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**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, 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, 2003**

**COMMISSION FILE NO. 000–24969**

**mPhase Technologies, Inc.**(Exact name of registrant as specified in its charter)

| **NEW JERSEY**                                                | **22-2287503**                         |
|---------------------------------------------------------------|----------------------------------------|
| (State or other jurisdiction ofincorporation or organization) | (I.R.S. EmployerIdentification 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 FORTHE PAST 90 DAYS. YES  NO **

**THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT’S CLASSES OF COMMON STOCK AS OF FEBRUARY 9, 2004 IS 78,271,658 SHARES, ALL OF ONE CLASS OF $.01 STATED VALUE COMMON STOCK.**

 

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mPHASE TECHNOLOGIES, INC.**INDEX**

|                |   |                                                                                                                                                                                        |   | PAGE   |
|----------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| PART I    |   | FINANCIAL INFORMATION                                                                                                                                                                       |   |        |
|                |   |                                                                                                                                                                                        |   |   |
| ITEM 1    |   | FINANCIAL STATEMENTS                                                                                                                                                                        |   |        |
|                |   |                                                                                                                                                                                        |   |   |
|           |   | Unaudited    Consolidated Balance Sheets–June 30, 2003 and December 31, 2003                                                                                                           |   | 3      |
|                |   |                                                                                                                                                                                        |   |   |
|                |   | Unaudited      Consolidated Statements of Operations–Three months ended December 31,      2002 and 2003 and from October 2, 1996 (Date of Inception) to December    31, 2003 |   | 4      |
|           |   |                                                                                                                                                                                        |   |   |
|                |   | Unaudited      Consolidated Statements of Operations–Six months ended December 31,      2002 and 2003 and from October 2, 1996 (Date of Inception) to December 31, 2003 |   | 5      |
|           |   |                                                                                                                                                                                        |   |   |
|                |   |                                                                                                                                                                                             |   |   |
|           |   | Unaudited      Consolidated Statements of Changes in Shareholders’ Deficit Six months    ended December 31, 2003                                                             |   | 6      |
|                |   |                                                                                                                                                                                             |   |   |
|           |   | Unaudited      Consolidated Statement of Cash Flow–Six Months Ended December 31,      2002 and 2003 and from October 2, 1996 (Date of Inception) to December 31, 2003   |   | 7      |
|                |   |                                                                                                                                                                                             |   |   |
|           |   | Notes    to Unaudited Consolidated Financial Statements                                                                                                                                     |   | 8      |
|                |   |                                                                                                                                                                                             |   |   |
| ITEM 2    |   | Management’s      Discussion and Analysis of Financial Condition and Condition and Results    of Operations                                                                            |   | 15     |
|                |   |                                                                                                                                                                                             |   |   |
| ITEM 3    |   | Quantitative    and Qualitative Disclosures about market risk                                                                                                                               |   | 26     |
|                |   |                                                                                                                                                                                             |   |   |
| ITEM 4    |   | CONTROLS AND PROCEDURES                                                                                                                                                                     |   | 26     |
|                |   |                                                                                                                                                                                             |   |   |
| PART II   |   | OTHER INFORMATION                                                                                                                                                                           |   |   |
|                |   |                                                                                                                                                                                             |   |   |
| Item 1.   |   | Legal Proceedings                                                                                                                                                                           |   | 27     |
|                |   |                                                                                                                                                                                             |   |   |
| Item 2.   |   | Changes in Securities                                                                                                                                                                       |   | 27     |
|                |   |                                                                                                                                                                                             |   |   |
| Item 3.   |   | Defaults Upon Senior Securities                                                                                                                                                             |   | 27     |
|                |   |                                                                                                                                                                                             |   |   |
| Item 4.   |   | Submission    of Matters to a Vote of Security Holders                                                                                                                                      |   | 27     |
|                |   |                                                                                                                                                                                        |   |   |
| Item 5.   |   | Other Information                                                                                                                                                                           |   | 27     |
|                |   |                                                                                                                                                                                        |   |   |
| Item 6.   |   | Exhibits on Reports    on Form 8-K                                                                                                                                                          |   | 28     |
|                |   |                                                                                                                                                                                        |   |   |
| Signature Page |   | 29                                                                                                                                                                                          |
|                |   |                                                                                                                                                                                        |   |   |

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

|                                                                                                                                                                                      |   |   | **June 30,** |   |   | **December 31,** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------------|--------|--------|------------------|--------|
|                                                                                                                                                                                      |   |   | **2003**     |   |   | **2003**         |   |
|                                                                                                                                                                                           |        |        |              |        |        |                  |        |
|                                                                                                                                                                                      |   |   |         |   |   |             |   |
| ASSETS                                                                                                                                                                                    |   |   |         |   |   |             |   |
| CURRENT ASSETS                                                                                                                                                                            |   |   |         |   |   |             |   |
| Cash and cash equivalents                                                                                                                                                                 |   | $      | 396,860      |   | $      | 319,923          |   |
| Accounts    receivable, net of bad debt reserve of $0 for each period                                                                                                                     |   |   | 287,135      |   |   | 182,136          |   |
| Stock subscription receivable                                                                                                                                                             |   |   | 110,000      |   |   | 175,000          |   |
| Inventories, net                                                                                                                                                                          |   |   | 2,103,328    |   |   | 1,488,451        |   |
| Prepaid expenses and other current assets                                                                                                                                                 |   |   | 100,329      |   |   | 69,911           |   |
|                                                                                                                                                                                           |        |        |              |        |        |                  |        |
| TOTAL CURRENT ASSETS                                                                                                                                                                      |   |   | 2,997,652    |   |   | 2,235,421        |   |
|                                                                                                                                                                                           |        |   |         |        |   |             |        |
| Property and equipment, net                                                                                                                                                               |   |   | 581,890      |   |   | 240,067          |   |
| Patents and licensing rights, net                                                                                                                                                         |   |   | 184,857      |   |   | 129,924          |   |
| Other Assets                                                                                                                                                                              |   |   | 17,250       |   |   | 17,250           |   |
|                                                                                                                                                                                           |        |        |              |        |        |                  |        |
| TOTAL ASSETS                                                                                                                                                                              |   |   | 3,781,649    |   |   | 2,622,661        |   |
|                                                                                                                                                                                           |        |        |              |        |        |                  |        |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                 |   |   |         |   |   |             |   |
|                                                                                                                                                                                      |   |   |         |   |   |             |   |
| CURRENT LIABILITIES                                                                                                                                                                       |   |   |         |   |   |             |   |
| Accounts payable                                                                                                                                                                          |   |   | 2,352,961    |   |   | 2,731,266        |   |
| Accrued expenses                                                                                                                                                                          |   |   | 885,735      |   |   | 430,016          |   |
| Due to related parties                                                                                                                                                                    |   |   | 187,372      |   |   | 584,902          |   |
| Notes payable, current                                                                                                                                                                    |   |   | 762,735      |   |   | 822,804          |   |
| Deferred revenue                                                                                                                                                                          |   |   | 214,180      |   |   | 214,180          |   |
| Notes payable, related parties                                                                                                                                                            |   |   | —       |   |   | 460,000          |   |
|                                                                                                                                                                                           |        |        |              |        |        |                  |        |
| TOTAL CURRENT LIABILITIES                                                                                                                                                                 |   |   | 4,402,983    |   |   | 5,243,169        |   |
|                                                                                                                                                                                           |        |        |              |        |        |                  |        |
| Long-term debt, net of current portion                                                                                                                                                    |   |   | 586,303      |   |   | —           |   |
| Other Liabilities                                                                                                                                                                         |   |   | 1,561,249    |   |   | 2,085,484        |   |
| Notes payable, related parties                                                                                                                                                            |   |   | 460,000      |   |   | —           |   |
|                                                                                                                                                                                           |        |        |              |        |        |                  |        |
| COMMITMENTS AND CONTINGENCIES (Note 9)                                                                                                                                                    |   |   |         |   |   |             |   |
| STOCKHOLDERS’ DEFICIT                                                                                                                                                                |   |   |         |   |   |             |   |
| Common      stock, stated value $.01, 150,000,000 shares authorized; 71,453,521 and      74,861,525 shares issued and outstanding at June 30, 2003 and December    31, 2003, respectively |   |   | 714,535      |   |   | 748,615          |   |
| Additional paid in capital                                                                                                                                                                |   |   | 104,081,049  |   |   | 105,135,240      |   |
| Deficit accumulated during development stage                                                                                                                                              |   |   | (108,016,497 | )      |   | (110,581,874     | )      |
| Less-Treasury stock, 13,750 shares at cost                                                                                                                                                |   |   | (7,973       | )      |   | (7,973           | )      |
|                                                                                                                                                                                           |        |        |              |        |        |                  |        |
| TOTAL STOCKHOLDERS’ DEFICIT                                                                                                                                                          |   |   | (3,228,886   | )      |   | (4,705,992       | )      |
|                                                                                                                                                                                           |        |        |              |        |        |                  |        |
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                                                                          |   | $      | 3,781,649    |   | $      | 2,622,661        |   |
|                                                                                                                                                                                      |        |        |              |        |        |                  |   |

The accompanying notes are an integralpart of these financial statements.

