---

UNITED
STATESSECURITIES AND EXCHANGE
COMMISSIONWASHINGTON, D.C. 20549

FORM 10-Q/A(Amendment no.3)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.

FOR THE QUARTER ENDED December 31, 2009

COMMISSION FILE NO. 000-30202

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

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

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

INDICATE BY CHECK MARK WHETHER
THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, DURING THE PRECEDING 12 MONTHS (OR
FOR SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORT), AND
(2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.

YES[X] NO[  ]

THE NUMBER OF SHARES
OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON STOCK AS OF February
12, 2010 IS 1,050,229,253 SHARES, ALL OF ONE CLASS OF $.01 STATED VALUE COMMON
STOCK.

1

---

Explanatory Note

This Form 10-Q/A (3) is being filed for the purpose of
restating those financial statements contained herein affected by the
restatement of the financial statements for fiscal years ended June 30, 2008 and
2009 as originally contained in the Company's Form 10-K filed with the U.S.
Securities and Exchange Commission on October 7, 2009, and restated in the
Company's Form 10-K/A (2) filed with the U.S. Securities and Exchange Commission
on April 21, 2010. The restatement involves reclassifying certain equity
instruments out of additional paid in capital into other contingent liabilities
for free standing warrants to issue shares at a fixed price as such warrants
were issued subsequent to the Company entering into Convertible Debenture
agreements which have features that may result in the obligation to issue shares
in excess of authorized shares available. The contingent liability was recorded
at the fair market value at the issuance date of the free standing warrants and
recalculated at June 30, 2008 and again at September 30, 2008, on the quarterly
measurement date, with the net change in the contingent liability credited to
the change in derivative value in the Consolidated Statement of Operations for
each period in accordance with FASB standards classification topic 815
(previously known as EITF 00-19). The restatements decrease the Net
Loss for the fourth quarter and for the fiscal year ended June 30, 2008 by
$572,900, as well as increase total liabilities and Total Stockholders' Deficit
at June, 30 2008 by $433,300. The restatements decrease the Net Loss for the
first quarter and for the fiscal year ended June 30, 2009 by $433,300.

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

In addition, the Company is also concurrently filing certain
additional improvements to its disclosure in this amended Form 10-Q for the
quarter ended December 31, 2009.

This Form 10Q/A (3) has not been updated for any events or
subsequent information other than the restatements discussed above.

---

mPHASE TECHNOLOGIES, INC.

INDEX

|               |                                                                                                                                                                                          | PAGE
|-------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----
|PART I         | FINANCIAL INFORMATION                                                                                                                                                                    |     
|               |                                                                                                                                                                                          |     
|ITEM 1         | Consolidated Balance Sheets
      June 30, 2009 (Audited) and December 31, 2009 (Unaudited), as restated                                                                                 | 3   
|               | Unaudited Consolidated Statements of
      Operations-Three months ended December 31, 2008 and 2009 and from October
      2, 1996 (Date of Inception) to December 31, 2009, as restated | 4   
|               | Unaudited Consolidated
      Statements of Operations-Six months ended December 31, 2008 and 2009 and
      from October 2, 1996 (Date of Inception) to December 31, 2009, as restated   | 5   
|               | Unaudited Consolidated Statement of Changes in
      Stockholders' Equity (Deficit) Six months ended December 31, 2008 and 2009,
    as restated                                         | 6   
|               | Unaudited Consolidated
      Statement of Cash Flow-Six Months Ended December 31, 2008 and 2009 and
      from October 2, 1996 (Date of Inception) to December 31, 2009, as restated     | 7   
|               | Notes to Consolidated Financial Statements                                                                                                                                               | 8   
|ITEM 2         | Management's Discussion
      and Analysis of Financial Condition and Condition and Results of
      Operations                                                                          | 19  
|ITEM 3         | Quantitative and Qualitative Disclosures about market
      risk                                                                                                                         | 30  
|ITEM 4         | CONTROLS AND PROCEDURES                                                                                                                                                                  | 30  
|PART II        | OTHER INFORMATION                                                                                                                                                                        |     
|Item 1.        | Legal Proceedings                                                                                                                                                                        | 31  
|Item 2.        | Changes in Securities                                                                                                                                                                    | 31  
|Item 3.        | Defaults Upon Senior Securities                                                                                                                                                          | 34  
|Item 4.        | Submission of Matters to a Vote of Security
      Holders                                                                                                                                | 34  
|Item 5.        | Other Information                                                                                                                                                                        | 34  
|Item 6         | Exhibits and Reports on Form 8-K                                                                                                                                                         | 34  
|Signature Page |                                                                                                                                                                                          | 35  

2

---

mPHASE TECHNOLOGIES, INC.
(A Development Stage Company)

**Consolidated Balance Sheets**

|                                                                                                                                                                                      |   | June 30,     |   |   | December 31, |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------ | - | - | ------------ | -
|                                                                                                                                                                                      |   | 2009         |   |   | 2009         |  
|                                                                                                                                                                                      |   |              |   |   | (Unaudited)  |  
|ASSETS                                                                                                                                                                                |   | As Restated  |   |   | As Restated  |  
|CURRENT ASSETS                                                                                                                                                                        |   |              |   |   |              |  
|Cash                                                                                                                                                                                  | $ | 100,138      |   | $ | 523,064      |  
|Accounts receivable                                                                                                                                                                   |   | 46,065       |   |   | 50,305       |  
|Prepaid and other current assets                                                                                                                                                      |   | 153,636      |   |   | 206,346      |  
|Total Current Assets                                                                                                                                                                  |   | 299,839      |   |   | 779,715      |  
|Property and equipment, net                                                                                                                                                           |   | 39,648       |   |   | 81,270       |  
|Note receivable                                                                                                                                                                       |   | 3,150,000    |   |   | 6,214,000    |  
|TOTAL ASSETS                                                                                                                                                                          | $ | 3,489,487    |   | $ | 7,074,985    |  
|LIABILITIES AND STOCKHOLDERS' DEFICIT                                                                                                                                                 |   |              |   |   |              |  
|CURRENT LIABILITIES                                                                                                                                                                   |   |              |   |   |              |  
|Accounts payable                                                                                                                                                                      | $ | 1,864,955    |   | $ | 1,755,314    |  
|Accrued expenses                                                                                                                                                                      |   | 482,388      |   |   | 580,362      |  
|Due to related parties                                                                                                                                                                |   | 369,920      |   |   | 65,958       |  
|Notes payable, related parties                                                                                                                                                        |   | 1,332,400    |   |   | 1,314,796    |  
|Short term notes                                                                                                                                                                      |   | 240,820      |   |   | 240,820      |  
|Current Portion, Long term debt                                                                                                                                                       |   | -            |   |   | 9,782        |  
|TOTAL CURRENT LIABILITIES                                                                                                                                                             | $ | 4,290,483    |   | $ | 3,967,031    |  
|Long term portion Equipment loan                                                                                                                                                      |   | -            |   |   | 32,981       |  
|Convertible debt derivative liability - (Note 4)                                                                                                                                      |   | 2,380,816    |   |   | 4,952,278    |  
|Convertible debentures net of discount of
      $1,385,395 and $3,213,664 on June 30, 2009 and Dec. 31, 2009
      respectively (Note 4)                                              |   | 2,052,355    |   |   | 4,445,361    |  
|TOTAL LIABILITIES                                                                                                                                                                     | $ | 8,723,654    |   | $ | 13,397,651   |  
|COMMITMENTS AND CONTINGENCIES (Note 6)                                                                                                                                                |   |              |   |   |              |  
|STOCKHOLDERS' DEFICIT                                                                                                                                                                 |   |              |   |   |              |  
|Common stock, par value $.01, 2,000,000,000
      shares authorized 870,419,882 and 1,035,959,396 shares issued and
      outstanding at June 30, 2009 and Dec. 31, 2009 respectively |   | 8,704,197    |   |   | 10,359,593   |  
|Additional paid in capital                                                                                                                                                            |   | 172,861,427  |   |   | 174,014,612  |  
|Deficit accumulated during development
      stage                                                                                                                                    |   | (186,791,819 | ) |   | (190,688,900 | )
|Less-Treasury stock, 13,750 shares at cost                                                                                                                                            |   | (7,973       | ) |   | (7,973       | )
|TOTAL STOCKHOLDERS' DEFICIT                                                                                                                                                           |   | ($5,234,168  | ) |   | ($6,322,666  | )
|TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT                                                                                                                                           | $ | 3,489,487    |   | $ | 7,074,985    |  

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

3

---

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

|                                                                                                                                                                                                   |   |                            |   |   |               |   |   |              |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | -------------------------- | - | - | ------------- | - | - | ------------ | -
|                                                                                                                                                                                                   |   |                            |   |   |               |   |   | Date of      |  
|                                                                                                                                                                                                   |   | For the Three Months ended |   |   | Inception to  |  
|                                                                                                                                                                                                   |   | Dec 31,                    |   |   | Dec 31,       |  
|                                                                                                                                                                                                   |   | 2008                       |   |   | 2009          |   |   | 2009         |  
|                                                                                                                                                                                                   |   |                            |   |   |               |   |   | As Restated  |  
|                                                                                                                                                                                                   |   |                            |   |   |               |   |   |              |  
|REVENUES                                                                                                                                                                                           | $ | 44,857                     |   | $ | 34,537        |   | $ | 22,834,993   |  
|                                                                                                                                                                                                   |   |                            |   |   |               |   |   |              |  
|COSTS AND EXPENSES                                                                                                                                                                                 |   |                            |   |   |               |   |   |              |  
|Cost of Sales                                                                                                                                                                                      |   | 0                          |   |   | 0             |   |   | 16,424,692   |  
|Research and Development (including non-cash stock related
      charges of $0, $0 and $2,503,719 for the three months ended Dec. 31, 2008,
      2009 and inception to date respectively)         |   | 215,620                    |   |   | 579,247       |   |   | 61,309,746   |  
|General and Administrative (including
      non-cash stock related charges of $0, $43,050 and $67,887,964 for the
      three months ended Dec. 31, 2008, 2009 and inception to date respectively) |   | 499,725                    |   |   | 489,232       |   |   | 119,936,009  |  
|Depreciation and Amortization                                                                                                                                                                      |   | 12,642                     |   |   | 7,286         |   |   | 3,316,735    |  
|TOTAL COSTS AND EXPENSES                                                                                                                                                                           |   | 727,987                    |   |   | 1,075,765     |   | $ | 200,987,182  |  
|LOSS FROM OPERATIONS                                                                                                                                                                               |   | (683,130                   | ) |   | (1,041,228    | ) |   | (178,152,189 | )
|OTHER INCOME (EXPENSE)                                                                                                                                                                             |   |                            |   |   |               |   |   |              |  
|Interest (Expense), net                                                                                                                                                                            |   | (61,650                    | ) |   | (42,116       | ) |   | (2,426,657   | )
|Reparation, Impairment and Other (Expense)
      net                                                                                                                                               |   | 0                          |   |   | (35,530       | ) |   | (8,541,953   | )
|Change in Derivative Value and Debt Discount                                                                                                                                                       |   | (1,844,571                 | ) |   | (2,381,263    | ) |   | (1,568,101   | )
|TOTAL OTHER INCOME (EXPENSE)                                                                                                                                                                       |   | (1,906,221                 | ) |   | (2,458,909    | ) |   | (12,536,711  | )
|NET (LOSS)                                                                                                                                                                                         |   | ($2,589,351                | ) |   | ($3,500,137   | ) | $ | (190,688,900 | )
|LOSS PER COMMON SHARE, basic and diluted                                                                                                                                                           |   | ($0.01                     | ) |   | ($0.00        | ) |   |              |  
|WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, basic and diluted                                                                                                                                      |   | 486,056,567                |   |   | 1,025,537,377 |   |   |              |  

