market for converged services to its customers on an optimal basis.

mPhase has transformed itself from a developer of closed end
proprietary technology for the delivery of TV over DSL to a Company that has
developed a carrier class middleware/software solution for the delivery of IP TV
using a standards-based platform designed to provide telecommunications with
maximum flexibility in system configuration with components from all major
vendors. mPhase is continuing in the development of a next generation set top
box designed to further enhance its IP TV+ solution and to be used as a stand
alone product. mPhase's current IPTV solution is designed to be used over fiber,
coax and copper or any combination thereof currently deployed by a
telecommunications service provider. In addition our IPTV solution may be used
with other telecommunications transport technology such as Multicast Routers
instead of DSLAM's for the delivery of voice, data and IPTV.

mPhase DSL Component Products. mPhase continues to design
and market a line of DSL component products ranging from commodity items such as
POTS splitters to innovative loop management products. Most notable in the suite
of DSL component products is the recently introducediPOTS3 (recently
renamed the "Broadband Loop Watch") or Intelligent POTS Splitter product. The
newly developed version of the Broadband Loop Watch product is compatible with
the Lucent Stinger as well as DSLAM's manufactured by other vendors. This
product marks a significant advancement in automating loop management. The
Broadband Loop Watch allows service providers to perform full loop testing for
DSL deployment and maintenance from a central office without having to deploy a
more costly deployment of personnel to the field. This is accomplished by
allowing service providers to temporarily bypass the POTS Splitter and have a
comprehensive view of their DSL networks. Prior to the introduction of this
product in order to perform full testing, service providers would have to
manually intervene so that so that test signals could be passed through the
network. As DSL deployments scale, it is becoming increasingly more important
for telecommunications service providers to streamline the process for
provisioning and troubleshooting DSL services. Additionally, as competition for
high speed Internet expands, the market is witnessing a reduction in price.
Therefore, it has become imperative that telecommunications service providers
lower the operational costs involved with supporting DSL services.

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Nanotechnology

Effective February 3, 2004, mPhase has entered into a
Development Agreement with Lucent Technologies, Inc. to commercialize the use of
nano power cell technology. The initial agreement was for a 12 month period of
exploratory development at the cost of $100,000 per month of a new form of power
cell having a shelf life far in excess of conventional battery technology. In
March of 2005 the Company extended such Agreement for another 12 months at the
cost of $100,000 per month to continue development of the nano power cell
product. We believe that this arrangement with the Bell Labs division of Lucent
will give mPhase the opportunity to develop and offer breakthrough battery
technology and other potential applications, initially to the government market
for defense and homeland security and ultimately to the commercial market. It is
anticipated that the initial applications for nano power cells will address the
need to supply emergency and reserve power to a broad range of products for the
defense department.

The Company believes that its entry into this new field of
high technology growth will provide product diversification without negatively
affecting its focus upon its traditional products aimed at delivery of
Television over DSL. The Company developed a lab prototype of its first nano
power cell product that was completed in the second quarter of fiscal year 2005.
The Company is unable, at this time, to predict when significant
commercialization and material revenues will be derived from its entry into the
NanoTechnology business.

On March 10, 2005 the Company announced and agreement with
the Bell Labs research and development arm of Lucent Technologies, Inc. to co
develop using the science of nanotechnology and commercialize uncooled magnetic
ultra-sensitive sensors for a host of defense and civilian applications. The
sensors, technically referred to as magnetometers, are based upon Micro Electro
Mechanical Systems (MEMS) using designs based upon fundamental breakthroughs
made in the past few years at Bell Labs as part of the New Jersey Nanotechnology
Consortium. Initial tests of theses MEMS magnetometers indicate sensitivities
1000 times those achieved in presently available uncooled magnetometers. Such
devices are designed to create a new generation of ultra sensitive magnetic
field sensors that will enable military combatants to detect with greater
accuracy and range hostile military forces. Commercial applications may include
inexpensive navigational components for mobile phones to sensing devices for
identification used in homeland security products, as well as sensors used in
diagnostic systems for detection of metal fatigue for numerous industrial
applications.

Nano Battery:

mPhase Technologies along with its partner Lucent/Bell Labs,
has been jointly conducting research since February 2004 that demonstrates
control and manipulation of fluids on superhydrophobic surfaces to create power
cells by controlling wetting behavior of electrolyte on nanostructured electrode
surfaces. The scientific research conducted this year has set the groundwork for
continued exploration in the development of intelligent nanotechnology power
cells (nano-batteries), and forms a path to commercialization of the technology
for a broad range of market opportunities. During the first half of 2005 the
battery team has been testing modifications and enhancements to the internal
design of the battery to optimize its power and energy density characteristics,
as well as making engineering improvements that will assist in making the
battery easier to manufacture when the project research that level of maturity.