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

| ** **                                                                                       |   |   | **Three Months Ended  December 31,   ** |   |   | **October 2, 1996 (Date of Inception)    to December 31,** |   |
|--------------------------------------------------------------------------------------------------|--------|--------|----------------------------------------------|--------|--------|----------------------------------------------------------------------|--------|
| ** **                                                                                       |   |   | **2002**                                     |   |   | **2003**                                                             |   |   | **2003** |   |
|                                                                                                  |        |        |                                              |        |        |                                                                      |        |  |  |  |
| REVENUES                                                                                         |   | $      | 561,760                                      |   | $      | 1,290,935                                                            |   | $ | 18,747,831 |   |
|                                                                                                  |        |        |                                              |        |        |                                                                      |        |  |  |  |
| COSTS AND EXPENSES                                                                               |   |   |                                         |   |   |                                                                 |   |   |   |   |
| Cost of Sales                                                                                    |   |   | 546,711                                      |   |   | 1,191,193                                                            |   |   | 13,134,889 |   |
| Research and development                                                                         |   |   |                                         |   |   |                                                                 |   |   |   |   |
| (including    non-cash stock related charges of $43,750, $0 and $2,045,669, respectively)        |   |   | 752,848                                      |   |   | 843,478                                                              |   |   | 35,801,977 |   |
| General and Administrative                                                                       |   |   |                                         |   |   |                                                                 |   |   |   |   |
| (including    non-cash stock related charges of $258,058, $195,000 and $46,172,594 respectively) |   |   | 731,396                                      |   |   | 913,519                                                              |   |   | 76,395,547 |   |
| Depreciation and amortization                                                                    |   |   | 128,652                                      |   |   | 27,978                                                               |   |   | 2,841,111 |   |
|                                                                                                  |        |        |                                              |        |        |                                                                      |        |  |  |  |
| TOTAL COSTS AND EXPENSES                                                                         |   |   | 2,159,607                                    |   |   | 2,976,168                                                            |   |   | 128,173,524 |   |
|                                                                                                  |        |        |                                              |        |        |                                                                      |        |  |  |  |
| LOSS FROM OPERATIONS                                                                             |   |   | (1,597,847                                   | )      |   | (1,685,233                                                           | )      |   | (109,425,693 | ) |
|                                                                                             |   |   |                                         |   |   |                                                                 |   |   |   |   |
| OTHER INCOME (EXPENSE)                                                                           |   |   |                                         |   |   |                                                                 |   |   |   |   |
| Gain on extinguishments                                                                          |   |   | —                                       |   |   | —                                                               |   |   | 226,549 |   |
| Minority interest loss in consolidated subsidiary                                                |   |   | —                                       |   |   | —                                                               |   |   | 20,000 |   |
| Capital losses                                                                                   |   |   | (16,077                                      | )      |   | —                                                               |   |   | (1,466,467 | ) |
| Loss from unconsolidated subsidiary                                                              |   |   | —                                       |   |   | —                                                               |   |   | (11,258 | ) |
| Interest Income (expense), net                                                                   |   |   | (15,414                                      | )      |   | (15,633                                                              | )      |   | 74,995 |   |
|                                                                                                  |        |        |                                              |        |        |                                                                      |        |  |  |  |
| TOTAL OTHER INCOME (EXPENSE)                                                                     |   |   | (31,491                                      | )      |   | (15,633                                                              | )      |   | (1,156,181 | ) |
|                                                                                                  |        |        |                                              |        |        |                                                                      |        |  |  |  |
| NET LOSS                                                                                         |   | $      | (1,629,338                                   | )      | $      | (1,700,866                                                           | )      | $ | (110,581,874 | ) |
|                                                                                                  |        |        |                                              |        |        |                                                                      |        |  |  |  |
| LOSS PER COMMON SHARE, basic and diluted                                                         |   | $      | (.03                                         | )      | $      | (.02                                                                 | )      |   |   |   |
|                                                                                                  |        |        |                                              |        |        |                                                                      |        |  |  |  |
| WEIGHTED AVERAGE COMMON                                                                          |   |   |                                         |   |   |                                                                 |   |   |   |   |
| SHARES OUTSTANDING, basic and diluted                                                            |   |   | 65,914,466                                   |   |   | 72,814,272                                                           |   |   |   |   |
|                                                                                                  |        |        |                                              |        |        |                                                                      |        |  |  |  |

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

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

| ** **                                                                                        |   |   | **Six Months Ended    December 31, ** |   |   | **October 2, 1996 (Date of Inception)        to December 31,** |   |
|---------------------------------------------------------------------------------------------------|--------|--------|--------------------------------------------|--------|--------|--------------------------------------------------------------------------|--------|
| ** **                                                                                        |   |   | **2002**                                   |   |   | **2003**                                                                 |   |   | **2003** |   |
|                                                                                                   |        |        |                                            |        |        |                                                                          |        |  |  |  |
| REVENUES                                                                                          |   | $      | 771,837                                    |   | $      | 3,780,137                                                                |   | $ | 18,747,831 |   |
|                                                                                                   |        |        |                                            |        |        |                                                                          |        |  |  |  |
| COSTS AND EXPENSES                                                                                |   |   |                                       |   |   |                                                                     |   |   |   |   |
| Cost of Sales                                                                                     |   |   | 744,030                                    |   |   | 3,289,937                                                                |   |   | 13,134,889 |   |
| Research and development                                                                          |   |   |                                       |   |   |                                                                     |   |   |   |   |
| including    non-cash stock related charges of $262,500, $0 and $2,045,669, respectively)         |   |   | 1,556,142                                  |   |   | 1,454,899                                                                |   |   | 35,801,977 |   |
| General and Administrative                                                                        |   |   |                                       |   |   |                                                                     |   |   |   |   |
| (including    non-cash stock related charges of $484,358, $307,245 and $46,172,894, respectively) |   |   | 1,624,178                                  |   |   | 1,518,411                                                                |   |   | 76,395,547 |   |
| Depreciation and amortization                                                                     |   |   | 259,381                                    |   |   | 74,082                                                                   |   |   | 2,841,111 |   |
|                                                                                                   |        |        |                                            |        |        |                                                                          |        |  |  |  |
| TOTAL COSTS AND EXPENSES                                                                          |   |   | 4,183,731                                  |   |   | 6,337,329                                                                |   |   | 128,173,524 |   |
|                                                                                                   |        |        |                                            |        |        |                                                                          |        |  |  |  |
| LOSS FROM OPERATIONS                                                                              |   |   | (3,411,894                                 | )      |   | (2,557,192                                                               | )      |   | (109,425,693 | ) |
|                                                                                              |   |   |                                       |   |   |                                                                     |   |   |   |   |
| OTHER INCOME (EXPENSE)                                                                            |   |   |                                       |   |   |                                                                     |   |   |   |   |
| Gain on extinguishments                                                                           |   |   | 40,724                                     |   |   | 23,087                                                                   |   |   | 226,549 |   |
| Minority interest loss in consolidated subsidiary                                                 |   |   | —                                     |   |   | —                                                                   |   |   | 20,000 |   |
| Capital losses                                                                                    |   |   | (16,077                                    | )      |   | —                                                                   |   |   | (1,466,467 | ) |
| Loss from unconsolidated subsidiary                                                               |   |   | —                                     |   |   | —                                                                   |   |   | (11,258 | ) |
| Interest Income (expense), net                                                                    |   |   | (34,149                                    | )      |   | (31,272                                                                  | )      |   | 74,995 |   |
|                                                                                                   |        |        |                                            |        |        |                                                                          |        |  |  |  |
| TOTAL OTHER INCOME (EXPENSE)                                                                      |   |   | (9,502                                     | )      |   | (8,185                                                                   | )      |   | (1,156,181 | ) |
|                                                                                                   |        |        |                                            |        |        |                                                                          |        |  |  |  |
| NET LOSS                                                                                          |   | $      | (3,421,396                                 | )      | $      | (2,565,377                                                               | )      | $ | (110,581,874 | ) |
|                                                                                                   |        |        |                                            |        |        |                                                                          |        |  |  |  |
|                                                                                              |   |   |                                       |   |   |                                                                     |   |   |   |   |
| LOSS PER COMMON SHARE, basic and diluted                                                          |   | $      | (.06                                       | )      | $      | (.04                                                                     | )      |   |   |   |
|                                                                                                   |        |        |                                            |        |        |                                                                          |        |  |  |  |
| WEIGHTED AVERAGE COMMON                                                                           |   |   |                                       |   |   |                                                                     |   |   |   |   |
| SHARES OUTSTANDING, basic and diluted                                                             |   |   | 63,397,799                                 |   |   | 72,251,251                                                               |   |   |   |   |
|                                                                                                   |        |        |                                            |        |        |                                                                          |        |  |  |  |