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

4

---

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

|                                                                                                                                                                                                              |   |                                |   |   |              |   |   | Date of      |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------------------------ | - | - | ------------ | - | - | ------------ | -
|                                                                                                                                                                                                              |   | For the Six Months ended Ended |   |   | Inception to |  
|                                                                                                                                                                                                              |   | Dec 31,                        |   |   | Dec 31,      |  
|                                                                                                                                                                                                              |   | 2008                           |   |   | 2009         |   |   | 2009         |  
|                                                                                                                                                                                                              |   | As Restated                    |   |   |              |   |   | As Restated  |  
|                                                                                                                                                                                                              |   |                                |   |   |              |   |   |              |  
|REVENUES                                                                                                                                                                                                      | $ | 51,123                         |   | $ | 86,375       |   | $ | 22,834,993   |  
|COSTS AND EXPENSES                                                                                                                                                                                            |   |                                |   |   |              |   |   |              |  
|Cost of Sales                                                                                                                                                                                                 |   | 0                              |   |   | 0            |   |   | 16,424,692   |  
|Research and Development (including non-cash stock related charges
      of $93,600, $0 and $2,503,719 for the six months ended Dec. 31, 2008, 2009
      and inception to date respectively)                 |   | 603,296                        |   |   | 1,093,573    |   |   | 61,309,746   |  
|General and Administrative (including
      non-cash stock related charges of $5,511,950, $43,050 and $67,887,964 for
      the six months ended Dec.31, 2008, 2009 and inception to date
      respectively) |   | 6,738,985                      |   |   | 910,056      |   |   | 119,936,009  |  
|Depreciation and Amortization                                                                                                                                                                                 |   | 26,125                         |   |   | 12,571       |   |   | 3,316,735    |  
|TOTAL COSTS AND EXPENSES                                                                                                                                                                                      |   | 7,368,406                      |   |   | 2,016,200    |   |   | 200,987,182  |  
|LOSS FROM OPERATIONS                                                                                                                                                                                          |   | (7,317,283                     | ) |   | (1,929,825   | ) |   | (178,152,189 | )
|OTHER INCOME (EXPENSE)                                                                                                                                                                                        |   |                                |   |   |              |   |   |              |  
|Interest (Expense), net                                                                                                                                                                                       |   | (100,703                       | ) |   | (722,817     | ) |   | (2,426,657   | )
|Reparation, Impairment and Other (Expense)
      net                                                                                                                                                          |   | (198,372                       | ) |   | (31,246      | ) |   | (8,541,953   | )
|Change in Derivative Value and Debt Discount                                                                                                                                                                  |   | (1,290,691                     | ) |   | (1,213,193   | ) |   | (1,568,101   | )
|TOTAL OTHER INCOME (EXPENSE)                                                                                                                                                                                  |   | ($1,589,766                    | ) |   | ($1,967,256  | ) |   | (12,536,711  | )
|NET (LOSS)                                                                                                                                                                                                    |   | ($8,907,049                    | ) |   | ($3,897,081  | ) |   | (190,688,900 | )
|LOSS PER COMMON SHARE, basic and diluted                                                                                                                                                                      |   | ($0.02                         | ) |   | ($0.00       | ) |   |              |  
|WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, basic and diluted                                                                                                                                                 |   | 519,217,774                    |   |   | 979,929,496  |   |   |              |  

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

5

---

**mPHASE TECHNOLOGIES,
INC.** **(A Development Stage Company)**
**Consolidated Statement of Changes in** **Shareholders'
Deficit** **For The Six Months Ended December 31, 2009**
(unaudited)

Common StockShares
    
    
    $.01 Par Value
    
    
    Treasury Stock
    
    
    Additional Paid in Capital
    
    
    Accumulated Deficit
    
    
    Total Shareholders' (Deficit)
      EquityBalance June 30, 2009 (As restated)
    
    870,419,882
    
    $
    8,704,197
    
    $
    (7,973
    )
    $
    172,861,427
    
    $
    (186,791,819
    )
    $
    (5,234,168
    )Conversions of Convertible Debentures plus
      accrued interest
    
    108,506,180
    
    
    1,085,062
    
    
    -
    
    
    595,663
    
    
    -
    
    
    1,680,725Conversions of Accounts Payable
    
    26,666,667
    
    
    266,667
    
    
    -
    
    
    (66,667
    )
    
    -
    
    
    200,000Issuance of common stock in private placements
      net of offering cost ($20,000)
    
    26,666,667
    
    
    266,667
    
    
    -
    
    
    (86,667
    )
    
    -
    
    
    180,000Issuance of Common Stock for Services
    
    2,000,000
    
    
    20,000
    
    
    
    
    
    23,050
    
    
    
    
    
    43,050Issuance of Common Stock for Reparations
    
    1,700,000
    
    
    17,000
    
    
    
    
    
    18,530
    
    
    
    
    
    35,530Beneficial Conversion feature of Officers' Notes Payable and
      conversion of accounts payable
    
    -
    
    
    -
    
    
    -
    
    
    669,276
    
    
    -
    
    
    669,276Net Loss for the Six Months Ended December 31,
      2009
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (3,897,081
    )
    
    (3,897,081
    )Balance December 31, 2009 (As restated)
    
    1,035,959,396
    
    $
    10,359,593
    
    $
    (7,973
    )
    $
    174,014,612
    
    $
    (190,688,900
    )
    $
    (6,322,666
    )


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

6

---

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

|                                                                                                                        |   |                      |   |   |                     |   |   | October 2, 1996 |  
|----------------------------------------------------------------------------------------------------------------------- | - | -------------------- | - | - | ------------------- | - | - | --------------- | -
|                                                                                                                        |   | For Six Months Ended |   |   | (Date of Inception) |  
|                                                                                                                        |   | Dec 31,              |   |   | Dec 31,             |   |   | To Dec 31,      |  
|                                                                                                                        |   | 2008                 |   |   | 2009                |   |   | 2009            |  
|                                                                                                                        |   | (As restated)        |   |   |                     |   |   | (As restated)   |  
|                                                                                                                        |   |                      |   |   |                     |   |   |                 |  
|Cash Flow From Operating Activities:                                                                                    |   |                      |   |   |                     |   |   |                 |  
|Net Income (Loss)                                                                                                       |   | ($9,340,349          | ) |   | ($3,897,081         | ) |   | ($190,688,900   | )
|Adjustments to reconcile net loss to net
      cash used in operating activities:                                       |   |                      |   |   |                     |   |   |                 |  
|Depreciation and amortization                                                                                           |   | 104,486              |   |   | 18,397              |   |   | 7,418,697       |  
|(Gain) loss on debt extinguishments                                                                                     |   | -                    |   |   | -                   |   |   | (937,370        | )
|Non-cash charges relating to issuance of common stock,                                                                  |   |                      |   |   |                     |   |   |                 |  
|common stock options and warrants                                                                                       |   | 5,605,550            |   |   | 43,050              |   |   | 70,260,481      |  
|Reparation charges                                                                                                      |   | 216,689              |   |   | 35,530              |   |   | 8,264,264       |  
|Derivative Value and Debt Discount charges                                                                              |   | 1,723,991            |   |   | 1,213,193           |   |   | 2,218,252       |  
|Write off of Granita Inventory/Sovereign Investment                                                                     |   | -                    |   |   |                     |   |   | 615,910         |  
|Other non cash charges including amortization of
      deferred compensation and beneficial conversion interest expense |   | -                    |   |   | 669,276             |   |   | 2,712,901       |  
|Changes in assets and liabilities:                                                                                      |   |                      |   |   |                     |   |   |                 |  
|Accounts receivable                                                                                                     |   | (44,367              | ) |   | 4,240               |   |   | 386,051         |  
|Inventories                                                                                                             |   | -                    |   |   | -                   |   |   | (510,471        | )
|Prepaid expenses and Other current assets                                                                               |   | 90,382               |   |   | (52,710             | ) |   | (125,285        | )
|Other                                                                                                                   |   |                      |   |   | -                   |   |   | 906,535         |  
|Accounts payable, Accrued expenses, Deferred
      revenue                                                              |   | 154,934              |   |   | 125,936             |   |   | 8,435,817       |  
|Due to/from related parties                                                                                             |   |                      |   |   |                     |   |   | -               |  
|Microphase / Janifast//Lintel                                                                                           |   | -                    |   |   | (118,045            | ) |   | 5,391,842       |  
|Officers and Other                                                                                                      |   | 144,072              |   |   | (17,604             | ) |   | 1,693,753       |  
|Net cash used in operating
      activities                                                                             |   | ($1,344,612          | ) |   | ($1,975,818         | ) |   | ($83,957,523    | )
|Cash Flow from Investing Activities:                                                                                    |   |                      |   |   |                     |   |   |                 |  
|Payments related to patents and licensing
      rights                                                                  |   | -                    |   |   | -                   |   |   | (450,780        | )
|Purchase of fixed assets                                                                                                |   | -                    |   |   | (15,000             | ) |   | (3,302,560      | )
|Investment in Sovereign                                                                                                 |   | -                    |   |   | -                   |   |   | (110,000        | )
|Net Cash (used) in investing activities                                                                                 | $ | 0                    |   |   | ($15,000            | ) |   | ($3,863,340     | )
|Cash Flow from Financing Activities:                                                                                    |   |                      |   |   |                     |   |   |                 |  
|Proceeds from issuance of common stock, exercises
      warrants and finders fees, net                                  |   | 180,000              |   |   | 180,000             |   |   | - 82,878,879    |  
|Payments of short term notes and equipment
      loan                                                                   |   |                      |   |   | (2,256              | ) |   | (1,283,808      | )
|Advances from Microphase                                                                                                |   |                      |   |   |                     |   |   | 347,840         |  
|Issuance of Convertible Debentures                                                                                      |   |                      |   |   |                     |   |   | 266,500         |  
|Net Proceeds (Repayment) from notes payable related parties                                                             |   |                      |   |   |                     |   |   | 234,516         |  
|Proceeds from collection of notes receivable under securities purchase agreements
      (note 4)                        |   | 1,150,000            |   |   | 2,236,000           |   |   | 5,386,000       |  
|Sale of minority interest in Granita subsidiary                                                                         |   |                      |   |   |                     |   |   | 514,000         |  
|Repurchase of treasury stock at cost                                                                                    |   |                      |   |   |                     |   |   | -               |  
|Net cash provided by financing activities                                                                               | $ | 1,330,000            |   | $ | 2,413,744           |   | $ | 88,343,927      |  
|Net increase in cash                                                                                                    |   | ($14,612             | ) | $ | 422,926             |   | $ | 523,064         |  
|CASH AND CASH EQUIVALENTS, beginning of period                                                                          |   | 15,533               |   |   | 100,138             |   |   |                 |  
|CASH AND CASH EQUIVALENTS, end of period                                                                                | $ | 921                  |   | $ | 523,064             |   | $ | 523,064         |  

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

7

---

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

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES

NATURE OF OPERATIONS - mPhase Technologies, Inc. (the
"Company") was organized on October 2, 1996 and is in the development stage, as
defined by FASB ASC 915 "Development Stage Entities." The Company's
present activities are focused on microfluidics, microelectromechanical systems
(MEMS) and nanotechnology. 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 considered necessary for a fair presentation have
been included. Operating results for the three and six months ended December
31, 2009 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, 2009.

Through, December 31, 2009 the Company had incurred cumulative
(a) development stage losses totaling approximately ($190,688,900) (b)
stockholders' deficit of ($6,322,666), and (c) negative cash flow from
operations equal to ($83,957,523). At, December 31, 2009, the Company had
$523,064 of cash and $50,305 of trade receivables to fund short-term working
capital requirements. In addition, the Company relies on the continuation of
funding under certain convertible securities agreements (See Note 4) 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.

LOSS PER COMMON SHARE, BASIC AND DILUTED - The Company accounts
for net loss per common share in accordance with the provisions of ASC 260-10,
"EARNINGS PER SHARE" ("EPS"). ASC 260-10 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 anti dilutive. At December 31, 2009, the
Company's convertible debentures agreements are convertible into approximately
509,043,000 shares of common stock. The officer's notes payable and accrued
interest therein are convertible into 195,000,000 shares of common stock, if
available.