In June of 2005 the battery project was expanded to include a
joint technical development effort through December 2005 between mPhase and
Rutgers University to potentially incorporate a Lithium based design. This work
program has initial started as a modest technology effort to help characterize
and test the nano battery design using Lithium chemistry and determine if the
current design is capable of supporting the lithium based chemistry. Based on
the results of the testing with Rutgers University, mPhase may decide to
accelerate the work effort.

Magnetometer:

In February 2005 mPhase and Lucent Technologies' Bell
Laboratories entered into a joint effort to develop an extremely sensitive
magnetometer. Magnetometers can be used in a wide range of applications that
include military surveillance, securing the retail environment, automotive
sensors and actuators, industrial processing, medical imaging, scientific
measurements, detection of mineral deposits and even air and space exploration.
In sensor networks ultra-sensitive magnetometers can be used, for example, to
detect and accurately pinpoint battlefield objects or they might also be used to
study the workings of the human brain.

Magnetometers work by sensing changes in magnetic fields due
to the motion of magnetic objects or changes in electrical currents generated by
those objects. The magnetometer detects these objects by measuring time-varying
magnetic signals that are superimposed on the combination of earth's background
field (used to orient compasses) and static magnetic fields due to nearby
magnetic objects.

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

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

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

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

Revenues. To date, all material revenues have been
generated from sales of the POTS Splitter Shelves and other DSL component
products to a small number of telecommunications companies. mPhase believes that
future revenues are difficult to predict because of "the length and variability
of the commercial roll-out of the IPTV to various telecommunications service
providers and (ii) the Company's recent entry into the NanoTechnology business.
Since the Company believes that there may be a significant international market
for its TV+ IPTV solution involving many different countries, with different
regulations, certifications and commercial practices than the United States,
future revenues are highly subject to the changing variables and uncertainties.
Additionally, the recent instability of the telecommunications market evidenced
by reduction in capital spending across the whole in the telecom sector
contributes to our difficulty in accurately predicting future revenues.

Cost of revenues. The costs necessary to generate
revenues from the sale of POTS Splitter Shelves and other related DSL component
products include direct material, labor and manufacturing. mPhase paid these
costs to Janifast Ltd., which has facilities in the People's Republic of China
and is owned by and managed by certain senior executives of the Company. The
cost of revenues also includes certain royalties paid to Microphase Corporation,
a privately held corporation organized in 1955, which shares certain common
management with the Company and is majority-owned by a director of mPhase. Costs
for future production of the TV + Platform will consist primarily of payments to
manufacturers to acquire the necessary components and assemble the product
including Lucent Technologies Inc., Espiral Group and Magpie Telecom Insiders,
Inc.

Research and development. Research and development
expenses consist principally of the payments made to Microphase and Lucent,
respectively, for development of the Broadband Loop Watch, the TV+ IPTV solution
and nanotechnology products respectively. The IPTV+ solution consists primarily
of middleware/software designed for the delivery of feature rich, carrier class,
broadcast TV, high speed internet and voice by telecommunications service
providers open using standards based equipment and transport configurations. All
research and development costs are expensed as incurred.

General and administrative. Selling, general and
administrative expenses consist primarily of salaries and related expenses for
personnel engaged in direct marketing of the TV+ solution for IPTV, POTS
Splitter Shelves, the Broadband Loop Watch "intelligent pots splitter"
diagnostic product 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
and mPhase leases its principal office in Norwalk, Connecticut from Microphase.

Non-Cash compensation charges. The Company makes
extensive use of stock options and warrants as a form of compensation to
employees, directors and outside consultants. We incurred non-cash compensation
charges totaling $53,763,519 from inception (October 2, 1996) through December
31, 2005, of which $3,250,744 was included in research and development expenses
and $50,512,775 was included in general and administrative expenses.

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General and administrative. Selling, general and
administrative expenses consist primarily of salaries and related expenses for
personnel engaged in direct marketing of the TV+, the POTS Splitter Shelves and
other DSL component products and Nanotechnology battery product, 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. Non-cash compensation charge. The Company makes extensive use of
stock options and warrants as a form of compensation to employees, directors and
outside consultants. From inception (October 2, 1996) through December 31, 2005
the Company has incurred cumulative (a) development stage losses of
$138,403,461, (b) an accumulated deficit of $138,403,461, and (c) negative cash
flow from operations of $61,004,109. The auditors report for the fiscal year
ended June 30, 2005 includes the statement that "there is substantial doubt of
the Company's ability to continue as a going concern". Management estimates that
the Company needs to raise approximately $5,000,000-$10,000,000 during the next
12 months to continue its present level of operations. As of December 31, 2005,
the Company had a negative net worth of $1,354,185 compared to a negative net
worth of $1,617,735 as of June 30, 2005 as a result of continuing net losses
incurred after June 30, 2005.