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

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

|                                                            |   |  **Shares** |          |  **$.01      Stated Value** |   |  **Treasury Stock** |   |  **AdditionalPaid-inCapital** |   |  **Accumulated Deficit** |   |  **Total Shareholders (Deficit) Equity** |   |
|-----------------------------------------------------------------|--------|------------------|---------------|----------------------------------|--------|--------------------------|--------|------------------------------------|--------|-------------------------------|--------|-----------------------------------------------|--------|
|                                                                 |        |                  |               |                                  |        |                          |        |                                    |        |                               |        |                                               |        |  |  |  |  |  |  |
| Balance    June 30, 2003                                        |   |             | 71,453,521    |                             | $      | 714,535                  |   | $                                  | (7,973 | )                             | $      | 104,081,049                                   |   | $ | (108,016,497 | ) | $ | (3,228,886 | ) |
|                                                                 |        |                  |               |                                  |        |                          |        |                                    |        |                               |        |                                               |        |  |  |  |  |  |  |
| Issuance    of common stock with warrants in private placements |   |             | 1,983,337     |                             |   | 19,834                   |   |                               | — |                          |   | 611,194                                       |   |   | — |   |   | 631,028 |   |
| Issuance    of common stock for services                        |   |             |  924,667 |                             |   | 9,246                    |   |                               | — |                          |   |  238,154                                 |   |   | — |   |   | 247,400 |   |
| Issuance    of common stock pursuant to exercise of warrants    |   |             | 500,000       |                             |   | 5,000                    |   |                               | — |                          |   | 145,000                                       |   |   | — |   |   | 150,000 |   |
| Issuance    of warrants to purchase common stock for services   |   |             | —        |                             |   | —                   |   |                               | — |                          |   | 59,843                                        |   |   | — |   |   |  59,843 |   |
| Net loss                                                        |   |             | —        |                             |   | —                   |   |                               | — |                          |   | —                                        |   |   | (2,565,377 | ) |   | (2,565,377 | ) |
|                                                                 |        |                  |               |                                  |        |                          |        |                                    |        |                               |        |                                               |        |  |  |  |  |  |  |
| Balance,    December 31, 2003                                   |   |             | 74,861,525    |                             | $      | 748,615                  |   | $                                  | (7,973 | )                             | $      | 105,135,240                                   |   | $ | (110,581,874 | ) | $ | (4,705,992 | ) |
|                                                                 |        |                  |               |                                  |        |                          |        |                                    |        |                               |        |                                               |        |  |  |  |  |  |  |

 

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    December 31, ** |   |   | **October 2, 1996 (Date of Inception)          to December 31,** |   |
|--------------------------------------------------------------------------------------------------|--------|--------|--------------------------------------------|--------|--------|----------------------------------------------------------------------------|--------|
| ** **                                                                                       |   |   | **2002**                                   |   |   | **2003**                                                                   |   |   | **2003** |   |
|                                                                                                  |        |        |                                            |        |        |                                                                            |        |  |  |  |
| Cash Flow From Operating Activities:                                                             |   |   |                                       |   |   |                                                                       |   |   |   |   |
| Net Loss                                                                                         |   | $      | (3,421,396                                 | )      | $      | (2,565,377                                                                 | )      | $ | (110,581,874 | ) |
| Adjustments    to reconcile net loss to net cash used in operating activities:                   |   |   |                                       |   |   |                                                                       |   |   |   |   |
| Depreciation and amortization                                                                    |   |   | 753,433                                    |   |   | 402,257                                                                    |   |   | 5,996,397 |   |
| Book Value of fixed assets disposed                                                              |   |   | 16,077                                     |   |   | —                                                                     |   |   | 74,272 |   |
| Provision for doubtful accounts                                                                  |   |   | —                                     |   |   | —                                                                     |   |   |  32,124 |   |
| Gain on debt extinguishments                                                                     |   |   | (40,725                                    | )      |   | (23,087                                                                    | )      |   | (226,549 | ) |
| Loss on unconsolidated subsidiary                                                                |   |   | —                                     |   |   | —                                                                     |   |   | 1,466,467 |   |
| Impairment of note receivable                                                                    |   |   | —                                     |   |   | —                                                                     |   |   | 232,750 |   |
| Loss on securities                                                                               |   |   | —                                     |   |   | —                                                                     |   |   | 11,258 |   |
| Non-cash      charges relating to issuance of common stock, common stock options and    Warrants |   |   | 790,608                                    |   |   | 307,245                                                                    |   |   | 48,451,342 |   |
| Changes in assets and liabilities:                                                               |   |   |                                       |   |   |                                                                       |   |   |   |   |
| Accounts receivable                                                                              |   |   | (68,859                                    | )      |   | 104,999                                                                    |   |   | (214,260 | ) |
| Inventories                                                                                      |   |   | 630,237                                    |   |   | 614,876                                                                    |   |   | (1,278,212 | ) |
| Prepaid expenses and other current assets                                                        |   |   | 69,324                                     |   |   | 30,418                                                                     |   |   | (566,203 | ) |
| Other non-current assets                                                                         |   |   | 2,695                                      |   |   | —                                                                     |   |   | — |   |
| Accounts payable                                                                                 |   |   | —                                     |   |   | 401,394                                                                    |   |   | 4,558,788 |   |
| Accrued expenses                                                                                 |   |   | (15,229                                    | )      |   | (419,559                                                                   | )      |   | 1,393,184 |   |
| Due to/from related parties                                                                      |   |   |                                       |   |   |                                                                       |   |   |   |   |
|    Microphase                                                                     |   |   | 495,566                                    |   |   | 313,226                                                                    |   |   | 2,609,175 |   |
|    Janifast                                                                       |   |   | 107,204                                    |   |   | 534,887                                                                    |   |   | 2,814,888 |   |
|    Officers                                                                       |   |   | 60,048                                     |   |   | (450,583                                                                   | )      |   | 108,756 |   |
|    Lintel                                                                         |   |   | —                                     |   |   | —                                                                     |   |   | 477,000 |   |
|    Others                                                                         |   |   | —                                     |   |   | —                                                                     |   |   | 211,972 |   |
| Receivables from Subsidiary                                                                      |   |   | —                                     |   |   | —                                                                     |   |   | (150,000 | ) |
| Deferred revenue                                                                                 |   |   | —                                     |   |   | —                                                                     |   |   | 214,180 |   |
|                                                                                                  |        |        |                                            |        |        |                                                                            |        |  |  |  |
| Net    cash used in operating activities                                                         |   |   | (621,017                                   | )      |   | (749,304                                                                   | )      |   | (44,364,545 | ) |
|                                                                                                  |        |        |                                            |        |        |                                                                            |        |  |  |  |
| Cash Flow from Investing Activities:                                                             |   |   |                                       |   |   |                                                                       |   |   |   |   |
| Payments related to patents and licensing rights                                                 |   |   | —                                     |   |   | —                                                                     |   |   | (375,720 | ) |
| Purchase of fixed assets                                                                         |   |   | —                                     |   |   | (5,500                                                                     | )      |   | (2,542,605 | ) |
|                                                                                                  |        |        |                                            |        |        |                                                                            |        |  |  |  |
| Net Cash (used)/provided by investing activities                                                 |   |   | —                                     |   |   | (5,500                                                                     | )      |   | (2,918,325 | ) |
|                                                                                                  |        |        |                                            |        |        |                                                                            |        |  |  |  |
| Cash Flow from Financing Activities:                                                             |   |   |                                       |   |   |                                                                       |   |   |   |   |
| Proceeds    from issuance of common stock and exercises of options and warrants                  |   |   | —                                     |   |   | 679,867                                                                    |   |   | 47,187,785 |   |
| Payments of notes payable                                                                        |   |   | (39,425                                    | )      |   | (2,000                                                                     | )      |   | (204,859 | ) |
| Advances from related party                                                                      |   |   | 623,290                                    |   |   | —                                                                     |   |   | 627,840 |   |
| Repurchase of treasury stock at cost                                                             |   |   | —                                     |   |   | —                                                                     |   |   | (7,973 | ) |
|                                                                                                  |        |        |                                            |        |        |                                                                            |        |  |  |  |
| Net    cash provided by financing activities                                                     |   |   | 583,865                                    |   |   | 677,867                                                                    |   |   | 47,602,793 |   |
|                                                                                                  |        |        |                                            |        |        |                                                                            |        |  |  |  |
| Net increase (decrease) in cash                                                                  |   |   | (37,152                                    | )      |   | (76,937                                                                    | )      |   | 319,923 |   |
| CASH    AND CASH EQUIVALENTS, beginning of period                                                |   |   | 47,065                                     |   |   | 396,860                                                                    |   |   | — |   |
|                                                                                                  |        |        |                                            |        |        |                                                                            |        |  |  |  |
| CASH    AND CASH EQUIVALENTS, end of period                                                      |   | $      | 9,913                                      |   | $      | 319,923                                                                    |   | $ | 319,923 |   |
|                                                                                                  |        |        |                                            |        |        |                                                                            |        |  |  |  |

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

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

| **1.         BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESNATURE 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 proprietary TraverserTM Digital    Video Data Delivery System (“Traverser”). The primary business    of the company is to design, develop, manufacture and market high band-width    telecommunication products incorporating digital subscriber line (“DSL”)    technology. The present activities of the Company are focused (a) upon cost    reduction and enhancement of its proprietary TraverserTM product under    an Agreement with Lucent Technologies, Inc. and (b) deployment of the TraverserTM product.    The TraverserTM enables telecommunications service providers to simultaneously    deliver MPEG2 digital quality television (utilizing non-internet protocol),    high-speed Internet and voice over copper telephone wire utilizing DSL technology.    Additionally, the Company sells DSL component products which includes microfilters,    splitters, and line extenders. |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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    TraverserTM and associated DSL component products. Since mPhase is in    the development stage, the accompanying consolidated financial statements    should not be regarded as typical for normal operating periods. |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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, 2003 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, 2003. |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Through December 31, 2003, the Company    had incurred cumulative (a) development stage losses totaling approximately    $110,581,874 and (b) negative cash flow from operations equal to $44,364,545.    At December 31, 2003, the Company had approximately $319,923 of cash, cash    equivalents and approximately $182,136 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. |