NEW ACCOUNTING PRONOUNCEMENTS- In June 2008, the Financial
Accounting Standards Board (FASB) ratified the final consensuses for ASC
815-40-5 Determining Whether an Instrument (or Embedded Feature) Is Indexed to
an Entitys Own Stock (ASC 815-40-5). ASC 815-40-5 became effective for
fiscal years beginning after December 15, 2008. The adoption of ASC 915-40-50
did not have a material effect on the Company's results of operations or
financial condition. Effective July 1, 2009, the Company adopted the Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC)
105-10, Generally Accepted Accounting Principles  Overall(ASC
105-10). ASC 105-10 establishes the FASB Accounting Standards Codification(the Codification) as the source of authoritative accounting principles recognized by
the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with U.S. GAAP. Rules and interpretive
releases of the SEC under authority of federal securities laws are also sources
of authoritative U.S. GAAP for SEC registrants. All guidance contained in the
Codification carries an equal level of authority. The Codification superseded
all existing non-SEC accounting and reporting standards. All other
non-grandfathered, non-SEC accounting literature not included in the
Codification is non-authoritative. The FASB will not issue new standards in the
form of Statements, FASB Staff Positions or Emerging Issues Task Force
Abstracts. Instead, it will issue Accounting Standards Updates (ASUs). The
FASB will not consider ASUs as authoritative in their own right. ASUs will serve
only to update the Codification, provide background information about the
guidance and provide the bases for conclusions on the change(s) in the
Codification. References made to FASB guidance throughout this document have
been updated for the Codification.

8

---

Effective January 1, 2009, the Company adopted FASB ASC Topic
805, Business Combinations(ASC 805). ASC 805 establishes principles
and requirements for how the acquirer of a business recognizes and measures in
its financial statements the identifiable assets acquired, the liabilities
assumed, and any non-controlling interest in the acquiree. ASC 805 also provides
guidance for recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. ASC 805 also provides guidance for recognizing changes in
an acquirers existing income tax valuation allowances and tax uncertainty
accruals that result from a business combination transaction as adjustments to
income tax expense. The adoption of ASC 805 did not have an impact on the
Company's results of operations or financial condition.

In April 2009, the FASB issued updated guidance related to
business combinations, which is included in the Codification in ASC 805-20,
Business Combinations  Identifiable Assets, Liabilities and Any
Noncontrolling Interest(ASC 805-20). ASC 805-20 amends and clarifies ASC
805 to address application issues regarding initial recognition and measurement,
subsequent measurement and accounting and disclosure of assets and liabilities
arising from contingencies in a business combination. In circumstances where the
acquisition-date fair value for a contingency cannot be determined during the
measurement period and it is concluded that it is probable that an asset or
liability exists as of the acquisition date and the amount can be reasonably
estimated, a contingency is recognized as of the acquisition date based on the
estimated amount. ASC 805-20 is effective for assets or liabilities arising from
contingencies in business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The Company does not believe ASC 805-20 will have a material
impact on the Companys future financial statements.

Effective January 1, 2008, the Company adopted FASB ASC 820-10,
Fair Value Measurements and Disclosures Overall(ASC 820-10) with
respect to its financial assets and liabilities. In February 2008, the FASB
issued updated guidance related to fair value measurements, which is included in
the Codification in ASC 820-10-55, Fair Value Measurements and Disclosures 
Overall  Implementation Guidance and Illustrations. The updated guidance
provided a one year deferral of the effective date of ASC 820-10 for
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed in the financial statements at fair value at least
annually. Therefore, the Company adopted the provisions of ASC 820-10 for
non-financial assets and non-financial liabilities effective January 1, 2009,
and such adoption did not have a material impact on the Companys results of
operations or financial condition.

Effective April 1, 2009, the Company adopted FASB ASC
820-10-65, Fair Value Measurements and Disclosures Overall  Transition and
Open Effective Date Information(ASC 820-10-65). ASC 820-10-65 provides
additional guidance for estimating fair value in accordance with ASC 820-10 when
the volume and level of activity for an asset or liability have significantly
decreased. ASC 820-10-65 also includes guidance on identifying circumstances
that indicate a transaction is not orderly. The adoption of ASC 820-10-65 did
not have an impact on the Companys results of operations or financial
condition.

Effective April 1, 2009, the Company adopted FASB ASC
825-10-65, Financial Instruments  Overall  Transition and Open Effective
Date Information(ASC 825-10-65). ASC 825-10-65 amends ASC 825-10 to
require disclosures about fair value of financial instruments in interim
financial statements as well as in annual financial statements and also amends
ASC 270-10 to require those disclosures in all interim financial statements. The
adoption of ASC 825-10-65 did not have a material impact on the Companys
results of operations or financial condition.

9

---

Effective April 1, 2009, the Company adopted FASB ASC 855-10,
Subsequent Events  Overall(ASC 855-10). ASC 855-10 establishes
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. It requires the disclosure of the date through which an
entity has evaluated subsequent events and the basis for that date  that is,
whether that date represents the date the financial statements were issued or
were available to be issued. This disclosure should alert all users of financial
statements that an entity has not evaluated subsequent events after that date in
the set of financial statements being presented. Adoption of ASC 855-10 did not
have a material impact on the Companys results of operations or financial
condition.

Effective July 1, 2009, the Company adopted FASB ASU No.
2009-05, Fair Value Measurements and Disclosures (Topic 820)(ASU
2009-05). ASU 2009-05 provided amendments to ASC 820-10, Fair Value
Measurements and Disclosures  Overall,for the fair value measurement of
liabilities. ASU 2009-05 provides clarification that in circumstances in which a
quoted price in an active market for the identical liability is not available, a
reporting entity is required to measure fair value using certain techniques. ASU
2009-05 also clarifies that when estimating the fair value of a liability, a
reporting entity is not required to include a separate input or adjustment to
other inputs relating to the existence of a restriction that prevents the
transfer of a liability. ASU 2009-05 also clarifies that both a quoted price in
an active market for the identical liability at the measurement date and the
quoted price for the identical liability when traded as an asset in an active
market when no adjustments to the quoted price of the asset are required are
Level 1 fair value measurements. Adoption of ASU 2009-05 did not have a material
impact on the Companys results of operations or financial condition.

In October 2009, the FASB issued ASU 2009-13,
Multiple-Deliverable Revenue Arrangements,(amendments to FASB ASC Topic
605, Revenue Recognition) (ASU 2009-13) and ASU 2009-14, Certain
Arrangements That Include Software Elements, (amendments to FASB ASC Topic
985, Software) (ASU 2009-14). ASU 2009-13 requires entities to
allocate revenue in an arrangement using estimated selling prices of the
delivered goods and services based on a selling price hierarchy. The amendments
eliminate the residual method of revenue allocation and require revenue to be
allocated using the relative selling price method. ASU 2009-14 removes tangible
products from the scope of software revenue guidance and provides guidance on
determining whether software deliverables in an arrangement that includes a
tangible product are covered by the scope of the software revenue guidance. ASU
2009-13 and ASU 2009-14 should be applied on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010, with early adoption permitted. The Company does not expect
adoption of ASU 2009-13 or ASU 2009-14 to have a material impact on the
Companys results of operations or financial condition.

2. SUPPLEMENTAL CASH FLOW INFORMATION

For the six months ended December 31,

|                                                                                  |   | 2008      |  |   | 2009      | 
|--------------------------------------------------------------------------------- | - | --------- |  | - | --------- | 
|                                                                                  |   |           |  |   |           | 
|Interest Accrued Unpaid                                                           | $ | 100,703   |  |   | 261,975   | 
|Non Cash Investing and Financing Activities:                                      |   |           |  |   |           | 
|Stock issued in settlement of accrued
      expenses                              |   |           |  | $ | 200,000   | 
|Conversion of convertible debt                                                    | $ | 1,450,895 |  |   |           | 
|                                                                                  |   |           |  | $ | 1,680,725 | 
|                                                                                  |   |           |  |   |           | 
|Beneficial Conversion of Officer's Notes
      and Conversion of Accounts Payable |   |           |  | $ | 669,276   | 

10

---

3. RELATED PARTY TRANSACTIONS

MICROPHASE CORPORATION

mPhase's President, Chief Operating Officer and Chairman of the
Board of the Company are also officers of Microphase and mPhase's President and
Chairman of the Board is a shareholder of Microphase. On May 1, 1997, the
Company entered into an agreement with Microphase, whereby it will use office
space as well as the administrative services of Microphase, including the use of
accounting personnel. This agreement was for $5,000 per month and was on a
month-to-month basis. In July 1998, the office space agreement was revised to
$10,000, in January 2000 to $11,050 per month, in July 2001 to $11,340 per
month, in July 2002 to $12,200 per month, in January 2003 to $10,000 per month,
and in July 2003 to $18,000 per month. Additionally, in July 1998, mPhase
entered into an agreement with Microphase, whereby mPhase reimburses Microphase
$40,000 per month for technical research and development. In January 2003 the
technical research and development agreement was revised to $20,000 per month,
and in July 2003 it was further revised to $5,000 per month for technical and
research development, $5,000 per month for administrative services and $5,000
per month under the office space agreement. Beginning July 1, 2006, billings for
all of the above services were $5,000 per month and were changed to $3,000 in
July of 2008. In addition, Microphase also charges fees for specific projects on
a project-by-project basis. During the six months ended December 31, 2008 and
2009 and from inception (October 2, 1996), $28,961, $144,846 and $9,520,325,
respectively, have been charged to expense.

As a result of the foregoing transactions, as of December 31,
2009, the Company had a payable to Microphase of $112,987.

JANIFAST LTD.

The Company has in the past purchased 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. In March of 2009 Janifast Ltd. ceased
operations owing to adverse financial conditions globally

During the six months ended December 31, 2008 and 2009 and the
period from inception (October 2, 1996), $0, $0and $16,031,811 respectively,
have been charged by Janifast Ltd to inventory or is included in operating
expenses in the accompanying statements of operations.

OTHER RELATED PARTIES

Mr. Abraham Biderman was employed until September 30, 2003 by
our former investment-banking firm Lipper & Company On December 31, 2009,
Mr. Biderman's affiliated firm of Palladium Capital Advisors was owed unpaid
finders fees in the amount of $150,000. During the six months ended December 31,
2009 and December 31, 2008 finders fees in the amount of $20,000 and $0,
respectively, were recorded.

Transactions with Officers

At various points during the current quarter and at various
points during the past fiscal year the Messrs, Durando, Dotoli and Smiley
provided bridge loans to the Company, evidenced by individual promissory notes
and deferred compensation so as to provide working capital to the Company. All
of the notes are payable on demand.

11

---

Total compensation (including the value of stock awards) to
related parties and payables to officers are summarized below.