The Company believes that significant deployments and
resulting revenues from the deployment of the TV+ are not expected until fiscal
year 2007.. The Company further believes that an increase in capital
expenditures in the telecommunications industry will also increase sales and
improve the Company's margins as well as increase the probability that the
Company will attain profitability. The Company does not expect to derive any
material revenue from its Nanotechnology product development until fiscal year
2008

THREE MONTHS ENDED DECEMBER 31, 2005 VS. DECEMBER 31, 2004

REVENUE

Total revenues were $168,208 for the three months ended
December 31, 2005 compared to $295,524 for the three months ended December 31,
2004. The decrease was primarily attributable to an decreased demand of the
Company's POTS Splitter product line. The Company continues to believe that its
line of POTS Splitter products is positioned to be competitively priced with
high reliability and connectivity, and as such has the potential to be a part of
continuing DSL deployment worldwide. The Company cannot predict when a new
upturn in sales of its POTS Splitter product might begin. The revenue was
primarily from one customer, Covad Communications.

COST OF REVENUES

Cost of sales were $135,098 for the three months ended
December 31, 2005 as compared to $245,125 in the comparable prior period in
2004, representing 80% of gross revenues for the quarter ended December 31, 2005
and 83% for the quarter ended December 31, 2004, respectively. Our margins have
contracted dramatically over the past three years as spending among the
telecommunications providers has contracted, coupled with downward pressures
related to the supply and demand of telecommunications products. Margins for the
quarter ended December 31, 2005, increased by 3% over the margins for the same
period ended December 31, 2004 due primarily due to continued weak demand for
POTS Splitters and global commodity price pressure on telecommunications
equipment products in general.

GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses were $6,713,083
for the three months ending December 31, 2005 up from $2,071,396 or an increase
of $4,641,687 from the comparable period in 2004. The increase in the selling,
general and administrative costs is comprised primarily of a one time special
reparation charge of approximately $4.7 million incurred in connection with the
markdown of certain warrants and issuance of additional shares of common stock
in private placements occurring in November and December of 2005 which raised
$2,238,973 for the Company net of fees and commissions.

RESEARCH AND DEVELOPMENT

Research and development expenses were $1,746,527 for the
three months ended December 31, 2005 as compared to $1,054,761 during the
comparable period in 2004 or an increase of $691,766. This consists of increased
spending in development and testing of Release 3.0 of the TV+ product testing
and deployment for a Russia telecommunications provider and development activity
of the new magnetometer as well as the power cell product using the science of
Nanotechnology. Both areas represent activities contracted though Lucent
Technologies and other vendors such as Magpie, Latens, Velonkani, and Espeal and
managed by mPhase. Also spending for continued development of the Company's
Broadband Loop Watch product account for expenditures of $79,898 with Microphase
Corporation and $2,618,549 with Lucent Technologies, Inc.

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The Company expects continued increases in research and
development costs throughout fiscal year 2006 as the Company continues and
expands its development through Lucent Technologies, Inc of the TV+ and
Nanotechnology product lines.. In order to broaden and diversify its current
line of business into additional high growth technology areas, the Company plans
to continue its development efforts with the Bell labs division of Lucent
Technologies, Inc. to commercialize the use of nano power cell technology.
Lucent/ Bell Labs is developing for mPhase micro-power source arrays fabricated
using nanotextured, superhydrophobic materials. This new business arrangement
with Lucent Bell Labs will give mPhase the opportunity to develop and offer
breakthrough battery technology applications, initially to government market
segments including defense and homeland security, and ultimately to the
commercial market. The initial applications for the nano power cell technology
will address the need to supply emergency and reserved power to a wide range of
electronic devices for the defense department. In addition the Company plans to
continue its research and development efforts with respect to the magnetometer
product line using the science of Nanotechnology.