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**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 – During the second quarter of fiscal 2004, the Company adopted the fair value recognitionprovisions of FASB Statement No. 123, *Accounting for Stock-Based Compensation*, for stock-based employee compensation, effective as of the beginning of the fiscal year. Underthe modified prospective method of adoption selected by the Company, stock-based employee compensation cost recognized in 2003 is the same as that which would havebeen recognized had the fair value recognition provisions of Statement 123 been applied to all awards granted after October 1, 1995. The following table illustrates the effect onnet income and earnings per share as if the fair value based method has been applied to all outstanding and unvested awards in each period. |

|                                                                                                                                              |   |                                 |       |                               |   |       |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|------------|------------------------------------|--------|------------|--------|
|                                                                                                                                              |   | **Three Months Ended  December 31,** |       | **Six Months Ended  December 31,** |   |
|                                                                                                                                                   |        |                                      |            |                                    |        |            |        |  |  |  |  |  |  |
|                                                                                                                                              |   | **2003**                             |       | **2002**                           |   | **2003**   |   | **2002** |   |
|                                                                                                                                                   |        |                                      |            |                                    |        |            |        |  |  |  |  |  |  |
| Net loss, as reported                                                                                                                             |   | $                                    | (1,700,866 | )                                  | $      | (1,629,338 | )      | $ | (2,565,377 | ) | $ | (3,421,396 | ) |
| Add: Stock-based employee compensation expense included in reported net income, net of related tax effects                                        |   |                                 | —     |                               |   | 1,403      |   |   | — |   |   | 23,923 |   |
| Deduct: Total stock-based employee    compensation expense determined under fair value based method for all awards,    net of related tax effects |   |                                 | —     |                               |   | (12,016    | )      |   | — |   |   | (204,885 | ) |
|                                                                                                                                                   |        |                                      |            |                                    |        |            |        |  |  |  |  |  |  |
| Pro forma net loss                                                                                                                                |   | $                                    | (1,700,866 | )                                  | $      | (1,639,951 | )      | $ | (2,565,337 | ) | $ | (3,602,358 | ) |
|                                                                                                                                                   |        |                                      |            |                                    |        |            |        |  |  |  |  |  |  |
| Loss per share:                                                                                                                                   |   |                                 |       |                               |   |       |   |   |   |   |   |   |   |
|      Basic and diluted—as reported                                                                                  |   | $                                    | (.02       | )                                  | $      | (.03       | )      | $ | (.04 | ) | $ | (.06 | ) |
|      Basic and diluted—pro forma                                                                                    |   | $                                    | (.02       | )                                  | $      | (.03       | )      | $ | (.04 | ) | $ | (.06 | ) |
|                                                                                                                                              |        |                                      |            |                                    |        |            |        |  |  |  |  |  |   |

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

**RECENT ACCOUNTING PRONOUNCEMENTS**– In    April 2002, the FASB issued SFAS No. 145 “Rescission of FASB Statements    No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This    statement rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment    of Debt,” and an amendment of that statement, SFAS No. 44, “Accounting    for Intangible Assets of Motor Carriers,” and SFAS No. 64, “Extinguishments    of Debt Made to Satisfy Sinking-Fund Requirements.” This statement amends    SFAS No. 13, “Accounting for Leases,” to eliminate inconsistencies    between the required accounting for sale-leaseback transactions and the required    accounting for certain lease modifications that have economic effects that    are similar to sale-leaseback transactions. Also, this statement amends other    existing authoritative pronouncements to make various technical corrections,    clarify meanings, or describe their applicability under changed conditions.    Provisions of SFAS No. 145 related to the rescission of SFAS No. 4 were effective    for the Company on November 1, 2002 and provisions affecting SFAS No. 13    were effective for transactions occurring after May 15, 2002. The adoption    of SFAS No. 145 did not have a material impact on our financial statements.

In June 2002, the FASB issued SFAS    No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This    statement covers restructuring type activities beginning with plans initiated    after December 31, 2002. Activities covered by this standard that are entered    into after that date will be recorded in accordance with the provisions of    SFAS No. 146. The adoption of SFAS No. 146 did not have a significant impact    on our consolidated financial position or results of operations.

In December 2002, the FASB issued    SFAS 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” which    provides alternative methods of transition for a voluntary change to fair    value based method of accounting for stock-based employee compensation as    prescribed in SFAS 123, “Accounting for Stock-Based Compensation.” Additionally,    SFAS 148 required more prominent and more frequent disclosures in financial    statements about the effects of stock-based compensation. The provisions    of this Statement are effective for fiscal years ending after December 15,    2002, with early application permitted in certain circumstances. The Company    has adopted the disclosure provisions in our consolidated financial statements    asdisclosed above under Stock Based Compensation.

In November 2002, the FASB issued    Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements    for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN    45”). FIN 45 requires a company, at the time it issues a guarantee,    to recognize an initial liability for the fair value of obligations assumed    under the guarantee and elaborates on existing disclosure requirements related    to guarantees and warranties. The initial recognition requirements of FIN    45 are effective for guarantees issued or modified after December 31, 2002    and adoption of the disclosure requirements are effective for the Company    during the first quarter ending January 31, 2003. The adoption of FIN 45    did not have a significant impact on our consolidated financial position    or results of operations.

In January 2003, the FASB issued    FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable    Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires    certain variable interest entities to be consolidated by the primary beneficiary    of the entity if the equity investors in the entity do not have the characteristics    of a controlling financial interest or do not have sufficient equity at risk    for the entity to finance its activities without additional subordinated    financial support from other parties. FIN 46 is effective for all new variable    interest entities created or acquired after January 31, 2003. For variable    interest entities created or acquired prior to February 1, 2003, the provisions    of FIN 46 must be applied for the first interim or annual period beginning    after June 15, 2003. The adoption of FIN 46 did not have a significant impact    on our consolidated financial position or results of operations.

In May 2003, the FASB issued 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 afterJune 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities, ifapplicable. 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 is not expected to have a significant impact on the Company’s results of operations or financial position.

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

**STATEMENT OF CASH FLOW SUPPLEMENTAL INFORMATION**

|          |   | **2002** |   | **2003** |   |
|---------------|--------|----------|--------|----------|--------|
|               |        |          |        |          |        |  |  |
| Interest Paid |   | $        | 6,684  |     | $      | 6,000 |   |
|               |        |          |        |          |        |  |  |
| Taxes Paid    |   | $        | — |     | $      | 250 |   |

**2.      RELATED      PARTY TRANSACTIONS**

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.

Microphase also charges fees for    specific projects on a project-by-project basis. During the three months    ended December 31, 2002 and 2003 and from inception (October 2, 1996) to    December 31, 2003, $1,097,582, $87,948, and $7,312,474, 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 TraverserTM Digital    Video and Data Delivery System and DSL component products. For the six months    ended December 31, 2002 and 2003, mPhase recorded royalties to Microphase    totaling $22,948 and $103,185, respectively. During the fiscal, year ended    June 30, 2003 Microphase received 4,033,333 shares of common stock plus 1,000,000    five year warrants to purchase shares of common stock of mPhase at $.30 per    share in exchange for the cancellation of accounts payable totaling $920,000.

As a result of the foregoing transactions    as of December 31, 2003, the Company had a $360,000 payable to Microphase,    which is included in notes payable to related parties and $15,015 of unpaid    invoices are included in amounts due to related parties in the accompanying    consolidated balance sheet. Additionally, at December 31,    2003,    there are    no undelivered    purchase orders remain outstanding to Microphase.

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 year ended June 30, 2003    Janifast Ltd. was issued 1,500,000 shares of mPhase common stock in connection    with the cancellation of $360,000 of outstanding liabilities of mPhase, the    value of which was based upon the price of the Company’s stock on the    effective date of the settlement. No gain or loss was recognized in connection    with conversions byJanifast Ltd. for the fiscal year ended June 30, 2003.

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

During the six months ended December    31, 2002 and 2003 and the period from inception (October 2, 1996) to December    31, 2003, $132,465, $1,816,019 and $13,134,400, respectively have been charged    by Janifast to inventory or expense and is included in operating expenses    in the accompanying statements of operations.

As a result of the foregoing transactions    as of December 31, 2003, the Company had $534,887 payable to Janifast, which    is included in amounts due to related parties in the accompanying balance    sheet. Additionally, at December 31, 2003, approximately $400,000 of undeliveredpurchase orders remain outstanding to Janifast Ltd.