Summary of compensation to related parties for the Six
Months Ended December 31, 2009

Durando
    
    
    Dotoli
    
    
    Smiley
    
    
    Biderman
    
    
    Microphase
    
    
    TotalConsulting / Salary
    $
    100,000
    
    $
    90,000
    
    $
    87,500
    
    
    
    
    
    
    
    $
    277,500Interest
    $
    34,795
    
    $
    24,797
    
    $
    14,603
    
    
    
    
    
    
    
    $
    74,194Rent
    
    
    
    
    
    
    
    
    
    
    
    
    $
    18,000
    
    $
    18,000G&A
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,846
    
    $
    1,846R&D
    
    
    
    
    
    
    
    
    
    
    
    
    $
    125,000
    
    $
    125,000Finders Fees
    
    
    
    
    
    
    
    
    
    $
    20,000
    
    
    
    
    $
    20,000Stock based compensation(shares issued)*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    0Stock based compensation(options issued)*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    0Total compensation
    $
    134,795
    
    $
    114,797
    
    $
    102,103
    
    $
    20,000
    
    $
    144,846
    
    $
    516,540


Summary of payables to related parties as of December 31,
2009

Durando
    
    
    Dotoli
    
    
    Smiley
    
    
    MicrophaseNotes payable
    $
    527,420
    
    $
    366,306
    
    $
    214,225Due
      to Officers / Affiliates
    $
    0
    
    $
    0
    
    $
    0
    
    $
    112,987Interest Payable
    $
    96,268
    
    $
    87,310
    
    $
    24,209Total Payable to related
      partiesas of December 31, 2009
    $
    623,688
    
    $
    453,616
    
    $
    238,434
    
    $
    112,987


Summary of Compensation to relatedparties for the
Six Months Ended December 31,2008

Durando
    
    
    Dotoli
    
    
    Smiley
    
    
    Biderman
    
    
    Microphase
    
    
    TotalConsulting / Salary
    $
    165,217 $
    
    
    128,500 $
    
    
    93,750
    
    
    
    
    
    
    
    $
    387,467Interest
    
    
    
    $
    
    
    
    8,582
    
    
    
    
    
    
    
    $
    8,582Rent
    
    
    
    
    
    
    
    
    
    $
    
    
    
    18,000
    
    $
    18,000G&A
    
    
    
    
    
    
    
    
    
    $
    
    
    
    10,961
    
    $
    10,961Finders Fees
    
    
    
    
    
    
    
    
    
    $
    20,000
    
    
    
    
    $
    20,000Stock
      based compensation (shares issued)*
    $
    1,215,000
    
    $
    720,000
    
    $
    450,000
    
    $
    180,000
    
    
    
    
    $
    2,565,000Stock based compensation (options issued)*
    $
    1,350,000
    
    $
    810,000
    
    $
    486,000
    
    $
    54,000
    
    
    
    
    $
    2,700,000Total compensation
    $
    2,730,217
    
    $
    1,658,500
    
    $
    1,038,332
    
    $
    254,000
    
    $
    28,961
    
    $
    5,710,011Common stock issued*
    
    27,000,000
    
    
    16,000,000
    
    
    10,000,000
    
    
    4,000,000
    
    
    
    
    
    57,000,000Options issued (5years @5 cents)
    
    50,000,000
    
    
    30,000,000
    
    
    18,000,000
    
    
    2,000,000
    
    
    
    
    
    100,000,000


12

---

Summary of payables to related parties as of December 31,
2008

|                                |   | Durando |  |   | Dotoli  |  |   | Smiley  |  |   | Microphase |  |   | Janifast  |  |       | Total         | 
|------------------------------- | - | ------- |  | - | ------- |  | - | ------- |  | - | ---------- |  | - | --------- |  | ----- | ------------- | 
|Notes payable                   | $ | 17,000  |  | $ | 23,000  |  | $ | 229,826 |  |   |            |  |   |           |  | $     | 269,826       | 
|Deferred Compensation           | $ | 278,000 |  | $ | 323,500 |  |   |         |  |   |            |  |   |           |  | $     | 601,500       | 
|Due to Officers / Affiliates    | $ | 327,707 |  | $ | 114,256 |  |   |         |  | $ | 56,990     |  |   | ($19,336) |  | $     | 479,617       | 
|Interest Payable                |   |         |  |   |         |  | $ | 27,334  |  |   |            |  | $ |           |  |       | 27,334        | 
|Total Payable to
      Officers | $ | 622,707 |  | $ | 460,756 |  | $ | 257,160 |  | $ | 56,990     |  |   | ($19,336) |  | **$** | **1,378,277** | 

*Shares issued to officers are pursuant to agreements dated
August 8, 2008 between the Company and the Messrs Durando, Dotoli and Smiley.
The agreements state that the stock granted may not be sold until the earlier of
two (2) years orwhen the stock price for 60 consecutive days closes at a
price of $.25 per share or greater and the average trading volume during such 60
day period is not less than 1,000,000 shares per day.

4. EQUITY TRANSACTIONS AND CONVERTIBLE DEBT

Private Placements

During the Six Months ended December 31, 2009, the Company
issued 26,666,667 shares of its common stock at $.0075 per share in private
placements generating gross proceeds of $200,000 with placement costs of
$20,000, netting $180,000.

During the Six Months ended December 31, 2008, the Company
issued 4,000,000 shares of its common stock at $.05 per share in private
placements generating net proceeds of $180,000, after placement costs of
$20,000. Related to this transaction was the issuance of 3,862,000 shares as
reparations shares to effect re-pricing costing an estimated $216,689.

Stock Based Compensation

During the six months ended December 31, 2009, the Company issued 2,000,000
shares of common stock to employees and consultants valued at $43,050.

During the six months ended December 31, 2008, the Company
issued 5 year options to purchase 104,675,000 shares of common stock at $.05 per
share. The value of such options was estimated to be $2,825,900 using the Black
Scholes method. In addition, 61,750,000 shares of common stock valued at
$2,779,650 were issued to employees and consultants.

Conversion of debt securities and Strategic vendor payables

During the six months ended December 31, 2009, $1,680,725 of
convertible debt and accrued interest thereon was converted into 108,506,180
shares of Common stock.

During the six months ended December 31, 2009, $200,000 of
accounts payable to Microphase Corporation was converted into 26,666,667 shares
of Common stock. The Company recorded $586,667 interest expense on the
beneficial conversion feature. The Company recorded $82,609 interest expense on
the beneficial conversion feature of officers notes during the six months ended
December 31, 2009.

During the six months ended December 31, 2008, $1,450,895 of
convertible debt was converted into 88,033,300 shares of common stock.

13

---

Long Term Convertible Debentures / Note Receivable / Debt
Discount

The Company currently has six separate convertible debt
arrangements with independent investors outstanding at December 31, 2009. During
the six months ended December 31, 2009, $1,680,725 of convertible debt and
accrued interest thereon was converted into 108,506,180 shares of Common
stock.These transactions are intended to provide liquidity and capital
to the Company and are summarized below.

General

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

The form of the transactions may generally be described as
follows:

- The receipt of cash
- The issuance of a note payable from mPhase.
- The issuance of a note receivable due to mPhase
- A Securities Purchase Agreement
- The note payable contains conversion features which permit the holder to
  convert debt into equity. Such debt was eligible to be converted into the
  Companys common stock immediately, thus requiring the recording of the entire
  liability upfront. Finally, to encourage conversion, a discount from market
  value was offered.
- The aggregate amount of notes payable exceeded the amount of cash
  received. As Consideration for this difference the Company took back a
  secured Note Receivable. Security is generally liquid investments of the
  investor.
- The note receivable provides a commitment to fund mPhase operations at
  particular points in time. It was this commitment that required us to record
  on our books the note payable and the note receivable separately versus
  netting the balances.

Derivative Value and Debt Discount

It was determined that the value of the note payable to the
holder (investor) was primarily due to the favorable conversion features of the
note. In accordance with FASB ASC 815-15-25-1, the conversion feature requires the
bifurcation of the embedded derivative from the host document and separate
reporting of the embedded conversion feature at fair value determined by a
Black-Scholes calculation. The value of the agreement includes the conversion
feature and the variable amount of shares that may be converted at any
particular point in time. As such and under GAAP, our Balance Sheet reflects the
value of the embedded conversion feature as Derivative Value and the
corresponding contra account to Notes Payable called Debt Discount.

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

A summary of our arrangement is as follows:

Arrangement #1 (LaJolla Cove Investors Inc,)

On Sept 11, 2008, the Company received proceeds of $200,000
under a Securities Purchase Agreement from La Jolla Cove Investors, Inc. This
transaction involves three related agreements: 1) A Securities Purchase
Agreement which may under certain circumstances permit the Company to draw up to
$2,000,000 of funds; 2) A Convertible Debenture totaling $2,000,000, with a
interest rate of 7 1/4% and a maturity date of September 30, 2011 and 3) A
Secured Note Receivable in the amount of $1,800,000, with a interest rate of 8
1/4% and maturity dates of September 30,2011 due from the same parties who are
the holders of the Convertible Debentures. Conversion of outstanding debentures
into common shares is at the option of the holder at a price equal to the dollar
amount of the debenture divided by the lesser of $.35 per share or 80% of the
three lowest Volume Weighted Average Prices during a 20 day trading period. At
the time of the transaction (September 11, 2008) the derivative value of this
security

14

---

was calculated to be $1,176,471.As of September 30, 2009 this
value had decreased to $519,044. On December 31, 2009, given the changes in the
stock price, this value had increased to $1,076,482, a $557,438 increase this
quarter creating a non-cash credit to earnings for the quarter ended December
31, 2009 of that amount. During the six month period ended December 31, 2009,
amortization of debt discount amounted to $143,292 reducing the balance to
$431,144.

Arrangement #2 JMJ Financial

On December 31, 2008, the Company entered into a second
agreement with JMJ Financial. This transaction involves; 1) A Convertible
Debenture in the amount of $1.1 million, with a one time interest factor of 12%
and a maturity date of December 31, 2011 and 2) A Secured Note Receivable in the
amount of $1.0 million, with a one time interest factor of 13.2 % and maturity
date of December 31, 2012 due from the same parties who are the holders of the
Convertible Debentures.

Conversion of outstanding debentures into common shares is at
the option of the holder. The number of shares into which this debenture can be
converted is equal to the dollar amount of the debenture divided by 75% of the
Lowest Trading Price during the 20 day trading period prior to conversion. For
the six months ended December 31,2009 the Company received $900,000 of cash
draws under the Debenture and the holder had converted into 64,522,845common
stock principal and accrued interest thereon in the amount of $1,020,975.

On June 30, 2009 the derivative value of this security was
calculated to be $444,552. On September 30, 2009, that amount was 195,721 and on
December 31, 2009 that value was decreased to $55,595 given the changes in the
stock price combined with the fact that the principle interest due under the
debenture had material conversions in satisfaction of the debt liability,
reducing the outstanding debt to $79,025 at December 31, 2009. The decrease in
the derivative liability for the three months ended December 31, 2009 was
$140,129. During the six month period ended December 31, 2009, amortization of
debt discount amounted to $453,226 reducing the balance to $35,663.

Arrangement#3 (JMJ Financial, Inc.)

On August 19, 2009, the Company received proceeds of $250,000
in connection with a third agreement with JMJ Financial. This transaction
involves 1) a Convertible Debenture in the amount of $1,870,000, plus a one time
interest factor of 12% ($224,400) and a maturity date of August 10, 2012 and 2)
A Secured Note Receivable in the amount of $1,700,000 plus a one time interest
factor of 13.2% ($224,400) and a maturity date of August 10, 2012 due from the
same parties who are the holders of the Convertible Debenture.

Conversion of outstanding into common shares is at the option
of the holder. The number of shares into which this debenture can be converted
is equal to the dollar amount of the debenture divided by 75% of the lowest
trade price during the 20 day trading period prior to conversion.At the
commitment date the derivative liability for the embedded conversion feature of
such security was $1,054,395 and the debt discount was valued at $1,224,395.

On September 30, 2009 the derivative liability had decreased to
$759,333. On December 31, 2009, given the changes in the stock price this value
had increased to $1,076,482 a $317,149 increase this quarter creating a non-cash
credit to earnings for the quarter ended December 31, 2009 of that amount.
During the six month period ended December 31, 2009, amortization of debt
discount amounted to $214,056 reducing the balance to $1,020,329.

Arrangement#4 (JMJ Financial, Inc.)

On September 30, 2009, the Company received a total of $150,000
of proceeds in connection with another agreement with JMJ Financial. This
transaction involves 1) A Convertible Debenture in the amount of $1,200,000 plus
a one time interest factor of 12% ($144,000) and a maturity date of September
23, 2012 and (2) A Secured Note in the amount of $1,100,000 plus a one time
interest rate factor of 13.2% ($144,000 each) and a maturity date of September
23, 2012 due from the same parties who are the holders of the Convertible
Debentures.

15

---

Conversion of outstanding into common shares is at the option
of the holder. The number of shares into which this debenture can be converted
is equal to the dollar amount of the debenture divided by 75% of the lowest
trade price during the 20 day trading period prior to conversion. In addition,
the Company has received a commitment from JMJ Financial to enter into an
identical financing not later than 60 days from September 23, 2009. At the
commitment date of September 23, 2009 the embedded conversion feature of such
security was $480,000 and the debt discount was valued at $580,000.

On September 30, 2009 the derivative liability had increased to
$487,272. On December 31, 2009, given the changes in the stock price this value
had increased to $844,221 a $356,949 increase this quarter creating a non-cash
charge to earnings for the quarter ended December 31, 2009 of that amount.
During the six month period ended December 31, 2009, amortization of debt
discount amounted to $96,666 reducing the balance to $483,334.