Research expenditures incurred with Microphase were related
to the continuing development of the company's DSL component products, including
the Company's line of pots splitters and microfilters and the company's newest
products, the ipots(tm) and the mPhase stretch. We believe the Broadband
Watch product that enables telcos to remotely and cost-effectively perform loop
management and maintenance including line testing, qualification and
troubleshooting provides a much needed solution to achieve greater cost
efficiencies for the deployment of telecommunications products.. Prior to the
introduction of such product, loop management could not be remotely performed
through a conventional pots splitter without manual intervention.. The unique
(patent pending) Broadband Watch circuit allows most test heads to perform both
narrow and wideband testing of the local loop through the central office pots
splitter without having to physically disconnect the pots splitter, thereby
eliminating the need to dispatch personnel and a truckroll.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense was $46,518 for the
three months ending, down from $127,485, or a decrease of $80,967 from the
comparable period in 2004. The decrease is a result of the Company's reduced
outlay for capital expenditures in its two most recent fiscal years. We do not
expect such downward trends to continue but such depreciation and amortization
expense should remain at the current levels until the Company commences
deployment of its Television over DSL platforms. We expect to increase capital
expenditures in connecting with the deployment of equipment at test sites with
various telecommunications service providers globally as development of our TV+
product progresses.

NET LOSS

The Company recorded a net loss of $8,436,518 for the three
months ended December 31, 2005 as compared to a loss of $3,305,930 for the three
months ended December 31, 2004. This represents a loss per common share of $.05
for the three month period ended December 31, 2005 as compared to a loss per
common share of $.04 for the three months ending December 31, 2004; based upon
weighted average common shares outstanding of 93,388,584 and 174,998,408 during
the periods ending December 31, 2005 and 2004, respectively. Approximately $4.7
million of the increase in the Company's net loss was the result of a one time
reparation payment in connection with the reduction in the strike price of
certain warrants and issuance of additional shares in connection with private
placements during the months of November and December of 2005 that raised a
total of $2,238,973 for the Company.

The Company believes the initial major deployments and the
resultant revenues of its Flagship product, the TV+ platform, are not expected
until the third quarter of fiscal year 2006, which along with any upturn of
spending in the telephone industry will also increase sales and improve the
Company's margins and provide the Company with the opportunity to attain
profitability.

SIX MONTHS ENDED DECEMBER 31, 2005 VS. DECEMBER 31, 2004

REVENUE

Total revenues were $548,802 for the six months ended
December 31, 2005 compared to $474,687 for the six months ended March 31, 2004.
The increase was attributable primarily to significantly increasing sales of the
Company's POTS Splitter product line in the first quarter of fiscal year 2005,
followed by more modest decrease in sales during the second quarter of fiscal
year 2005, as compared to such quarters in fiscal year 2004. There remains
continued volatility in capital spending in the telecommunications market,
including customers that order component products from the Company. The Company
is in the process of reevaluating its line of POTS Splitter products to ensure
that such products will continue to be competitively priced with high
reliability and connectivity, and as such has the potential to be a significant
part of DSL deployment worldwide. The Company cannot predict future demand for
such product line.

COST OF REVENUES

Cost of sales was $473,071 for the six months ended December
31, 2005 as compared to $374,905 in the prior period, as a result of an increase
in POTS Splitter sales and constituted 86% and 79% of gross revenues, for the
six months ended December 31, 2004 and 2003, respectively. The margins have
decreased slightly during the current period as spending among the
telecommunications service providers continues to be volatile together with an
increase in competition from global providers of such products resulting in
commodity pricing.

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RESEARCH AND DEVELOPMENT

Research and development expenses were $3,607,947 for the six
months ended December 31, 2005 as compared to $2,156,151 during the comparable
period in 2004; or an increase of $1,451,796 from the comparable period in 2004.
The Company incurred all of its research and development expenses with vendors
including Lucent, Microphase, Magpie Insiders, Inc., Espial, Velankani and other
strategic vendors for the six months ended December 31, 2005 which totaled
$3,607,947 as compared to $1,678,635 incurred with vendors other than GTRC
during the comparable period in 2004. The increase in the research and
development expenses includes non-cash charges relating to the issuance of
common stock and options to employees and consultants, which totaled $1,133,075
for the six months ended December 31, 2005 as compared to $385,495 for the
comparable period ended December 31, 2004 resulting in an increase of $747,580.

Such decreases are the result primarily of elimination of further development
of the TRAVERSER DVDDS product by GTRC as the Company focuses its efforts on
research and development and expenditures associated therewith on the TV+
product with Lucent, which has been comparatively, to date, less expense to
develop.

The Company does, however, expects an increase in research and development
costs beginning in the third quarter of fiscal year 2006 due to continuing
development of new features for its IPTV solution as well as continued
development with Bell Labs of our nanotechnology line of products..