As consideration for a letter of    settlement with a former consultant of mPhase, the Company had loaned the    former consultant $250,000 in the form of a Note (“Note”), secured    by 75,000 shares of the former consultants common stock of mPhase. The Note    was due April 7, 2001. Accordingly, during the year ended June 30, 2002 and    2003, the Company charged $20,250 and $0, respectively, to administrative    expense as a result of impairment of the Note. At December 31, 2003, the    Company has included the residual balance of $17,250, representing the estimated    fair value of the underlying stock, in long-term assets in the accompanying    consolidated balance sheet.

Effective March 30, 2002, the Company    converted liabilities due to Piper Rudnick LLP, outside legal counsel to    mPhase into: a warrant to purchase up to a total of 1,683,490 shares of the    Company’s common stock; a second warrant to purchase 550,000 shares    of the Company’s common stock; and Piper agreed to accept a Promissory    note for $420,872 of their remaining payable at an interest rate of 8% with    scheduled payments of $5,000 per month commencing June 1, 2002 and continuing    through December 1, 2003, with a final payment of principal plus accrued    interest due at maturity on December 31, 2003. The Company is currently in    arrears with respect to all amounts due under the Promissory note.

**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, 2003 inventory is comprised of the following:

| Raw materials                  |   | $      | 121,991   |   |
|--------------------------------|--------|--------|-----------|--------|
| Work in progress               |   |   | 672,634   |   |
| Finished goods                 |   |   | 1,180,176 |   |
|                                |        |        |           |        |
| Total                          |   |   | 1,974,801 |   |
| Less: Reserve for Obsolescence |   |   | (486,350  | )      |
|                                |        |        |           |        |
| Net Inventory                  |   | $      | 1,488,451 |   |
|                                |        |        |           |        |

**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 financialstatements.

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

Utilization of net operating losses generated    through December 31, 2003 may be limited due to changes in ownership that    have occurred.

**5.     ACCRUED EXPENSES**

Accrued expenses representing accrued    general and administrative expenditures were $430,016 at December 31, 2003.    At December    31, 2003 unpaid invoices for expenses for research and development expenses    incurred with Lucent Technologies, Inc.  totaling $420,000 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, 2002 and ended December 31, 2003, 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 six months ending December    31, 2002, the Company granted 251,500 shares of its common stock to consultants    for services performed. Additionally, effective for the six months ended    December 31, 2002, the Company issued 4,873,333 shares of the Company’s    Common Stock and 2,491,800 warrants in connection with the extinguishment    of debt. During the six months ending    December 31, 2003, the Company granted 924,667 shares of its common stock    and warrants    to purchase 249,667 shares of its common stock to consultants for services    performed valued at $307,243. During the six months ended December 31, 2003,    the Company issued 333,337 shares of its common stock together witha like amount of 5 year warrants, at an exercise price $.30 per share, in a    private placement and 500,000 shares of its common stock pursuant to the     exercise of  warrants generating net proceeds to  Company of $250,000.    In December of 2003, the Company    issued 1,550,000 shares of its common stock together with a like amount of    5 year warrants to purchase one share each of the Company’s common stock,    with an exercise price of $.35 per share, in a private placement generating    net proceeds of $517,500, $175,000 of which was collected in January, 2004.    An advisor of the Company was issued 100,000 shares for assisting in this    transaction.

**8.     DEBT CONVERSIONS AND EXTENSION**

Effective for the six months ending    December 31, 2002, pursuant to debt conversion agreements, the Company converted    the $1,566,242 of liabilities due to certain strategic vendors and related    parties into 4,873,333 shares of the Company’s common stock, and 2,491,800    warrants which resulted in an aggregate gain on extinguishments of $40,725.    Additionally, during the six months ending December 31, 2003, a note payable    in  the amount of $360,000 to Microphase Corporation was executed in exchange    for the cancellation of a like amount of accounts payable to Microphase on    September 25, 2003which matures on July 25, 2004. Additionally, a note payable to Martin Smiley,    CFO and General Counsel of mPhase, in the amount of $100,000 was extended    from September 25, 2003 to July 24, 2004. Both liabilities carry an interest    rate of 12% payble quarterly in arrears. Each note is convertible into Common    Stock  of mPhase at the rate of $.30 cents per sharethrough July 25, 2004. Upon conversation, each note holder will be granted warrants    to purchase an  equivalent amount of mPhase Common Stock at $.30 cents per    share for a period of five years from the date of conversion.

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

**9.     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, 2002 and 2003    and for the period from inception through December 31, 2003 totaled approximately    $100,000, $0 and $13,524,300, respectively. See Subsequent Events below.

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 TraverserTM DVDDS.

**10.     DEFERRED REVENUE**

Deferred revenue as of December 31,    2003 consists of customer’s billings in excess of costs totaling $156,180    on the POTS product line whereby completion of customer acceptance will be    attained when original splitters are upgraded to the next generation splitters    and deposits of $58,000 from Beta customers on the TraverserTM product    line orders to be delivered when it reaches commercial production.

**11.     SUBSEQUENTEVENTS**

Subsequent to December 31, 2003, the Companyfinalized an agreement with GTRC to settle approximately $1,835,000 of accounts payable pursuantto the issuance of a warrant convertible into approximately 5,100,000 shares of the Company’scommon stock on a cash-less basis. At December 31, 2003 the Company has included this amount as a non-currentobligation under the caption “Other Liabilities.”

 

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**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 12,000 shareholders and    approximately 72 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 Atlanta, GA. mPhase shares common office space with    Microphase Corporation, a privately held company. Microphase is a leader    in the field of RF and filtering technologies within the defense and telecommunications    industry. It has been in operation for almost 50 years and supports mPhase    with both engineering, administrative and financial resources as needed.

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mPhase develops, markets and sells    a line of innovative DSL (“digital subscriber line”)-based broadband    telecommunications equipment. Our flagship product line includes two systems    enabling the delivery of television over DSL by telephone service providers.    Both of these products facilitate telephone companies becoming full service    communications providers by enabling the simultaneous delivery of digital    broadcast television, high speed data and voice services over the existing    telephone line infrastructure. mPhase has developed its flagship line of    products with a specific target in mind-telephone companies in parts of the    world where access to multichannel television is limited. To that end, mPhase’s    primary goal is to develop cost-effective TV over DSL solutions that support    proven, revenue-generating services (i.e., broadcast television) rather than    developing robust, feature-intensive and expensive platforms intended to    compete with cable companies such as those that exist in the US.

mPhase introduced its first TV over    DSL product, the TraverserTM Digital Video and Data Delivery System in    1999. The TraverserTM DVDDS, is a patented end-to-end system based upon    proprietary technology developed in conjunction with Georgia Tech Research    Corporation. Because it is an end-to-end video-over-ADSL system, the TraverserTM does    not interoperate with other manufacturer’s DSL CO equipment or CPE modems.    This system is the only non-Internet Protocol system on the market today.    The company continues to market this product, and believes it to be ideal    for customers specifically interested in supporting television services with    a minimal need to support high-speed data customers.

The TraverserTM  is installed    at Hart Telephone Company in Hartwell, Georgia, where a 100-user system is    currently operational. Hart Telephone competed the construction of its digital    head end toward the end of 2001, marking the Traverser’sTM  transition    to commercial deployment. A TraverserTM system is also installed at the    BMW manufacturing plant in Spartanburg, South Carolina for use as a telebroadcast    system in a commercial setting.

The mPhase TV+ platform, recently    developed in conjunction with the Bell Labs division of Lucent Technologies,    Inc. (Lucent), is a new product 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 CO and the customer premises.    The TV+ formerly named ‘Simple TV’, is a modular solution for the delivery    of several hundred broadcast television channels over ADSL that utilizes    an industry-leading, standards-based Lucent StingerTM DSL Access Concentrator    for transport of digital television plus high speed internet and voice. The    mPhase TV+ platform consists of a cost-reduced Traverser INITM set top    box located in acustomer’s premises plus the Lucent Stinger located at the telephone company’sCO. A newly developed mPhase Broadcast Television Switch (“BTS”) interfaceswith the Stinger and a video headend built by a telephone service provider todownlink broadcast television programming from satellites. The BTS formats thevideo data prior to distribution to a customer by the Stinger and supports administrativetasks associated with subscriber management. Using the Lucent Stinger (digitalsubscriber line access mutiplexer commonly known as a DSLAM) for transport inthe TV+ platform results in a highly scalable architecture for the delivery ofvideo. This scalability is accomplished by internally multicasting each televisionchannel for delivery from the CO to a larger number of end users than would beotherwise possible over ADSL. We believe that the TV+ platform is the most cost-effective,standards-based solution for delivery of broadcast television using ADSL. TheStinger is one of a few DSLAM’s currently on the market with robust internalmulticasting capabilities. For mPhase, the alliance with Lucent marks a changein strategy from selling a complete proprietary platform to providing an industry-standardmodular solution.

Both the TV+ platform and the legacy    DVDDS products are aimed for use 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).    We believe there is a significant cost advantage when our mPhase TV+ solution    is compared against other platforms utilizing existing telephone lines containing    the same features. The mPhase TV+ platform does not contain the features    such as the delivery of two or more TV channels to a single set top box over    copper telephone lines or video on demand and interactive TV features. As    ADSL technology migrates forward to ADSL2 or ADSL2+, mPhase will include    additional features to its TV+ platform in a modular scaleable cost-effective    manner depending upon actual market demand for such features in markets that    mPhase is targeting.