Arrangement#5 (JMJ Financial, Inc.)

On November 17, 2009, the Company received a total of $186,000
of proceeds in connection with another agreement with JMJ Financial. This
transaction involves 1) A Convertible Debenture in the amount of $1,200,000 plus
a one time interest factor of 12% ($144,000) and a maturity date of September
23, 2012 and (2) A Secured Note in the amount of $1,100,000 plus a one time
interest rate factor of 13.2% ($144,000 each) and a maturity date of September
23, 2012 due from the same parties who are the holders of the Convertible
Debentures.

Conversion of outstanding into common shares is at the option
of the holder. The number of shares into which this debenture can be converted
is equal to the dollar amount of the debenture divided by 75% of the lowest
trade price during the 20 day trading period prior to conversion. At the
commitment date the derivative value of the embedded conversion feature of such
security was $536,000 and the debt discount was valued at $636,000.

On December 31, 2009, given the changes in the stock price this
value had increased to $844,221 a $308221 increase this quarter creating a
non-cash charge to earnings for the quarter ended December 31, 2009 of that
amount. During the six month period ended December 31, 2009, amortization of
debt discount amounted to $17,667 reducing the balance to $618,333.

Arrangement#6 (JMJ Financial, Inc.)

On December 22, 2009, the Company received a total of $300,000
of proceeds in connection with another agreement with JMJ Financial. This
transaction involves 1) A Convertible Debenture in the amount of $1,500,000 plus
a one time interest factor of 12% ($180,000) and a maturity date of December 15,
2012 and (2) A Secured Note in the amount of $1,400,000 plus a one time interest
rate factor of 13.2% ($180,000 each) and a maturity date of December 15, 2012
due from the same parties who are the holders of the Convertible Debentures.

Conversion of outstanding into common shares is at the option
of the holder. The number of shares into which this debenture can be converted
is equal to the dollar amount of the debenture divided by 75% of the lowest
trade price during the 20 day trading period prior to conversion. In addition,
the Company has received a commitment from JMJ Financial to enter into similar
financing arrangement which involves involves 1) A Convertible Debenture in the
amount of $1,200,000 plus a one time interest factor of 12% ($144,000) and a
maturity date of December 15, 2012 and (2) A Secured Note in the amount of
$1,100,000 plus a one time interest rate factor of 13.2% ($144,000 each) and a
maturity date of December 15, 2012, such financing to commence not later than
February 15, 2009. At the commitment date the derivative value of the embedded
conversion feature of such security was $542,714 and the debt discount was
valued at $642,714.

On December 31, 2009, given the changes in the stock price this
value had increased to $1,055,276 a $512,563 increase this quarter creating a
non-cash charge to earnings for the quarter ended December 31, 2009 of that
amount. During the six month period ended December 31, 2009, amortization of
debt discount amounted to $17,853 reducing the balance to $624,861.

16

---

Other Equity
During the years ended June 30, 2008 and 2009 the Company reevaluated warrants
contracts to purchase 13,104,168 shares at fixed prices ranging from $.05 to
$.15 per share originally issued during Fiscal Year Ended June 30, 2008 pursuant
to FASB Standards Codification Topic 815 (previously known EITF 00-19) , such
reevaluation was to review if the Company should record an additional Derivative
Liability which would be recordable if the other convertible instruments the
Company has outstanding; primarily the Convertible Debentures discussed above;
would limit or prevent the Company from honoring the conversion of these fixed
price warrants during their contract term. The evaluation was performed on a
contract by contract basis to equity instruments subject to FASB Standards
Codification Topic 815 (previously known EITF 00-19); namely the warrants
discussed above and the Convertible Debenture agreements whereby the Company
utilized a sequencing method prescribed therein, based upon applying shares
available to contracts with the earliest inception date first.
During the fiscal year ended June 30, 2008 the Company reclassified contracts
for warrants to purchase 12,604,168 shares of the Companys common stock at
fixed prices ranging from $.13 to $.15 per share to contingent liabilities.
Contracts for warrants to purchase 11,111,113 shares of the Companys common
stock at $.14 per share continued to be subject to reevaluation through March
31, 2009 and contracts for warrants to purchase 1,604,168 shares of the
Companys common stock at fixed prices ranging from $.13 to $.15 per share
continued to be subject to reevaluation through September 30, 2009.
At the issuance dates during the fiscal year ended June 30, 2008 the estimated
value of the contingent liability of these warrants approximated $1,006,200; and
as recalculated on the quarterly measurement dates, as of June 30, 2008 the
estimated value of the contingent liability approximated $433,300, and during
the six months ended December 31, 2008 the estimated value of the contingent
liability was determined to no longer be material. The net change in the
contingent liability was credited to the change in derivative value in the
Consolidated Statement of Operations for each period in accordance FASB
Standards Codification Topic 815 (previously known EITF 00-19).
As recalculated on each of the quarterly measurement dates subsequent to
December 31, 2008, the estimated value of the contingent liability of the
contracts for the warrants to purchase 12,604,168 shares of the Companys common
stock continued to not be material.

5. GRANITA MEDIA

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

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

During the six month period ended December 31, 2009, Granita
Media Inc did not conduct any operations and management is considering all
alternatives.

6. COMMITMENTS AND CONTINGENCIES

The Company has a lease obligation for the rental of office
space in Little Falls New Jersey until May 31, 2010. The annual obligation under
such lease requires rent of $26,940 for the year beginning June 1, 2009 and
ending May 31, 2010.

mPhase has entered into various agreements with Georgia Tech
Research ("GTRC") and its affiliate, Georgia Tech Applied Research Corporation,
("GTARC"), pursuant to which the Company received technical assistance in
developing the commercialization of its Digital Video and Data Delivery System.
Cost incurred by the Company for GTRC technical assistance with respect to its
research and development activities has totaled $13,539,952 from the period from
inception through September 30, 2008, all of which was incurred prior to
2005.

Legal Proceedings

From time to time the Company may be involved in legal
proceedings in the ordinary course of business.

17

---

7. FAIR VALUE MEASUREMENTS

Effective July 1, 2008, we adopted Accounting Standards
Codification ("ASC") 820-10-20, Fair Value Measurements, which provides a
framework for measuring fair value under GAAP. ASC 820-10-20defines fair value
as the exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date. ASC 820-10-20 requires that valuation techniques maximize the
use of observable inputs and minimize the use of unobservable inputs. ASC
820-10-20 also establishes a fair value hierarchy, which prioritizes the
valuation inputs into three broad levels. Financial assets and liabilities
valued using level 1 inputs are based on unadjusted quoted market prices within
active markets. Financial assets and liabilities valued using level 2 inputs are
based primarily on quoted prices for similar assets or liabilities in active or
inactive markets. For certain long-term debt, the fair value was based on
present value techniques using inputs derived principally or corroborated from
market data. Financial assets and liabilities using level 3 inputs were
primarily valued using managements assumptions about the assumptions market
participants would utilize in pricing the asset or liability. Valuation
techniques utilized to determine fair value are consistently applied.

The table below presents a reconciliation for liabilities
measured at fair value on a recurring basis at December 31, 2009 and 2008:

|                                 |   | Fair Value Measurements      
|-------------------------------- | - | -----------------------------
|                                 |   | Using Significant            
|                                 |   | Unobservable Inputs (Level 3)
|                                 |   | Derivative Liability         
|                                 |   | December                     
|                                 |   | 31, 2009                     
|                                 |   |                              
|                                 | $ | 2,380,816                    
|Balance at July 1                |   |                              
|                                 |   |                              
|                                 |   |                              
|Decrease in Derivative Liability |   | (41,647)                     
|                                 |   |                              
|                                 |   |                              
|Debt discounts                   |   | 2,613,109                    
|                                 |   |                              
|                                 |   |                              
|Balance at December 31           | $ | 4,952,278                    

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

Some of the Companys financial instruments are not measured
at fair value on a recurring basis but are recorded at amounts that approximate
fair value due to their liquid or short-term nature, such as cash and cash
equivalents, receivables and payables.

We have determined that it is not practical to estimate the
fair value of our notes payable because of their unique nature and the costs
that would be incurred to obtain an independent valuation. We do not have
comparable outstanding debt on which to base an estimated current borrowing rate
or other discount rate for purposes of estimating the fair value of the notes
payable and we have not been able to develop a valuation model that can be
applied consistently in a cost efficient manner. These factors all contribute to
the impracticability of estimating the fair value of the notes payable. At
December 31, 2009, the carrying value of the notes payable and accrued interest
was approximately $5.8 million. The JMJ Convertible Notes, which are due at
various times through December 2012, yield an interest rate of 12%. Refer to
Note 4 of these financial statements for more information about the Companys
notes payable.

8. SUBSEQUENT EVENTS

As of February 11, 2010, Long term convertible debt and accrued
interest thereon in the aggregate amount of $211,025 has been converted into
14,269,857 shares of common stock on convertible agreements outstanding as of
December 31, 2009.

Additionally the company entered into another agreement with
JMJ Financial. This transaction involves 1) A Convertible Debenture in the
amount of $1,200,000 plus a one time interest factor of 12% ($144,000) and a
maturity date of December15, 2012 and (2) A Secured Note in the amount of
$1,100,000 plus a one time interest rate factor of 13.2% ($144,000 each) and a
maturity date of December 15, 2012 due from the same parties who are the holders
of the Convertible Debentures. The Company has received $400,000 from repayment
of the note receivable for this arrangement subsequent to December 31, 2009
through February 11, 2010.

18

---

9. RESTATEMENT OF RESULTS

The restatement involves reclassifying certain equity
instruments out of additional paid in capital into other contingent liabilities
for free standing warrants to issue shares at a fixed price as such warrants
were issued subsequent to the Company entering into Convertible Debenture
agreements which have features that may result in the obligation to issue shares
in excess of authorized shares available. The contingent liability was recorded
at the fair market value at the issuance date of the free standing warrants and
recalculated at June 30, 2008 and again during fiscal year ended June 30, 2009, on the quarterly
measurement date, with the net change in the contingent liability credited to
the change in derivative value in the Consolidated Statement of Operations for
each period in accordance with
FASB standards classification topic 815 (previously
known as
EITF  0019). The restatements decrease the Net
Loss for the fourth quarter and for the fiscal year ended June 30, 2008 by
$572,900, as well as increase total liabilities and Total Stockholders Deficit
at June, 30 2008 by $433,300. The restatements decrease the Net Loss for the
first quarter and for the fiscal year ended June 30, 2009 by $433,300.

The contingent
liability was recorded at the fair market value at the issuance date of the free
standing warrants and recalculated on the quarterly measurement date, with the
net change in the contingent liability credited to the change in derivative
value in the Consolidated Statement of Operations for each period in accordance
with EITF  0019 resulting in the following restatement to the financial
captions listed below:

|Consolidated Balance Sheets                                          |   | June 30, 2008     |   |   | December 31, 2009
    
    (unaudited) |  
|-------------------------------------------------------------------- | - | ----------------- | - | - | -------------------------------------- | -
|                                                                     |   | as originally     |   |   | as                                     |  
|                                                                     |   | reported          |   |   | restated                               |  
|                                                                     |   |                   |   |   |                                        |  
|Contingent liabilities                                               | $ | -                 |   | $ | 433,300                                |  
|Total Liabilties                                                     | $ | 5,155,686         |   | $ | 5,588,986                              |  
|Additional paid in capital                                           | $ | 165,067,510       |   | $ | 164,061,310                            |  
|Deficit accumulated during development stage                         | $ | (172,268,340      | ) | $ | (171,695,440                           | )
|TOTAL STOCKHOLDERS DEFICIT                                          | $ | (2,804,853        | ) | $ | (3,238,153                             | )
|                                                                     |   |                   |   |   |                                        |  
|                                                                     |   |                   |   |   |                                        |  
|Consolidated Statements of Operations-For the Six Months
      Ended |   | December 31, 2008 |   |   | December 31, 2009                      |  
|                                                                     |   | (unaudited)       |   |   | (unaudited)                            |  
|Other Income (Expense)                                               | $ | (2,023,066        | ) | $ | (1,589,766                             | )
|Net (Loss)                                                           | $ | (9,340,349        | ) | $ | (8,907,049                             | )
|Loss per Share                                                       | $ | (0.02             | ) | $ | (0.02                                  | )

In addition, the Company expanded its disclosure with respect
to Convertible Debentures, Certain Equity Instruments and Notes Receivable.