Research expenditures incurred with Microphase were related
to the continuing development of the company's DSL component products, including
the company's line of pots splitters and microfilters and the company's newest
product, the Broadband Loop Watch. We believe the mPhaseBroadband Loop
Watch offers a much-needed solution for the DSL industry; theproduct
enables telecommunications service providers to remotely and cost-effectively
perform loop management and maintenance including line testing, qualification
and troubleshooting. Prior to the introduction of theBroadband Loop
Watch, loop management could not be remotely performed through a conventional
pots splitter without dispatching personnel to the field. The unique Broadband
Loop Watch circuit allows most test heads to perform both narrow and wideband
testing of the local loop through the central office pots splitter without
having to physically disconnect the pots splitter, thereby eliminating the need
to dispatch personnel and a truckroll. The Company anticipates future demand for
this product, as it significantly reduces the cost of deploying and maintaining
DSL services.

The changes in Research and Development expenses for the six month period
ended December 31, 2005 as compared to the six month period ended December 31,
2004 included the following significant items:

1. An increase of charges from Lucent Technologies of $1,018,949
2. A decrease of depreciation related to research and development of $ from
  $128,506 to $66,787.
3. An increase of expenses with Microphase and other strategic vendors of
  $710,668

Charges from Lucent Technologies Inc. totaled $2,618,549 for
the six months ended December 31, 2005 as compared to $1,599,600 for the same
period ended December 31, 2004. Such charges consisted of $1,097,600 for
development of the TV+ product and $1,400,000 incurred with respect to the
Company's new Nanotechnology product line.

The elements attributing to the decrease in other research
and development expenses included a decrease in the operations of the Company's
joint venture, mPhase Television.net. The major costs incurred by the joint
venture were payroll expenses attributable to research and development of the
Company's transmission capabilities and acquisition of television content. Costs
incurred by the joint venture during the nine months ending March 31, 2003 were
$31,000 as compared to $0 for the nine months ending March 31, 2004.

GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses were $7,805,375
for the six months ending December 31, 2005 up from $2,780,291 or an increase of
$5,025,084 from the comparable period in 2004. The increase in the selling,
general and administrative costs includes non-cash charges relating to the
issuance of common stock and options to employees and consultants, which totaled
$132,550 for the six months ended December 31, 2005 as compared to $1,127,833
for the comparable period ended December 31, 2004 resulting in a decrease of
$995,283. The increase in selling, general and administrative expenses is also
to a one time special separation charge of approximately $4.7 million of expense
associated with adjustments of offering prices of certain of the private
placements completed in fiscal year 2006. Additionally travel expenses increased
by $143,383 and increased spending in advertising, trade shows and marketing and
resulting expenses amounted to an aggregate of $20,666 .We expect sales and
travel expenses to grow as the Company's approaches the deployment of its TV+
products in the future.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense was $66,787 for the six
months ending December 31, 2005, down from $128,506, or a decrease of $61,719
from the comparable period in 2004. The decrease is a result of the company's
reduced outlays for capital expenditures in its two most recent fiscal years. We
do not expect such downward trend to continue but such depreciation and
amortization expense should remain at the current reduced levels until the
company commences deployment of its television over DSL platforms. We expect to
increase capital expenditures in connecting with the deployment of equipment at
test sites with various telecommunications service providers globally as
deployment of our TV+ product progresses.

NET LOSS

The Company recorded a net loss of $11,394,054 for the six
months ended December 31, 2005 as compared to a loss of $5,137,192 for the six
months ended December 31, 2004. This represents a loss per common share of $.07
for the six month period ended December 31, 2005 as compared to a loss per
common share of $.06 for the six months ending December 31, 2004; based upon
weighted average common shares outstanding of 163,613,560 and 91,474,828 during
the periods ending December 31, 2005 and 2004, respectively.

Although it is difficult to predict the exact timing of
additional material deployments of its TV+ product, the Company believes that
significant revenue is not expected until the of fiscal year 2007, which along
with any upturn of spending in the telephone industry, will also increase sales
and improve the Company's operating margins and provide the Company with the
opportunity to attain profitability sometime in fiscal year 2008.

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CRITICAL ACCOUNTING POLICIES

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

RESEARCH AND DEVELOPMENT

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

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 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
financial statements.

Utilization of net operating losses generated through June 30, 2005 may be
limited due to "changes in control" of our common stock that occurred.

STOCK-BASED COMPENSATION

On July 1, 2005, the Company adopted the provisions of
Financial Accounting Standards Board Statement No. 123R, "Share-Based
Payment"(SFAS 123R). SFAS 123R revised SFAS 123, "Accounting for Stock
Based Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock
Issued to Employees." SFAS 123R requires companies to measure and recognize
compensation expense for all employee stock-based payments at fair value over
the service period underlying the arrangement. Therefore, the Company is now
required to record the grant-date fair value of its stock-based payments (i.e.,
stock options and other equity-based compensation) in the statement of
operations. The Company adopted FAS 123R using the "modified prospective"
method, whereby fair value of all previously-granted employee stock-based
arrangements that remained unvested at July 1, 2005 and all grants made on or
after July 1, 2005 have been included in the Company's determination of
stock-based compensation expense for the three and six months ended December 31,
2005. The Company has not restated its operating results for the three and six
months ended December 31, 2004 to reflect charges for the fair value of employee
stock-based arrangements.