We believe the legacy DVDDS developed    by GTRC, when combined with a version of the cost-reduced Traverser INITM set    top box redesigned by Lucent, continues to be a cost effective TV platform.    The DVDDS can be sold in international markets where primary demand is for    multi-channel digital broadcast television plus voice only and where there    is little demand for high speed internet. We believe the mPhase TV+ platform    is the optimal solution for both a telecommunications service provider where    the ultimate customer requires all three services, i.e. high-speed internet,    voice and digital broadcast television over ADSL.

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For those television markets in the    United States that are not served by HFC, we believe the availability of programming    content is essential to facilitate potential sales of our TV platforms over    ADSL. In March of 2000, we established mPhase Television net., Inc. (mPhase    TV), a joint venture between mPhase and Alphastar International, Inc. mPhase    TV can provide contracts, licensing agreements, marketing and legal support    to service providers interested in deploying television over ADSL for U.S.    markets. mPhase TV has secured licenses to resell programming for approximately    80 channels of U.S. broadcast television. mPhase TV enables telecommunications    service providers in the U.S. to provide customers a full complement of television    programming. This enables a U.S. telecommunications service provider to avoid    the necessity of securing such contracting rights individually with many    different providers of broadcast television content. It is important to note    that the role of mPhase TV has changed since its inception. Originally, mPhase    TV was to utilize a satellite uplink/downlink facility and serve as an aggregator    of television content. This would eliminate the need for a telecommunications    service provider, purchasing a TV delivery platform from mPhase, from having    to build a full scale television reception facility (head-end) to downlink    broadcast television channels from satellites orbiting the earth. However,    recent advances in technology have significantly reduced the costs for a    telephone company to build a full scaleheadend. Therefore, the role of mPhaseTV is now limited to providing the appropriate    licenses and relationships as opposed to offering a content aggregation solution.    As part of its cost reduction efforts, mPhase terminated its lease of Alphastar’s    earth station satellite uplink and downlink facility in Oxford, CT. mPhase    owns approximately 57% of mPhase TV.

To effectively market this joint    solution, mPhase has been established as a Lucent Business Partner. As a business    partner, mPhase is able to sell the complete SimpleTV platform, including    reselling the Lucent Stinger®. The agreement enables mPhase to sell the    SimpleTV platform anywhere in the world where the customer is interested    in supporting digital video services. Additionally, mPhase and Lucent are    jointly marketing this product solution to existing Lucent customers, as    well as to Lucent’s extensive network of business partners around the    world. Together the two companies are in the process of identifying strong    opportunities and target markets. Once identified, collectively mPhase and    Lucent will approach Lucent’s establishedbusiness partner in that region for further marketing to the appropriate end    customer. This co-marketing relationship adds tremendous value to mPhase.    By gaining access to Lucent’s business partners, mPhase will have the    opportunity to significantly increase exposure for its SimpleTV solution    without having to increase the size of its direct sales force.

mPhase DSL Component Products – mPhase    also has designed and markets a line of DSL component products ranging from    items such as Plain Old Telephone Service (POTS) splitters to innovative    loop management products. From our inception in 1996 to date virtually all    of mPhase’s revenue has been derived from sales of our component DSL    products such as POTS splitters and low pass filters. Our newest innovation    in our suite of DSL component products is our iPOTS or Intelligent POTS splitter    product. This product enables telephone service providers comprehensive remote    and automated test access to all elements of a DSL network. The iPOTS1, and    iPOTS3 allow a telephone service provider to bypass POTS splitters on a DSL    network and avoid having to manually intervene and disrupt line usage so    a test signal can pass through a DSL network. This product marks an advancement    in automating DSL loop management. As DSL deployments increase, it is becoming    more important for telecommunications service providers to streamline the    process for rolling-out and troubleshooting DSL services. Additionally, as    competition for high speed Internet expands, the market is witnessing a reduction    in the price for such service. Therefore, it has become imperative that telecommunications    service providers lower the operational costs involved with supporting DSL    services. Currently our iPOTS1 is designed for use with the Lucent Stinger,    whereas, the iPOTS3 is compatible with DSLAM’s manufactured by other    vendors. mPhase currently has a non-exclusive worldwide distribution agreement    with Corning Cable Systems for the sale of the iPOTS products. Such arrangement    potentially expands exposure for this product, as Corning is one of the largest    vendors of central office DSL filtering equipment. The Company is also aggressively    pursuing direct efforts with respect to sales of the iPOTS product.

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 mPhase has established a worldwide    distribution agreement with Corning Cable Systems for the sale of this product.    Utilizing Corning as a distribution channel expands exposure for this product,    as Corning is one of the largest vendors of central office DSL filtering    equipment.

mPhase was organized on October 2,    1996. On February 17, 1997, the Company acquired Tecma Laboratories, Inc.,    a public corporation in a reverse merger transaction. This resulted in the    Company’s stock becoming publicly traded on the NASDAQ Over-the-Counter    Bulletin Board. On June 25, 1998, the Company acquired Microphase Telecommunications,    Inc. in a stock for stock exchange, whose principal assets included patents    and patent applications utilized in the Company’s TraverserTM product.    On March 2, 2000, mPhase acquired an interest in mPhaseTelevision.Net, Inc.,    a joint venture organized to provide digital television programming content    to service providers deploying television over DSL.

From mPhase’s inception, the    operating activities related primarily to research and development, establishing    third-party manufacturing and distribution relationships and developing product    brand recognition among telecommunications service providers. These activities    included establishing trials and field tests of the TraverserTM  product    with Hart Telephone Company in Georgia, and establishing a core administrative    and sales organization. In addition, we have recently entered an Agreement    with Lucent Technologies, Inc. to cost-reduce and enhance features of mPhase’s    Digital Set Top Box that is part of its TraverserTM product.

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 TraverserTM to various    telecommunications service providers. Since the Company believes that there    may be a significant international market for the TraverserTM 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 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. Costs for future    production of the TraverserTM product will consist primarily of payments    to manufacturers to acquire the necessary components and assemble the products    and future patent royalties payable to Georgia Tech Research Corporation,    (“GTRC”).

Research and development. Research    and development expenses consist principally of payments made to GTRC, Microphase    Corporation and Lucent Technologies, Inc. for development of the TraverserTM and    the integration mPhase’s Broadcast Television Switch with the Lucent    Stinger® voice and data delivery system product. All research and development    costs are expensed as incurred.

General and administrative. Selling,    general and administrative expenses consist primarily of salaries and related    expenses for personnel engaged in direct marketing of the TraverserTM,    the POTS Splitter Shelves and other DSL component products, as well as support    functions including executive, legal and accounting personnel. Certain administrative    activities are outsourced on a monthly fee basis to Microphase Corporation.    Finally, mPhase leases the principal office from Microphase Corporation.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, 2003 the Company has    incurred cumulative (a) development stage losses and has an accumulated deficit    of $110,581,874 and (b) negative cash flow from operations of $44,364,545.    The auditors report for the fiscal year ended June 30, 2003 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 $2,000,000 during the next 12 months to continue    its present level of operations. As of December 31, 2003, the Company had    a negative net worth of $4,705,992 compared to a negative net worth of $3,228,886    as a result of continuing net losses incurred after June 30, 2003.

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In fiscal 2001, the Company had anticipated    that the sales of its component products would be able to supplement the underwriting    of the completion of our flagship product, the TraverserTM. In fiscal    2002 these sales declined with the overall decline of DSL deployments and    spending in the telephone industry. For the second three months of fiscal    year 2004, sales of POTS splitters were $1,290,935. The Company believes    its new IPOTS product will capture some of the existing DSL deployments,    providing increases in revenue in the third quarter of fiscal 2004. Until    such time such revenues are realized, the Company intends on maintaining    its reduced cost structure to minimize its losses, which management believes    will permit the Company to sustain its development process and ultimately    achieve profitability.

The Company believes that significant    deployments and resulting revenues from these deployments of its flagship    products, the TraverserTM and the TV+ respectively, are not expected    until the second quarter of fiscal year 2005. 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.

**THREE MONTHS ENDED DECEMBER 31,2003 VS. DECEMBER 31, 2002**

**REVENUE**

Total revenues were $1,290,935 for    the three months ended December 31, 2003 compared to $561,760 for the three    months ended December 31, 2002. The increase was primarily attributable to    an increased 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 significant part of DSL deployment worldwide.    The Company cannot predict  if the upturn in sales of its POTS Splitter    product will continue. The revenue increase was primarily from two customers,    Covad Communications and Bell South.

**COST OF REVENUES**

Cost of sales were $1,191,193 for    the three months ended December 31, 2003 as compared to $546,711 in the comparable    prior period in 2002, representing 92.3% of gross revenues for the quarter    ended December 31, 2003 and 97.3% for the quarter ended December 31, 2002,    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, 2003, increased by 5%    over the margins for the same period ended December 31, 2002 due to a lower    cost of production due to better material prices on our POTS Splitter product    line, offset by reduced selling prices due to pricing pressure. We are unable    to determine whether such increase in margins will continue for the remainder    of fiscal    year 2004.