19

---

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 19,000 shareholders and approximately 1.1
billion 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. mPhase
shares common office space with Microphase Corporation, a privately held
company. Microphase is a leader in the field of radio frequency and filtering
technologies within the defense and telecommunications industry. It has been in
operation for over 50 years and supports mPhase with both engineering and
administrative and financial resources as needed.

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

The platform technology behind the Smart NanoBattery is a
porous nanostructured material used to repel and precisely control the flow of
liquids. The material has aSmart Surface that can potentially be
designed for self-cleaning applications, water purification/desalination, liquid
filtration/separation, and environmental cleanup.

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

mPhase is headquartered in Little Falls, New Jersey, with
additional offices in Norwalk, Connecticut, and New York, New York.

20

---

Since our inception in 1996 we have been a development-stage
company and operating activities have related primarily to research and
development, establishing third-party manufacturing relationships and developing
product brand recognition among telecommunications service providers.

Description of Operations

Microfluidics, MEMS, and Nanotechnology

In February of 2004, mPhase entered the business of developing
new products based on materials whose properties and behavior are controlled at
the micrometer and nanometer scales. (For reference, a micrometer or micron is
equal to one millionth (10 -6) of a meter and a nanometer is one
billionth (10-9) of a meter  the scale of atoms and molecules. A
human hair is approximately 50 microns in diameter, or 50,000 nanometers thick.)
The Company has expertise and capabilities in microfluidics,
microelectromechanical systems (MEMS), and nanotechnology. Microfluidics refers
to the behavior, precise control and manipulation of fluids that are
geometrically constrained to a small, typically micrometer scale.

MEMS is the integration of mechanical elements, sensors,
actuators, and electronics on a common silicon substrate through
microfabrication technology. Nanotechnology is the creation of functional
materials, devices and systems through control of matter (atoms and molecules)
on the nanometer length scale (1-100 nanometers), and exploitation of novel
phenomena and properties (physical, chemical, biological, mechanical,
electrical) at that length scale. In its Smart NanoBattery, mPhase exploits the
physical phenomenon of electrowetting by which a voltage is used to change the
wetting properties of a liquid/solid interface at the nanometer scale. Consider
water as the liquid. Through electrowetting, mPhase can change a surface from
what is referred to as a hydrophobic ("water fearing") state to a hydrophilic
("water loving") state. In the hydrophobic state, the water beads up or is
repelled by the surface. In the hydrophillc state, the water spreads out or is
absorbed by the surface. The ability to electronically control the wetting
characteristics of a surface at the nanometer scale forms the basis of mPhase's
nanotechnology operations and intellectual property portfolio.

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

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

21

---

History of Nanotechnology Operations

Smart NanoBattery

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

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

Also in July of 2007, mPhase formed a new wholly-owned
subsidiary, Always Ready, Inc., to focus on the development of its
nanotechnology products. The Company has used this subsidiary as a division of
the Company in order to develop increasing brand recognition of its battery
product. The Company decided in September of 2007 to transfer its development
work out of Bell Labs (Alcatel/Lucent) in order to broaden its nanotechnology
product commercialization efforts. In terms of the battery, Bell Labs was no
longer sufficient because they had no in-house means to handle lithium
chemistry. mPhase/AlwaysReady continued to work with Rutgers ESRG which could
work with lithium, but also engaged in work with other companies to supply
essential components, fabricate prototypes, and plan manufacturing approaches.
These companies included a well-respected silicon foundry and battery
manufacturer.

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

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

22

---

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

Magnetometer

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

IPTV

Historically, the Company since its inception has focused upon
developing innovative solutions for the delivery of Broadcast Television as part
of a "triple play" of services that includes voice and high-speed internet for
telephone service providers globally. Beginning in fiscal year 2004, the Company
began developing Broadcast television delivery solutions through
software/middleware designed to enable telephone service providers to deliver
video data using internet protocol. The Company's middleware/software is highly
scalable, potentially saving telephone service providers significant hardware
deployment costs for routers and servers required for the carrier class delivery
of broadcast television using internet protocol. Such solution potentially
expands the content of available information from the internet into broadcast
quality television. The Company's middleware is capable of delivering over
copper, fiber, coax or any infrastructure representing a combination of the
foregoing that is used by a telecommunications service provider. The Company has
not to date been able to derive any significant revenue from our TV+ solution.
No active development of the product has occurred since fiscal year 2007.

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

23

---

FINANCIAL OVERVIEW

Revenues. Since July 1,2007 and inclusive of the most
current quarter, revenue has primarily been attributable to grants from the
United States Army and testing arrangements involving its nanotechnology
products.

Cost of revenuesCost associated with revenues from Army
Grants and fees for testing our nanotechnology products is currently very low.
It is anticipated that the Companys cost of revenues will increase
significantly as the Company moves forward with the commercialization and
distribution of its emergency flashlight product and other potential products
associated with its mechanically-activated reserve battery.

Research and development. Research and development
expenses have consisted principally of direct labor and payments made to Eagle
Picher, Porsche Design Studio and Microphase, as well as other third party
vendors involved in the development of the solution and nanotechnology products.
All research and development costs are expensed as incurred.

General and administrative.General and administrative
expenses consist primarily of salaries and related expenses for personnel
engaged in its nanotechnology product line, legal and accounting personnel.
Certain administrative activities are outsourced on a monthly fee basis to
Microphase Corporation and mPhase leases its office in Norwalk, Connecticut from
Microphase Corporation.

Non-Cash compensation charges. The Company makes
extensive use of stock, stock options and warrants as a form of compensation to
employees, directors and outside consultants. We incurred non-cash compensation
charges totaling $70,260,481 from inception (October 2, 1996) through December
31, 2009.

Other Income (Expense).Included in Other Expense are
non-recurring items related to the change in the value of derivative securities
and amortization as related debt discount. Such amounts will fluctuate
significantly and should not be considered as recurring or in any way indicative
of operating results. In addition, it has been the Company's policy to record as
an expense the cost of re-pricing securities (Reparation Cost) to raise capital.

Cumulative losses, net worth and capital needs

The Company has incurred cumulative development stage losses of
$190,688,900 and negative cash flow from operations of ($83,957,523) from
inception through December 31, 2009. The auditors report for the fiscal year
ended June 30, 2009 includes the statement that "there is substantial doubt of
the Company's ability to continue as a going concern". As of December 31, 2009,
the Company had a negative net worth of ($6,322,666) compared to a negative net
worth of ($5,234,168) as of June 30, 2009 as a result of continuing net losses.
The Company has Convertible Debentures funded with JMJ Financial, Inc that
should enable the Company to raise significant working capital for the next
fiscal year. Draws under this facility in the current fiscal quarter ended
December 31, 2009 amounted to $868,000 (accounted for as a pay-down of notes
receivable) and accrued interest thereon. The Company expects to be able to receive approximately $300,000
per month through August of 2012 under its current Convertible Debentures with JMJ Financial, Inc. While the Company believes these facilities will fund short
term capital needs it may from time to time need to supplement such funding.. In
the longer term, we estimate that the Company will need to raise approximately
$5-15 million of additional capital above the funds through June 30, 2011 in
order to fund commercialization of its products. The Company does not expect to
derive any material revenue from its Nanotechnology product development until
the third quarter of fiscal year 2011.

24

---

THREE MONTHS ENDED December 31, 2009 VS. December 31,
2008

REVENUE

Total revenues were $34,537 for the three months ended December
31, 2009 compared to $44,857 for the three months ended December 31, 2008.
Revenue derived in the current quarter was related to billings under a Phase II
U.S. Army Grant of $750,000 (net to the Company of $500,000) that began
September 2008.

RESEARCH AND DEVELOPMENT

Research and development expenses were $579,247 for the three
months ended December 31, 2009 as compared to $215,620 during the comparable
period in 2008 or an increase of $363,627. This increase in spending is a result
of acceleration of work to bring its emergency flashlight using its mechanically
activated reserve battery to market . In connection with such efforts the
Company incurred increased research and development expenses with major vendors
including Eagle Pitcher totaling $50,000, Porsche Design Studio $67,120, MKE
$36,108 and Microphase Corporation $75,000, respectively, for the quarter ended
December 31, 2009.

Subject to available funds, the Company expects to increase its
research and development efforts throughout fiscal year 2010. Such research is
expected to also include products such as the Phase II Army Reserve Battery that
is being developed using the science of nanotechnology. The initial applications
for the nano power cell technology will address the need to supply emergency and
reserved power to a wide range of electronic devices for both commercial and
defense applications.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative (G&A) expenses were $489,232 for
the three months ending December 31, 2009 down from $499,725 or a decrease of
$10,493 from the comparable period in 2008. The decrease in G&A expense is
primarily the result of the Company engaged in significant salary reductions for
its employees in late September of 2008 that has continued and the Company has
reduced the size of its staff to 8 full time employees.

OTHER (EXPENSE) AND INCOME

Included in the current quarter are non-cash charges and costs
associated with convertible debt that include a non-cash charge for the change
in derivative value of an increase $1,912,194 in the derivative liability,
increased by amortization of debt discount costs of $469,069, resulting in a net
loss of $2,381,263from derivative liabilities associated with the Companys
convertible debt and is not indicative of operating results.

NET INCOME AND (LOSS)

The Company recorded a net loss of $3,500,137 for the three
months ended December 30, 2009 as compared to a loss of $2,589,351 for the three
months ended December 31, 2008. This represents a net loss per common share of
$.00 (based upon weight average shares of 1,025,537,377) and loss per share of
$.01(based upon weight average shares of 486,056,567) for the three month
periods ended December 31, 2009 and 2008 respectively. The increase in net loss
is attributable to the significant increase in research and development expenses
and non-cash charges from derivative liabilities associated with the Companys
convertible debt recorded for the three months ended December 31, 2009.

25

---

SIX MONTHS ENDED December 31, 2009 VS December 31, 2008

REVENUE

Total revenues were $86,375 for the six months ended December
31, 2009, compared to $51,123 for the six months ended December 31, 2008.
Revenue for the most recent quarter is exclusively associated with a Phase II
Grant from the U.S. Army for developing a standby or backup battery for
electronics based upon the technology of its nanotechnology battery.

RESEARCH AND DEVELOPMENT

Research and development expenses were $1,093,573 for the six
months ended December 31, 2009, as compared to $ 603,296 during the comparable
period in 2008, or an increase of $490,277. During the most recent period the
Company had incurred most of its research and development expenses with
strategic vendors such as Porsche Design Studio, EMK and Eagle Picher in
connection with the development of an emergency flashlight using the Companys
mechanically-activated battery product for both commercial and military
applications. The overall increase in expense from the prior period is primarily
a result of increased research and development efforts regarding its battery
technology.

GENERAL AND ADMINISTRATIVE EXPENSES

General and Administrative expenses were $910,056 for the six
months ended December 31, 2009, decreasing from $6,738,985, or a $5,828,929
decrease from the comparable period in 2008. The decrease is primarily due to
significant non-cash charges relating to the issuance of common stock and
options to employees and consultants, which amounted to $5,511,950 during the
six month period ended on December 31, 2008. This decrease is augmented by an
additional $316,979 reduction of other General and Administrative expenses
primarily due to the fact that the Company engaged in significant salary
reductions for its employees in late September of 2008 that has continued and
the Company has reduced the size of its staff to 8 full time employees.

OTHER INCOME (EXPENSE)

Other Income and (Expense) was $(1,967,256) for the six months
ended December 31, 2009, compared to expense of ($1,589,766) for the comparable
period ended December 31, 2008. This change is primarily due to reduction in the
charges for the change in market value of Derivative Securities, net of
amortization, totaling $77,498 and increase in interest expense (including
beneficial conversion interest charges) totaling $622,114 offset by a reduction
of reparation expenses of $167,126.