INVENTORY RESERVE AND VALUATION ALLOWANCE

The Company carries its inventory 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. In determining the lower of
cost or market, the Company periodically reviews and estimates a valuation
allowance to reserve for technical obsolescence and marketability. The allowance
represents management's assessment and reserve for the technical obsolescence
based upon the inter-operability of its component products, primarily filters
and splitters, with presently deployed and next generation DSL infrastructures
as well as a reserve for marketability based upon current prices and the overall
demand for the individual inventory items. Material changes in either the
technical standards of future DSL deployments or further erosion in the demand
for deployments of DSL infrastructures could affect the estimates and
assumptions resulting in the amounts reported.

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MATERIAL RELATED PARTY TRANSACTIONS

MICROPHASE CORPORATION

mPhase's President, Chief Operating Officer and Chairman of
the Board of the Company are also officers of Microphase and mPhase's president
and chairman of the board are shareholders of Microphase. On May 1, 1997, the
Company entered into an agreement with Microphase, whereby it will use office
space as well as the administrative services of Microphase, including the use of
accounting personnel. This agreement 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, in January 2000 to $11,050 per month, in July 2001 to $11,340 per
month, in July 2002 to $12,200 per month, in January 2003 to $10,000 per month,
and in July 2003 to $18,000 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. In January 2003 the
technical research and development agreement was revised to $20,000 per month,
in July 2003 it was further revised to $5,000 per month for technical research
and development, $5,000 per month for administrative services and $5000 per
month under the office space agreement.

Microphase also charges fees for specific projects on a
project-by-project basis. During the three months ended December 30, 2004 and
2005 and from inception (October 2, 1996) to December 31, 2005, $0, $90,000, and
$7,314,526 respectively, have been charged to expense or inventory under these
Agreements and is included in operating expenses in the accompanying
consolidated statements of operations.

The Company is obligated to pay a 3% royalty to Microphase on revenues from
its proprietary Traverser(TM) Digital Video and Data Delivery System and DSL
component products. For the three months ended December 31, 2004 and 2005,
mPhase recorded royalties to Microphase totaling $11,784 and $16,409,
respectively.

On December 31, 2005, Microphase agreed to convert all amounts charged to the
Company under the terms of these agreements into 2,050,000 shares of common
stock and a 5 year warrant to purchase a like amount of shares at $.18.

As a result of the foregoing transactions as of December 31, 2005, the
Company had a $0 payable to Microphase. Additionally, at December 31, 2005,
there are not undelivered purchase orders that remain outstanding to Microphase.

JANIFAST LTD.

The Company purchases products and incurs certain research
and development expenses with Janifast Ltd., which is owned by U.S. Janifast
Holdings, Ltd., a company in which three directors of mPhase are significant
shareholders and one is an officer, in connection with the manufacturing of POTS
Splitter shelves and component products including cards and filters sold by the
Company.

During the six months ended December 31, 2004 and 2005 and
the period from inception (October 2, 1996) to December 31, 2005, $398,715,
$544,449 and $15,514,374, respectively have been charged by Janifast to The
Company for components of inventory or cost of sales expense that is included in
operating expenses in the accompanying statements of operations.

On December 31, 2005, Janifast agreed to convert amounts charged to the
Company under the terms of these agreements into 950,000 shares of common stock
and a 5 year warrant to purchase a like amount of shares at $.18.

As a result of the foregoing transactions as of December 31,
2005, the Company had $23,648 payable to Janifast, which is included in amounts
due to related parties in the accompanying balance sheet. Additionally, at
December 31, 2005, approximately $343,962 of undelivered purchase
orders remain outstanding to Janifast ltd.

OTHER RELATED PARTIES

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

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

As of December 31, 2005, the Company made each payment owed to Piper Rudnick
LLP.

Mr. Abraham Biderman was employed until September 30, 2003 by
our former investment-banking firm Lipper & Company. During the three months and
six months ended December 31, 2005, Mr. Biderman's current firm Eagle Advisers,
Inc. has acted as a finder of money in connection with finder's fees of $211,067
and $312,067 respectively.