**RESEARCH AND DEVELOPMENT**

Research and development expenses    were $913,519 for the three months ended December 31, 2003 as compared to    $752,848 during the comparable period in 2002 or an increase of $160,671.    This increase is comprised primarily of an increase of $220,000 to Lucent    for development of our TV+ platform, offset by a reduction in expenses to    Microphase of approximately $50,000 as compared to the quarter ended December    31,    2002    and a decrease of $43,750 in non-cash stock and stock option expenses of$0 in the current quarter when compared to the quarter ended December 31, 2002.

Such decreases are the result of    elimination of further development of the TraverserTM DVDDS product by    GTRC as the Company focuses its efforts on Research and Development expenditures    associated with the TV+ product with Lucent which has been comparatively,    to date, less expensive to develop. 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 iPOTSTM and the mPhase Stretch.    We believe the mPhase iPOTSTM offers a much needed solution for the DSL    industry; the iPOTSTM enables telcos to remotely and cost-effectively    perform loop management and maintenance including line testing, qualification    and troubleshooting. Prior to the introduction of the iPOTSTM, loop management    could not be remotely performed through a conventional POTS Splitter without    the use of expensive cross connects or relay banks because of the mandatory    DC blocking capacitors in traditional POTS splitters, as required by the    ITU, ANSI and ETSI. The unique (patent pending) iPOTSTM 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.    Also recently developed is the DSL loop extender product called mPhaseStretch.    This product extends the service distance for the mPhase TraverserTM and    can be used in conjunction with other DSL services. The Company anticipates    future demand for the Stretch loop extender product as it addresses a primary    issue in DSL services.

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**GENERAL AND ADMINISTRATIVE EXPENSES**

Selling, general and administrative    expenses were $843,478 for the three months ending December 31, 2003    up from $731,396 or an increase of $112,082 from the comparable period in    2002. These include an increase in marketing related expenses of approximately    $40,000, increases in legal expenses of approximately $34,000 and other various    expenses incurring individually insignificant increases totally approximately    $100,000,    offset    by a decrease in non-cash administrative expenses of approximately $60,000.We expect sales and travel expenses    to grow as the Company approaches the deployment of its TV+ products in thefuture.

**DEPRECIATION AND AMORTIZATION**

Depreciation    and amortization expense was $27,978 for the three months ending December    31, 2003, down from $128,652, or a decrease of $63,062 from the comparable    periodin 2002. The decrease is a result of the Company’s reduced outlays for capitalexpenditures in its two most recent fiscal years. We do not expect such downwardtrend to continue but such depreciation and amortization expense should remainat the current reduced levels until the Company commences deployment of its Televisionover 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    $1,700,866 for the three months ended December 31, 2003 as compared to a    loss of $1,629,338 for the three months ended December 31, 2002. This represents    a    loss per common share of $.02 for the three month period ended December    31, 2003 as compared to a loss per common share of $.03 for the three months    ending December 31, 2002; based upon weighted average common shares outstanding    of 65,914,466 and 72,814,272 during the periods ending December 31, 2002    and2003, respectively.

The Company believes the initial     major deployments and the resultant revenues of its flagship products,    the TraverserTM DVDDS and the TV+ respectively, are not expected until    the second quarter of fiscal year 2005, 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 opportunities to attain profitability.

**SIX MONTHS ENDED DECEMBER  31, 2003 VS. DECEMBER  31, 2002**

**REVENUE**

Total revenues were $3,780,137 for    the six months ended December 31, 2003 compared to $771,837 for the six months    ended December 31, 2002, representing an increase of $3,008,300. The increase    was primarily attributable to an increased 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 significant    part of DSL deployment worldwide. The Company  cannot predict if the upturn    in sales of its Pots Splitter line will be sustained at this level. The revenue    increase was primarily from two customers, Covad Communications and Bell    South.

**COST OF REVENUES**

Cost of sales were $3,289,937 for    the six months ended December 31, 2003 as compared to $744,030 in the prior    period, representing 87.0% of gross revenues for the first half of fiscal    2004 which ended December 31, 2003 and 96.4% for the first half of fiscal    2003 which ended December 31, 2002, 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. Our gross margins for the    first half of fiscal 2004, which ended December 31, 2003, increased    by 7.4% over the margins for the same period ended December 31, 2002    due to better cost of materials used in the Pots Splitter product line.    Due to pricing pressure    in the current quarter, the improvement of our gross margins year to date    is down 2.2 % from the 9.6% improvement we noted in the first quarter. We    are unable to determine whether such    increase    in the    year to date gross margins can be sustained for the remainder of fiscal year    2004. 

**RESEARCH AND DEVELOPMENT**

Research and development expenses    were $1,454,899 for the six months ended December 31, 2003 as compared $1,556,142    during the comparable period in 2002, or a decrease of $101,243. This decrease    is comprised primarily of a reduction in expenses to GTRC by $100,000, compared    to the six months ended December 31, 2002,  decreases in expenses to Microphase    of approximately $116,000 and $262,500 in the non-cash option expense component    of research and development and expenditures; offset by costs incurred for    the increased research efforts on the TV+ product with Lucent of over $420,000    for the first half offiscal 2004 when compared to the first half of fiscal 2003 which ended December    31, 2002. 

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, expect    an increase in research and development costs beginning in March, 2004. In    order to broaden and diversify its current line of business into additional    high growth technology areas, the Company has entered into a Development    Agreement, effective February 3, 2004, with the Bell labs division of Lucent    Technologies,    Inc.    to commercialize the use of nano power cell technology. Under the terms of    the $1.2 million contract, Lucent/ Bell Labs will develop 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 andreserved power to a wide range of electronic devices for the defense department.

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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 mphase *ipots(tm*)   offers a much-needed solution for the DSL industry; the *ipots(tm*) enables telcos to remotely and cost-effectively perform loop management and maintenance including line testing, qualification and troubleshooting. Prior to the introduction of the*ipots(tm)*, loop management could not be remotely performed through a conventional pots splitter without the use of expensive cross connects or relay banks because of the mandatorydc blocking capacitors in traditional pots splitters, as required by the itu, ansi and etsi. The unique (patent pending) *ipots(tm*) circuit allows most test heads to perform both narrow and wideband testing of the local loop through the central office pots splitter 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. Also recently developed is the DSL loop extender product called mphase stretch. This product extends the service distance for the mphase traverser(tm) and can be used in conjunction with other DSL services. The company anticipates future demand for the stretch loopextender product as it addresses a primary issue in DSL services. 

**GENERAL AND ADMINISTRATIVE EXPENSES**

Selling, general and administrative expenses were $1,518,411 for the six months ending December 31, 2003 down from $1,624,178 or a decrease of $105,767 from the comparable period in 2002. The decrease in the selling, general and administrative costs is comprised primarily of a reduction in expenses of non-cash charges relating to the issuance of common stock and options to consultants, which totaled $307,245 for the six months ended December 31, 2003 as compared to $484,358 for the comparable period ended December 31, 2002 resulting in a savings of $177,113. This decrease, coupled with other reductions in selling, general and administrative costs including travel were offset by increases in marketing costs, including payroll and related expensesfor two new technical sales managers having the composite effect of increasing aggregate administrative expenses other than non-cash charges relating to the issuance of equity instruments by approximately $75,000.  We expect sales and travel expenses to grow as the company’sapproaches the deployment of its tv+ products in the future.

**DEPRECIATION AND AMORTIZATION**

Depreciation and amortization expense was $74,082 for the six months ending December 31, 2003, down from $259,381, or a decrease of $185,299 from the comparable period in 2002.  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 $2,565,377 for the six months ended December 31, 2003 as compared to a loss of $3,421,396 for the six months ended December 31, 2002. This represents a loss per common share of $.04 for the six month period ended December 31, 2003 as compared to a loss per common share of $.06 for the six months ending December 31, 2002; based upon weighted average common shares outstanding of 63,397,799 and 72,251,251 during the periods ending December 31, 2003 and 2002, respectively.

 Although it is difficult to predict    the exact timing of our fist sales, the company believes the initial major    deployments and the resultant revenues of its flagship products, the *traverser(tm*)    and the *tv+* respectively,  are not  expected until the second quarter of fiscal year 2005,    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 opportunities to attain profitability. 

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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 normalwarranty 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, 2003 may be limited due to “changes in control”  of our common stock that occurred.

**STOCK-BASED COMPENSATION**

Financial Accounting Statement No.    123, Accounting for Stock Based Compensation, encourages, but does not require    companies to record compensation cost for stock-based employee compensation    plans at fair value. The Company has chosen to continue to account for stock-based    compensation for grants to employees using the intrinsic method prescribed    in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued    to Employees, and related interpretations. Accordingly, compensation cost    for stock options is measured as the excess, if any, of the quoted market    price of the Company’s stock at the date of the grant over the amount    an employee must pay to acquire the stock. The Company has adopted the “disclosure    only”alternative described in SFAS 123 and SFAS 148, which require pro forma disclosuresof net income and earnings per share as if the fair value method of accountinghad been applied. The Company accounts for non-employee stock based awards inwhich goods or services are the consideration received for the equity instrumentsissued based on the fair value of the consideration received or the fair valueof the equity instrument issued, whichever is more readily determinable.