NET LOSS

The Company recorded a net loss of ($3,897,081) for the six
months ended December 31, 2009, as compared to a loss of ($8,907,049) for the
six months ended December 31, 2008. This represents a loss per common share of
($.00 ) for the six month period ended December 31, 2009 , as compared to a loss
per common share of ($0.02) for the six months ending December 31, 2008, based
upon weighted average common shares outstanding of 979,929,496 and 519,217,774,
respectively. Overall, the decreased loss is a result of non cash charges
related to the issuance of common stock and the decrease in cost associated with
convertible debt securities. This is offset in part by the suspension of
development of the IPTV business segment and a significant reduction in
personnel expense.

26

---

CRITICAL ACCOUNTING POLICIES

REVENUE RECOGNITION

As required, mPhase has adopted ASC 605-10-525 "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.

RESEARCH AND DEVELOPMENT

Research and development costs are charged to operations as
incurred in accordance with ASC 730 "Research and Development."

OPTIONS, WARRANTS AN OTHER CONVERTIBLE EQUITY INSTRUMENTS

STOCK BASED COMPENSATIONOn July 1, 2005, the Company adopted the provisions of Financial Accounting
Standards Board Statement No. 123R, "Share-Based Payment" (SFAS 123R). SFAS 123R
revised SFAS 123, "Accounting for Stock Based Compensation" and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R requires
companies to measure and recognize compensation expense for all employee
stock-based payments at fair value over the service period underlying the
arrangement. Therefore, the Company is now required to record the grant-date
fair value of its stock-based payments (i.e., stock options and other
equity-based compensation) in the statement of operations. The fair value of
options granted in fiscal year ended June 30, 2008 and 2009 was estimated as of
the date of grant using the Black-Sholes stock option pricing model, based on
the following weighted average assumptions: annual expected return of 0%, an
average life of 5 years, annual volatility of 71% and 80.3% and a risk-free
interest rate 2.25% and 3.0%in the years 2008 and 2009 respectively. MATERIAL EQUITY INSTRUMENTSThe Company has material equity instruments including Convertible Debentures
and Convertible Notes that are accounted for as Derivative liabilities (SEE
BELOW) and options and warrants that are evaluated quarterly for potential
reclassification as liabilities pursuant to EITF 00-19 (SEE ALSO NOTE 8
"Stockholders Equity" under the caption "Other Equity"). The Company utilized a
sequencing method prescribed by EITF 00-19, based upon applying shares available
to contracts with the earliest inception date first. During the fiscal year
ended June 30, 2008 the Company reclassified contracts for warrants to purchase
12,604,168 shares at fixed prices ranging from $.13 to $.15 per share to
contingent liabilities. 
The contingent liability was recorded at the fair market value, such estimated
value, as restated, was based upon the contractual life of the free standing
warrants, using the Black Scholes pricing model, based on the following weighted
average assumptions: annual expected return of 0%, an average life of 5 years,
annual volatility 81% and a risk-free interest rate 2.25%. At the issuance date
of the free standing warrants, such warrants were issued during the fourth
quarter of fiscal June 30, 2008; the estimated value approximated $1,006,200 and
as recalculated on the quarterly measurement dates, at June 30, 2008 the
estimated value approximated $433,300. At September 30, 2008, the estimated
value was determined to no longer be material. The net change in the contingent
liability was credited to the change in derivative value in the Consolidated
Statement of Operations for the Fiscal years ended June 30, 2008 and 2009 for
$572,900 and $433,300, respectively, for each of these periods in accordance
FASB Standards Codification Topic 815 (previously known EITF 00-19). DERIVATIVE FINANCIAL INSTRUMENTSStatement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended and EITF Issue No.
00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock" require all derivatives to be
recorded on the balance sheet at fair value. The beneficial conversion features
of the convertible debentures are embedded derivatives and are separately valued
and accounted for on our balance sheet with changes in fair value recognized
during the period of change as a separate component of other income/expense.
Fair values for exchange-traded securities and derivatives are based on quoted
market prices. The pricing model we use for determining fair value of our
derivatives is the Black-Scholes Pricing Model. Valuations derived from this
model are subject to ongoing internal and external verification and review. The
model uses market-sourced inputs such as interest rates and stock price
volatilities. Selection of these inputs involves management's judgment and may
impact net income. " MATERIAL RELATED PARTY TRANSACTIONS

MICROPHASE CORPORATION

mPhase's President, Chief Operating Officer and Chairman of the
Board of the Company are also officers of Microphase and mPhase's President and
Chairman of the Board is a shareholder of Microphase. On May 1, 1997, the
Company entered into an agreement with Microphase, whereby it will use office
space as well as the administrative services of Microphase, including the use of
accounting personnel. This agreement was for $5,000 per month and was on a
month-to-month basis. In July 1998, the office space agreement was revised to
$10,000, in January 2000 to $11,050 per month, in July 2001 to $11,340 per
month, in July 2002 to $12,200 per month, in January 2003 to $10,000 per month,
and in July 2003 to $18,000 per month. Additionally, in July 1998, mPhase
entered into an agreement with Microphase, whereby mPhase reimburses Microphase
$40,000 per month for technical research and development. In January 2003 the
technical research and development agreement was revised to $20,000 per month,
and in July 2003 it was further revised to $5,000 per month for technical and
research development, $5,000 per month for administrative services and $5,000
per month under the office space agreement. Beginning July 1, 2006, billings for
all of the above services were $5,000 per month and were changed to $3,000 in
July 2008. In addition, Microphase also charges fees for specific projects on a
project-by-project basis. During the six months ended December 31, 2008 and 2009
and from inception (October 2, 1996) through December 31, 2009, $28,961,
144,846, and 9,520,325 respectively, have been charged to expense.

As a result of the foregoing transactions as of December 31,
2009 the Company had a payable to Microphase of $112,987.

27

---

JANIFAST LTD.

The Company has historically purchased products and incurs
certain research and development expenses with Janifast Ltd., which is owned by
U.S. Janifast Holdings, Ltd., a company in which two 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 that were discontinue in 2007. In March of 2009,
Janifast Ltd. ceased operations owing to adverse financial conditions globally.
During the six months ended December 31, 2008 and 2009 and the period from
inception (October 2, 1996), $0, $0_and $16,031,811 respectively, have been
charged by Janifast to inventory or is included in operating expenses in the
accompanying statements of operations.

Transactions with Officers

At various points during past fiscal years Messrs, Durando,
Dotoli and Smiley provided bridge loans to the Company, evidenced by individual
promissory notes and deferred compensation so as to provide working capital to
the Company. All of the notes are payable on demand.. During the 6 months ended
December 31, 2009 interest accrued at 12% on such notes was $74,194and $230,000
of such notes were repaid. This compared to interest accrued at 12% on such
notes of $8,582 and a net increase in the principal amount of such notes to
$115,087 during the six months ended December 31, 2008.

Total compensation (including the value of stock awards) to
related parties and payables to officers is summarized below :

Summary of compensation to related parties for the Six
Months Ended December 31, 2009

|                                          |   | Durando |  |   | Dotoli  |  |   | Smiley  |  |   | Biderman |  |   | Microphase |  |   | Total   | 
|----------------------------------------- | - | ------- |  | - | ------- |  | - | ------- |  | - | -------- |  | - | ---------- |  | - | ------- | 
|Consulting / Salary                       | $ | 100,000 |  | $ | 90,000  |  | $ | 87,500  |  |   |          |  |   |            |  | $ | 277,500 | 
|Interest                                  | $ | 34,795  |  | $ | 24,797  |  | $ | 14,603  |  |   |          |  |   |            |  | $ | 74,194  | 
|Rent                                      |   |         |  |   |         |  |   |         |  |   |          |  | $ | 18,000     |  | $ | 18,000  | 
|G&A                                       |   |         |  |   |         |  |   |         |  |   |          |  | $ | 1,846      |  | $ | 1,846   | 
|R&D                                       |   |         |  |   |         |  |   |         |  |   |          |  | $ | 125,000    |  | $ | 125,000 | 
|Finders Fees                              |   |         |  |   |         |  |   |         |  | $ | 20,000   |  |   |            |  | $ | 20,000  | 
|Stock based compensation(shares issued)*  |   |         |  |   |         |  |   |         |  |   |          |  |   |            |  | $ | 0       | 
|Stock based compensation(options issued)* |   |         |  |   |         |  |   |         |  |   |          |  |   |            |  | $ | 0       | 
|Total compensation                        | $ | 134,795 |  | $ | 114,797 |  | $ | 102,103 |  | $ | 20,000   |  | $ | 144,846    |  | $ | 516,540 | 

Summary of Compensation to related parties for the Six
MonthsEnded December 31,2008

Durando
    
    
    Dotoli
    
    
    Smiley
    
    
    Biderman
    
    
    Microphase
    
    
    TotalConsulting / Salary
    $
    165,217
    
    $
    128,500 $
    
    
    93,750
    
    
    
    
    $
    
    
    
    387,467Interest
    
    
    
    $
    
    
    
    8,582
    
    
    
    
    $
    
    
    
    8,582Rent
    
    
    
    
    
    
    
    
    
    $
    
    
    
    18,000 $
    
    
    18,000G&A
    
    
    
    
    
    
    
    
    
    $
    
    
    
    10,961
      $
    
    
    10,961Finders Fees
    
    
    
    
    
    
    
    
    
    $
    20,000
    
    $
    
    
    
    20,000Stock based
      compensation (shares issued)*
    $
    1,215,000
    
    $
    720,000 $
    
    
    450,000
    
    $
    180,000
    
    $
    
    
    
    2,565,000Stock based compensation (options issued)*
    $
    1,350,000
    
    $
    810,000 $
    
    
    486,000
    
    $
    54,000
    
    $
    
    
    
    2,700,000


28

---

|Total
      compensation         | $ | 2,730,217  |  | $ | 1,658,500 $ |  |  | 1,038,332  |  | $ | 254,000 $ |  |  | 28,961 $ |  |  | 5,710,011   | 
|-------------------------------- | - | ---------- |  | - | ----------- |  |  | ---------- |  | - | --------- |  |  | -------- |  |  | ----------- | 
|                                 |   |            |  |   |             |  |  |            |  |   |           |  |  |          |  |  |             | 
|Common stock
      issued*       |   | 27,000,000 |  |   | 16,000,000  |  |  | 10,000,000 |  |   | 4,000,000 |  |  |          |  |  | 57,000,000  | 
|Options issued (5years @5 cents) |   | 50,000,000 |  |   | 30,000,000  |  |  | 18,000,000 |  |   | 2,000,000 |  |  |          |  |  | 100,000,000 | 

*Shares issued to officers are pursuant to agreements dated
August 8, 2008 between the Company and the Messrs Durando, Dotoli and Smiley.
The agreements state that the stock granted may not be sold until the earlier of
two (2) years orwhen the stock price for 60 consecutive days closes at a
price of $.25 per share or greater and the average trading volume during such 60
day period is not less than 1,000,000 shares per day.

OTHER RELATED PARTIES

Mr. Abraham Biderman was employed until September 30, 2003 by
our former investment-banking firm Lipper & Company. On December 31, 2009,
Mr. Biderman's affiliated firm of Palladium Capital Advisors was owed unpaid
finders fees in the amount of $150,000. During the six months ended December 31,
2009 and December 31, 2008 finders fees in the amount of $20,000 and $20,000,
respectively, were recorded.

29

---

LIQUIDITY AND CAPITAL RESOURCES

The Company has incurred cumulative development stage losses of
($190,688,900) and negative cash flow from operations of ($83,957,523). The
auditors report for the fiscal year ended June 30, 2009 includes the statement
that "there is substantial doubt of the Company's ability to continue as a going
concern". As of December 31, 2009, the Company had a negative net worth of
($6,322,666) compared to a negative net worth of ($5,234,168) as of June 30,
2009 as a result of continuing net losses. The Company has convertible debt
outstanding that is subject to additional funding which potentially allows the
Company access to additional funding of approximately $6.6 million Such
facilities should enable the Company to raise significant working capital for
the next fiscal year. Draws under these arrangements for the six months December
31, 2009 amounted to $2,236,000 . While the Company believes these facilities
will fund short term capital needs it may from time to time need to supplement
such funding. In the longer term, we estimate that the Company may need to raise
approximately $5 million of additional capital above the funds anticipated from
the note receivable. Such monies would be necessary primarily to roll-out its
Emergency Flashlight produce and fund future expenditures for commercialization
of its SmartBattery products. The Company does not expect to derive any material
revenue from its Nanotechnology product development until the first quarter of
fiscal year 2010.