During the six month period ended December 31, 2005, Mr. Durando, Mr. Dotoli
and Mr. Smiley made bridge loans to the Company in the aggregate amounts of
$50,000, $100,000 and $150,000. The loans due Mr. Ditoli and Mr. Smiley are
outstanding at December 31, 2005. All of the loans have since been repaid.

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LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2005 mPhase had working capital deficit of
$1,455,755 as compared to working capital deficit of $3,093,043 at December 31,
2004. Through December 31, 2005, the Company had incurred development stage
losses totaling approximately $138,403,461. At December 31, 2005, the Company
had $1,172,757 of cash, cash equivalents and $158,594 of trade receivables to
fund short-term working capital requirements. The Company's ability to continue
as a going concern and its future success is dependent upon its ability to raise
capital in the near term to: (1) satisfy its current obligations, (2) continue
its research and development efforts, and (3) the successful wide scale
development, deployment and marketing of its products.

Historically, mPhase has funded its operations and capital
expenditures primarily through private placements of common stock. Management
expects that its ongoing financial needs will be provided by financing
activities and believes that the sales of its line of POTS Splitter products and
other related DSL component products will provide some offset to cash flow 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 component sales. At December 31, 2005, the Company had cash and
cash equivalents of $1,172,757 compared to $351,185 at June 30, 2005, accounts
receivable of $158,594 and inventory of $447,943. This compared to $533,841 of
accounts receivable and $460,000 of inventory at June 30, 2005.

Cash used in operating activities was $5,365,403 during the
six months ending December 31, 2005. The cash used by operating activities
principally consists of the net loss, and significant changes in assets and
liabilities, including additional cash used by decreasing accounts payable and
accrued expenses by approximately $464,999 by depreciation and amortization of
$84,669, and by non-cash charges of $5,059,150 for common stock options and
warrants issued for services and reparations. The Company does not expect
decreases of inventory to be as significant in upcoming quarters, yet we will
not need to increase inventory until the roll out of our TV+ platform.

The Company has entered into various agreements with GTARC,
pursuant to which the Company receives technical assistance in developing the
Digital Video and Data Delivery System. The Company has incurred expenses in
connection with technical assistance from GTARC totaling approximately $0, $0,
for the three month periods ended December 31, 2005 and 2004, respectively, and
$13,539,932 from the period from inception through December 31, 2005. GTRC may
receive a royalty of up to 5% from any future sales by the Company of its legacy
TraverserTM DVDDS product.

As of December 31, 2005, mPhase is obligated to pay Lucent
Technologies, Inc., the sum of $313,600 in 2 payments of $156,800 each against
project milestones under its current Development Agreement for development of
Version 3.0 of its TV+ product. In addition, the Company is obligated to make
payments of $100,000 per month through February of 2006 under a separate
Development Agreement with Lucent covering development of its new battery
developed through the science of Nanotechnology as well as $100,000 per month
through March of 2006 to Lucent in connection with development of its
magnetometer product line using the science of Nanotechnology.

24

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LOSSES DURING THE DEVELOPMENT STAGE AND MANAGEMENT'S PLANS

From inception (October 2, 1996) through December 31, 2005
the Company had incurred development stage losses and has an accumulated deficit
of approximately $138,403,461 and a stockholders' deficit of $1,359,185. For the
six months ended December 31, 2005, and from inception through December 31, 2005
respectively, the Company had negative cash flow from operations of $5,365,403
and $3,037,959 respectively. The report of the Company's outside auditors,
Rosenberg, Rich, Baker, Berman and Company with respect to its latest audited
10K for the fiscal year ended June 30, 2005 stated that "there is substantial
doubt of the Company's ability to continue as a going concern". Management
estimates that the Company will need to raise approximately $5 million during
the next 12 months to continue its present level of operations.

We continue our efforts to raise additional funds through
private placements of our common stock and strategic alliances, the proceeds of
which are required to fund continuing expenditures and the controlled
development stage rollout of our TV+. 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 needed or at terms
that we deem to be reasonable.

We have evaluated our cash requirements for the remainder of
fiscal year 2006 based upon certain assumptions, including our ability to raise
additional financing and increased sales of our POTS Splitter, Broadband Watch
and TV+ products . The Company anticipates that it will need to raise, at a
minimum, approximately $5 primarily in private placement of its common stock
with accredited investors, during the next 12 months, or alternatively we will
need to curtail certain expenses as incurred at the present levels including
marketing and research and development expenses. Additional investments in
development of the TV+ and Nanotechnology battery products will be required in
the next 12 months.

Management believes that the up to $5 million to be raised,
in new Private Placements in the capital markets, will be sufficient to cover
its current operating expenses and permit the company to maintain its present
operational levels. This amount may be supplemented with additional funds that
could be received from investors, currently holding warrants to purchase up to a
total of approximately 108 million shares of common stock at exercise
prices of approximately $.18 - $.30 per share which are presently "in the money"
and can be exercised during the next 12 months.