**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.    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. The    allowance is estimated as the difference between inventory at historical    cost, on a first in first out basis, and market based upon assumptions about    future demand, current prices and product liability, and charged to the provision    for inventory, which is a component of cost of sales. At the point the historical    cost is adjusted, a lower cost-basis for that inventory is established, and    subsequent changes in facts and circumstances do not result in the restoration    or increase in that newly established cost basis.

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During the fiscal years ended June    30, 2003, 2002 and 2001, the Company reserved approximately $302,000, approximately    $928,000, and approximately $315,000, respectively, for technical obsolescence    and marketability based upon current prices and overall demand and charged    a like amount to expense, representing 8.4% of average inventory, at cost,    of approximately $3,588,000 on hand during the period in fiscal 2003; 20.2%    of average inventory, at cost, of approximately $4,602,000 on hand during    the period in fiscal 2002; and 13.6% of average inventory, at cost, of approximately    $2,309,000 on hand during fiscal 2001. The reserve and corresponding charges    in fiscal 2002 were increased as the Company experienced a dramatic decrease,    along with the entire telephonic industry, in demand for our component products    in addition to the decision to table the production of certain product line    items built on certain European standards and which the Company does not    expect to pursue in the near future. As of June 30, 2003, the Company recorded    a cost adjustment of approximately $1,059,000, recognizing permanent cost    reductions due to price adjustments approximating $318,000 and reductions    due to obsolescence resulting from a lack of inter-operability of certain    components in inventory with the Company’s present product line approximating    $741,000. As a result on June 30, 2003 the Company had a total inventory    valuation reserve of $486,500 against its inventory with a total balance,    at cost, of $2,589,678, or 18.8%. If there was to be a sudden and significant    decrease in demand for our products, or if there were a higher incidence    of inventory obsolescence because of rapidly changing technology and customer    requirements, we could be required to increase our inventory allowances and    our gross margins could be adversely affected.

**MATERIAL RELATED PARTY TRANSACTIONS**

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

The Company has also incurred charges    for beta testing and on-site marketing, including the display of a live working    model at Hart Telephone. In addition, the Company has entered into a supply    agreement with Hart Telephone, which is scheduled to commence upon the commercial    production of the TraverserTM. A member of mPhase’s board of directors    is employed by Lintel, Inc., the parent corporation of Hart Telephone.

Mr. Durando, the President and CEO    of mPhase, owns a controlling interest and is a director of Janifast Limited.    Mr. Durando and Mr. Dotoli are officers of Microphase Corporation. Mr. Ergul,    the chairman of the board of mPhase, owns a controlling interest and is a    director of Microphase Corporation. Microphase, Janifast, Hart Telephone    and Lintel Corporation are significant shareholders of mPhase. Microphase,    Janifast and Hart Telephone have converted significant liabilities to equity    in fiscal years June 30, 2001, 2002 and 2003. Management believes the amounts    charged to the Company by Microphase, Janifast, mPhase Television.net and    Hart Telephone are commensurate to amounts that would be incurred if outside    parties were used. The Company believes Microphase, Janifast and Hart Telephone    have the ability to fulfill their obligations to the Company without further    support from the Company.

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**LIQUIDITY AND CAPITAL RESOURCES**

At December 31, 2003 mPhase had working    capital deficit of $3,007,748 as compared to working capital deficit of $1,658,120    at December 31, 2002. Through December 31, 2003, the Company had incurred    development stage losses totaling approximately $110,581,874. At December    31, 2003, the Company had approximately $319,923 of cash, cash equivalents    and    approximately $182,136 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 itsproducts.

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  cashflow 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, 2003, the Company had cash  and cash equivalents of $319,923 compared to $396,860 at June 30, 2003, accounts  receivable of $182,136 and inventory of $1,488,451. This compared to $287,135 of accounts  receivable and $2,103,328 of inventory at June 30, 2003.

Cash used in operating activities     was $749,304 during the six months ending December 31, 2003. The cash     used  by operating activities principally consists of the net loss, and     significant  changes in assets and liabilities, including additional cash used for decreasing      accrued expenses by approximately $420,000 offset by depreciation and amortization  of $402,257, and by non-cash charges of $307,245 for common stock options and      warrants issued for services and cash flow provided from a decrease in     inventory  of approximately $615,000. 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, 2003 and 2002, respectively,     and $13,524,300 from the period from inception through December 31,     2003.  The Company and GTRC entered into a Memorandum of Intent, on October     14, 2002  and revised on November 12, 2002, as of February 17, 2003 this has been finalized,      resulting in the settlement of all amounts outstanding and the exchange     of mutual  releases in consideration for one $100,000 promissory note payable in quarterly      equal installments of $16,667 commencing March 31, 2004 and warrants to     purchase  approximately 5,100,000 shares of the Company’s common stock, on a cashless  basis at $.35 per share through 2008. The Company and GTARC are in final documentation  based upon such Memorandum  of Intent. mPhase is the sole, worldwide  licensee of the technology developed by GTARC in conjunction with the TraverserTM  product line. Upon completion of the commercial product, GTRC may receive a   royalty of up to 5% of product sales.

During the twelve months ending June    30, 2003, certain strategic vendors and related parties converted approximately    $1.9 million of accounts, payable and accrued expenses into 5,923,333    shares of the Company’s common stock and 2,491,800 warrants to purchase    additional shares of common stock of the Company.

As of December, 2003, mPhase is obligated     to pay Lucent Technologies, Inc., the sum of $140,000 per month through    May  of 2004 under a new Development Agreement with Lucent for further development     of the TV+ product representing charges the Company has yet to incur of    approximately $560,000 in addition to $420,000 included in accounts payable    at December 31, 2003, for  a total sum of $980,000 pertaining to DSL Delivery Systems.

The Company does, however, expect    an increase in research and development costs beginning in March, 2004. In    order to broaden and diversify its current line of business into additional    high growth technology areas, the Company has entered into a Development    Agreement, effective February 3, 2004, with the Bell labs division of Lucent    Technologies, Inc. to commercialize the use of nano power cell technology.    Under the terms of the $1.2 million contract, Lucent/ Bell Labs will develop    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 t o a wide range of electronic devices for the defense    department.

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**LOSSES DURING THE DEVELOPMENT STAGE AND MANAGEMENT’S PLANS**

From inception (October 2, 1996)    through December 31, 2003 the Company had incurred development stage losses    and has an accumulated deficit of approximately $110,582,000  and    a stockholder’s deficit of $4,705,992. For the six months ended December    31,  2003, and from inception through December 31, 2003 respectively, the    Company had negative cash flow from operations of $749,304 and $44,364,545,    respectively. The report of the Company’s outside auditor’s, Rosenberg,    Rich, Baker, Berman and Company with respect to its latest audited 10k for    the fiscal year ended June 30,2003 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 $2,000,000    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 TraverserTM Digital    Video and Data Delivery System. 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 2004 and into fiscal 2005 based upon certain assumptions, including our ability    to raise additional financing and increased sales of our POTS Splitter. The    Company anticipates that it will need to raise, at a minimum, approximately    $2,000,000 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.

Management believes that the $2 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 19.8 million shares of common stock    at exercise prices of approximately $.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, 2003, plus financing to be secured during    the balance of fiscal    year 2004, and expected POTS splitter revenues, will be sufficient to meet    our obligations through the end of fiscal year 2004 and into the first half    of fiscal 2005. 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, 2003.

**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, 2003 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. As noted in other public    filings of mPhase, the CEO and COO of mPhase also serve as Directors and    Officers of Packetport. At that time these persons advised mPhase that they    deny any violation of law on their part and intend to vigorously contest    such recommendation or action, if any. To date no action has been filed against    Packetport, its Officers or Directors. mPhase is not named as a party in    connection with this matter.

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, 2003 the Company issued the following unregistered securities:

During the three months ending December     31, 2003, the Company granted 750,000 shares of its common stock to consultants  for services performed valued at $195,000. Additionally, the Company issued     500,000 shares of its common stock pursuant to the exercise of previously    outstanding  warrants, generating net proceeds intended to be used for general corporate    purpose  of $150,000. In December of 2003, the Company issued 1,550,000 shares    of its  common stock together with a like amount of warrants, with an exercise price     of $35, in a private placement generating net proceeds intended to be used    for  working capital and general corporate purposes, of $542,500 of which $367,500     was collected during December and $175,000 was collected in January, 2004.    A  consultant who assisted the Company with this transaction also received 100,000     shares of the Company’s common stock.

**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 FORM8-K**

|   | (a)    | 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. |
|   |   |                                                                                                          |
|   | 1.     | On February 17, 2004, the Company filed a report on Form 8-K relating to other events pertaining to:          |
|   |   |                                                                                                          |   |
|   |   | a)                                                                                                            | Development Agreement to commercialize use of nano power with Lucent Technologies, Inc. |
|   |   |                                                                                                          |   |
|   |   | b)                                                                                                            | Convension Agreement to convert approximately $1.8 million of accounts payable, pursuant to a warrant at approximately $.35 per share, with Georgia Tech Research Institute. |

 

 

 

 

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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 18, 2004 | By: /s/ Martin S. Smiley    |
|                     |                        |
|                     | Martin S. Smiley            |
|                     | Executive Vice President    |
|                     | Chief Financial Officer and |
|                     | General Counsel             |

 

 

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