MANAGEMENT'S PLANS

The Company has shifted its focus to the development of
products using the science of Nanotechnology. The Company does not expect to
derive any material revenue from its Emergency Flashlight product until the
first quarter of fiscal year 2010.

30

---

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, 2009.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our
management, including the Chief Executive Officer and Chief Financial Officer,
we have evaluated the effectiveness of our disclosure controls and procedures as
required by Exchange Act Rule 13a-15(b) as 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, 2009 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.

31

---

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time the Company may be involved in legal actions
in the ordinary course of business.

normal course of business.

ITEM 2. CHANGES IN SECURITIES

Private Placements

During the Six Months ended December 31, 2009, the Company
issued 26,666,667 shares of its common stock at $.0075 per share in private
placements generating gross proceeds of $200,000 with placement costs of
$20,000, netting $180,000.

Stock Based Compensation

During the six months ended December 31, 2009, the Company
issued 2,000,000 shares of common stock to employees and consultants valued at
$43,050.

Conversion of debt securities and Strategic vendor payables

During the six months ended December 31, 2009, $1,680,725 of
convertible debt and accrued interest thereon was converted into 108,506,180
shares of Common stock.

During the six months ended December 31, 2009, $200,000 of
accounts payable to Microphase Corporation was converted into 26,666,667 shares
of Common stock. The Company recorded $586,667 interest expense on the
beneficial conversion feature. The Company recorded $82,609 interest expense on
the beneficial conversion feature of officers notes during the six months ended
December 31, 2009.

Long Term Convertible Debentures / Note Receivable / Debt
Discount

The Company currently had six separate convertible debt
arrangements with independent investors outstanding at December 31, 2009. During
the six months ended December 31, 2009, $1,680,725 of convertible debt and
accrued interest thereon was converted into 108,506,180 shares of Common
stock.

These transactions are intended to provide liquidity and
capital to the Company and are summarized below.

Arrangement #1 (LaJolla Cove Investors Inc,)

On Sept 11, 2008, the Company received proceeds of $200,000
under a Securities Purchase Agreement from La Jolla Cove Investors, Inc. This
transaction involves three related agreements: 1) A Securities Purchase
Agreement which may under certain circumstances permit the Company to draw up to
$2,000,000 of funds; 2) A Convertible Debenture totaling $2,000,000, with a
interest rate of 7 1/4% and a maturity date of September 30, 2011 and 3) A
Secured Note Receivable in the amount of $1,800,000, with a interest rate of 8
1/4% and maturity dates of September 30,2011 due from the same parties who are
the holders of the Convertible Debentures. Conversion of outstanding debentures
into common shares is at the option of the holder at a price equal to the dollar
amount of the debenture divided by the lesser of $.35 per share or 80% of the
three lowest Volume Weighted Average Prices during a 20 day trading period.

At the time of the transaction (September 11, 2008) the
derivative value of this security was calculated to be $1,176,471.As of
September 30, 2009 this value had decreased to $519,044.

32

---

On December 31, 2009, given the changes in the stock price,
this value had increased to $1,076,482, a $557,438 increase this quarter
creating a non-cash credit to earnings for the quarter ended December 31, 2009
of that amount. During the six month period ended December 31, 2009,
amortization of debt discount amounted to $143,292 reducing the balance to
$431,144.

Arrangement #2 JMJ Financial

On December 31, 2008, the Company entered into a second
agreement with JMJ Financial. This transaction involves; 1) A Convertible
Debenture in the amount of $1.1 million, with a one time interest factor of 12%
and a maturity date of December 31, 2011 and 2) A Secured Note Receivable in the
amount of $1.0 million, with a one time interest factor of 13.2 % and maturity
date of December 31, 2012 due from the same parties who are the holders of the
Convertible Debentures.

Conversion of outstanding debentures into common shares is at
the option of the holder. The number of shares into which this debenture can be
converted is equal to the dollar amount of the debenture divided by 75% of the
Lowest Trading Price during the 20 day trading period prior to conversion. For
the six months ended December 31,2009 the Company received $900,000 of cash
draws under the Debenture and the holder had converted into 64,522,845common
stock principal and accrued interest thereon in the amount of $1,020,975.

On June 30, 2009 the derivative value of this security was
calculated to be $444,552. On September 30, 2009, that amount was 195,721 and on
December 31, 2009 that value was decreased to $55,595 given the changes in the
stock price combined with the fact that the principle interest due under the
debenture had material conversions in satisfaction of the debt liability,
reducing the outstanding debt to $79,025 at December 31, 2009. The decrease in
the derivative liability for the three months ended December 31, 2009 was
$140,129. During the six month period ended December 31, 2009, amortization of
debt discount amounted to $453,226 reducing the balance to $35,663.

Arrangement#3 (JMJ Financial, Inc.)

On August 19, 2009, the Company received proceeds of $250,000
in connection with a third agreement with JMJ Financial. This transaction
involves 1) a Convertible Debenture in the amount of $1,870,000, plus a one time
interest factor of 12% ($224,400) and a maturity date of August 10, 2012 and 2)
A Secured Note Receivable in the amount of $1,700,000 plus a one time interest
factor of 13.2% ($224,400) and a maturity date of August 10, 2012 due from the
same parties who are the holders of the Convertible Debenture.

Conversion of outstanding into common shares is at the option
of the holder. The number of shares into which this debenture can be converted
is equal to the dollar amount of the debenture divided by 75% of the lowest
trade price during the 20 day trading period prior to conversion.At the
commitment date the derivative liability for the embedded conversion feature of
such security was $1,054,395 and the debt discount was valued at $1,224,395.

On September 30, 2009 the derivative liability had decreased to
$759,333. On December 31, 2009, given the changes in the stock price this value
had increased to $1,076,482 a $317,149 increase this quarter creating a non-cash
credit to earnings for the quarter ended December 31, 2009 of that amount.
During the six month period ended December 31, 2009, amortization of debt
discount amounted to $214,056 reducing the balance to $1,020,329.

33

---

Arrangement#4 (JMJ Financial, Inc.)

On September 30, 2009, the Company received a total of $150,000
of proceeds in connection with another agreement with JMJ Financial. This
transaction involves 1) A Convertible Debenture in the amount of $1,200,000 plus
a one time interest factor of 12% ($144,000) and a maturity date of September
23, 2012 and (2) A Secured Note in the amount of $1,100,000 plus a one time
interest rate factor of 13.2% ($144,000 each) and a maturity date of September
23, 2012 due from the same parties who are the holders of the Convertible
Debentures.

Conversion of outstanding into common shares is at the option
of the holder. The number of shares into which this debenture can be converted
is equal to the dollar amount of the debenture divided by 75% of the lowest
trade price during the 20 day trading period prior to conversion. In addition,
the Company has received a commitment from JMJ Financial to enter into an
identical financing not later than 60 days from September 23, 2009. At the
commitment date of September 23, 2009 the embedded conversion feature of such
security was $480,000 and the debt discount was valued at $580,000.

On September 30, 2009 the derivative liability had increased to
$487,272. On December 31, 2009, given the changes in the stock price this value
had increased to $844,221 a $356,949 increase this quarter creating a non-cash
charge to earnings for the quarter ended December 31, 2009 of that amount.
During the six month period ended December 31, 2009, amortization of debt
discount amounted to $96,666 reducing the balance to $483,334.

Arrangement#5 (JMJ Financial, Inc.)

On November 17, 2009, the Company received a total of $186,000
of proceeds in connection with another agreement with JMJ Financial. This
transaction involves 1) A Convertible Debenture in the amount of $1,200,000 plus
a one time interest factor of 12% ($144,000) and a maturity date of September
23, 2012 and (2) A Secured Note in the amount of $1,100,000 plus a one time
interest rate factor of 13.2% ($144,000 each) and a maturity date of September
23, 2012 due from the same parties who are the holders of the Convertible
Debentures.

Conversion of outstanding into common shares is at the option
of the holder. The number of shares into which this debenture can be converted
is equal to the dollar amount of the debenture divided by 75% of the lowest
trade price during the 20 day trading period prior to conversion. At the
commitment date the derivative value of the embedded conversion feature of such
security was $536,000 and the debt discount was valued at $636,000.

On December 31, 2009, given the changes in the stock price this
value had increased to $844,221 a $308221 increase this quarter creating a
non-cash charge to earnings for the quarter ended December 31, 2009 of that
amount. During the six month period ended December 31, 2009, amortization of
debt discount amounted to $17,667 reducing the balance to $618,333.

Arrangement#6 (JMJ Financial, Inc.)

On December 22, 2009, the Company received a total of $300,000
of proceeds in connection with another agreement with JMJ Financial. This
transaction involves 1) A Convertible Debenture in the amount of $1,500,000 plus
a one time interest factor of 12% ($180,000) and a maturity date of December 15,
2012 and (2) A Secured Note in the amount of $1,400,000 plus a one time interest
rate factor of 13.2% ($180,000 each) and a maturity date of December 15, 2012
due from the same parties who are the holders of the Convertible Debentures.

Conversion of outstanding into common shares is at the option
of the holder. The number of shares into which this debenture can be converted
is equal to the dollar amount of the debenture divided by 75% of the lowest
trade price during the 20 day trading period prior to conversion. In addition,
the Company has received a commitment from JMJ Financial to enter into similar
financing arrangement which involves involves 1) A Convertible Debenture in the
amount of $1,200,000 plus a one time interest factor of 12% ($144,000) and a
maturity date of December 15, 2012 and (2) A Secured Note in the amount of
$1,100,000 plus a one time interest rate factor of 13.2% ($144,000 each) and a
maturity date of December 15, 2012, such financing to commence not later than
February 15, 2009. At the commitment date the derivative value of the embedded
conversion feature of such security was $542,714 and the debt discount was
valued at $642,714.

34

---

On December 31, 2009, given the changes in the stock price this
value had increased to $1,055,276 a $512,563 increase this quarter creating a
non-cash charge to earnings for the quarter ended December 31, 2009 of that
amount. During the six month period ended December 31, 2009, amortization of
debt discount amounted to $17,853 reducing the balance to $624,861.

Subsequent to December 31, 2009, through February 11, 2010,
Long term convertible debt and accrued interest thereon in the aggregate amount
of $211,025 has been converted into 14,269,857 shares of common stock on
convertible agreements outstanding as of December 31, 2009. Additionally the
company entered into another agreement with JMJ Financial. This transaction
involves 1) A Convertible Debenture in the amount of $1,200,000 plus a one time
interest factor of 12% ($144,000) and a maturity date of December15, 2012 and
(2) A Secured Note in the amount of $1,100,000 plus a one time interest rate
factor of 13.2% ($144,000 each) and a maturity date of December 15, 2012 due
from the same parties who are the holders of the Convertible Debentures. The
Company has received $400,000 from repayment of the note receivable for this
arrangement subsequent to December 31, 2009 through February 11, 2010.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

In a Form 8K filed on December 23, 2009 the Company announced
that it received $300,000 of additional funding from JMJ Financial under the
terms of a Convertible Note.

In a Form 8K filed on December 30, 2009 the Company announced
that its consumer division mPower Technologies Inc. is unveiling its mPower
Emergency Illuminator product at the consumer electronics show in Las Vegas,
Nevada.

35

---

|**EXHIBITS.** | **DESCRIPTION.**                                                                                           
|------------- | -----------------------------------------------------------------------------------------------------------
|              |                                                                                                            
|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.

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: May 11, 2010 | By:/s/ Martin S. Smiley                    
|                    | Martin S. Smiley                           
|                    | Executive Vice President                   
|                    | Chief Financial Officer and General Counsel

36

---