Should these cash flows not be available to us, we believe we
would have the ability to revise our operating plan and make certain further
reductions in expenses, so that our resources which were available at December
31, 2005, plus financing to be secured during the balance of fiscal year 2006,
and expected POTS splitter revenues, will be sufficient to meet our obligations
through the end of fiscal year 2006. We have continued to experience operating
losses and negative cash flows. To date, we have funded our operations with a
combination of component sales debt conversions with related parties and
strategic vendors, and private equity offerings. Management believes that we
will be able to secure the necessary financing in the short-term to fund our
operations into our next fiscal year. However, failure to raise additional
funds, or generate significant cash flows through revenues, could have a
material adverse effect on our ability to achieve our intended business
objectives.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is not exposed to changes in interest rates as
the Company has no debt arrangements and no investments in certain
held-to-maturity securities. Under our current policies, we do not use interest
rate derivative instruments to manage exposure to interest rate changes. A
hypothetical 100 basis point adverse move in interest rates along the entire
interest rate yield curve would not materially affect the fair value of any
financial instruments at December 31, 2005.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of
management including the Chief Executive Officer and Chief Financial Officer, we
have evaluated the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14c and of the end of
the period covered by this report. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that these disclosure
controls and procedures are effective. There were no changes in our internal
control over financial reporting during the quarter ended December 31, 2005 that
have materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.

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PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

mPhase was advised in April 2002 that following an
investigation by the staff of the Securities and Exchange Commission, the staff
intended to recommend that the Commission file a civil injunctive action against
Packetport.com, Inc. ("Packetport") and its Officer's and Directors. Such
recommendation related to alleged civil violations by Packetport and such
Officers and Directors of various sections of the Federal Securities Laws. The
staff has alleged civil violations of Sections 5 and 17(a) of the Securities Act
of 1933 and Sections 10(b) and 13(d) of the Securities Exchanges Act of 1034.
mPhase also serve as Directors and Officers of Packetport. On November 15, 2005,
a civil enforcement action was filed in Federal District Court against
Microphase Corporation and the CEO and COO of mPhase corporation. mPhase is not
named as a party in connection with this matter. As noted in other public
filings of mPhase, the CEO and COO of mPhase as well as Microphase continue to
deny any wrongdoing in connection with the Civil Action filed and intend to
vigorously defend any and all counts set forth in such action.

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

ITEM 2. CHANGES IN SECURITIES

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

The conversion of $369,061 and $175,000 of liabilities due to Microphase
Corporation, and Janifast Ltd into 2,050,000 shares and 950,000 shares of stock,
respectively. The value attributable to the shares was based upon the market
price of the Company's common stock on the measurement date, such date was
determined pursuant to EITF00-1, as to when all the contingent terms of the
conversion agreements were met, in which no gain or loss was recognized on the
conversion of $544,061 of debt.

The Company issued 1,702,900 shares together with of 5 year warrants to
purchase 1,702,900 shares of the Company's common stock to accredited investors
at $.20 per share in a private placement generating pursuant to Rule 506 of
Regulation D of the Securities Act of 1933 generating $340,580 of gross proceeds
available to the Company to be used for general corporate purposes.

The Company issued 11,477,785 shares together with of 5 year
warrants to purchase 11,477,785 shares of the Company's common stock to
accredited investors at $.18 per share in a private placement generating
pursuant to Rule 506 of Regulation D of the Securities Act of 1933 generating
$2,238,973 of gross proceeds available to the Company to be used for general
corporate purposes.

The Company also issued 35,196,777 shares of its common stock together with a
like amount of warrants to affect revised pricing on previous private offerings.

The Company issued 772,128 shares of its common stock pursuant to the
exercise of warrants, generating net proceeds of $192,000 to the Company.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

> (1)

EXHIBITS.

31.1      Certification of Chief
Executive Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.

31.2      Certification of Chief Financial Officer
pursuant to Section 302 of the Sarbanes - Oxley Act of 2002. 
32.1      Certification of Chief Executive Officer
pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. 
32.2      Certification of Chief Financial Officer
pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.

28

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SIGNATURES

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

|                             | mPHASE TECHNOLOGIES,
    INC.  
|---------------------------- | -------------------------------
|Dated: February 14,
    2006 | By: /s/ Martin S.
    Smiley   
|                             | Martin S. Smiley               
|                             | Executive Vice
    President   
|                             | Chief Financial
    Officer and
|                             | General Counsel                

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