Edgar Filing: MPHASE TECHNOLOGIES INC

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A

|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE YEAR ENDED JUNE 30, 2002

COMMISSION FILE NO.000-24969
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mPHASE TECHNOLOGIES, INC.
(Name of issuer in its charter)

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

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

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

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

(Title of Class)

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

Indicate by check mark if the disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to the Form 10-K.

As of August 26, 2002, there were 60,807,508 shares of common stock, no par
value, stated value $.01, outstanding and the aggregate market price of shares
held by non-affiliates was approximately $9,836,701 (Based upon a closing
common stock price of $.28 on August 26, 2002) (solely for the purpose of
calculating the preceding amount, all directors and officers of the registrant
are deemed to be affiliates.)

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mPHASE TECHNOLOGIES, INC.

ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 30, 2002

TABLE OF CONTENTS

PAGE

PART I

ITEM 1. Business ........................................ 3

ITEM 2. Properties ...................................... 14

ITEM 3. Legal Proceedings ............................... 14

ITEM 4. Submission of Matters to a Vote of Security
Holders ........................................ 15

PART II

ITEM 5. Market for Registrant's Common Equity and
Related Stockholder Matters ..................... 16

ITEM 6. Selected Consolidated Financial Data ............ 16

ITEM 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations ...................................... 19

ITEM 8. Financial Statements and Supplementary Data ..... 27

ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial
Disclosure ...................................... 27

PART III

ITEM 10. Directors, Executive Officers and Key Employees
of the Registrant ............................... 28

ITEM 11. Executive Compensation .......................... 29

ITEM 12. Security Ownership of Certain Beneficial Owners
and Management .................................. 33

ITEM 13. Certain Relationships and Related Transactions .. 34

PART IV

ITEM 14A. Exhibits, Financial Statement Schedules and
Reports on Form 8-K ............................. 36

Report of Independent Public Accountants ........ F1

Report of Certified Public Accountants .......... F3

Financial Statements ............................ F4-F11

Notes to Financial Statements ................... F12-F28

ITEM 14B. Valuation and Qualifying Accounts ............... 40

ITEM 15. Certifications .................................. 42

PART I

FORWARD-LOOKING STATEMENTS

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

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

ITEM 1. BUSINESS

GENERAL DESCRIPTION OF THE BUSINESS

mPhase Technologies, Inc. ("mPhase" or the "Company") is a development stage
technology company headquartered in Norwalk, Connecticut. The Company is a
developer of broadband communications products, specifically, digital
subscriber line ("DSL") products for telecommunications service providers
around the world. mPhase shares common office space and common management with
Microphase Corporation, a privately-held corporation. Microphase is a seller
of radio frequency and filtering technologies to the defense industry.
Microphase has been in operation for almost 50 years and supports mPhase with
engineering, administrative and financial resources, as needed.

Since our inception in 1996, mPhase has been a development-stage company.
Our primary activities have consisted of designing, manufacturing and testing
our flagship product designed to deliver digital quality broadcast television
over DSL, the Traverser(TM) Digital Video and Data Delivery System ("DVDDS").
The TRAVERSER(TM) is a patented end to end system that enables a
telecommunications service provider to deliver up to 384 channels of motion
picture entertainment group two ("MPEG-2") standard broadcast digital quality
television, high speed internet and voice over copper telephone lines between
a central office facility of the provider and a customer's premises. mPhase
has not as yet derived any material revenues from sales of the Traverser(TM).

The Traverser(TM) is a proprietary technology involving digital compression
developed in conjunction with Georgia Tech Research Corporation which allows
for the delivery of any channel to all users at any given time without any
dilution in quality. The Traverser(TM) consists of an Access Shelf located at
a central office and an Intelligent Network Interface set top box located in a
telephone customer's home. Because it is an end to end system, the
Traverser(TM) does not operate with other manufacturer's DSL central office
equipment or customer premises equipment modems. The Traverser(TM) utilizes
Asymmetric ("DSL") that allows for significantly more downstream than upstream
bandwidth for transmission which is well suited for delivery of broadcast
television. The system is the only system on the market that utilizes non-
Internet Protocol ("IP") transmission.

mPhase believes the Traverser(TM) is best suited for markets outside of the
United States where fiber-optic infrastructure necessary for cable TV does not
exist. Nevertheless, to facilitate sales of the Traverser(TM) in the United
States, mPhase has established a joint venture, mPhaseTelevision.Net, Inc.
("mPhaseTV") with Alphastar International, Inc. ("Alphastar"). mPhaseTV has
entered into licensing agreements with content originators for upwards of 80
channels of television content. mPhaseTV can provide a single source of
licensing agreements for service providers interested in entering into the
business of television over telephone

wires. By being able to offer this service to potential customers, the Company
believes it eliminates a potential barrier to purchase and/or speeds the time
to market for its customers.

mPhase also has designed and markets a line of DSL component products
ranging from commodity items such as Plain Old Telephone Service ("POTS")
splitters to innovative loop management products. From our inception in 1996
to date virtually all of mPhase's revenue have been derived from sales of our
commodity DSL products such as POTS splitters and low pass filters.

Our most recent innovation in our suite of DSL component products is the
recently introduced iPOTS OR intelligent POTS Splitter product. The iPOTS
product is designed to allow a telecommunications service provider to remotely
trouble-shoot and maintain both their narrowband voice and wideband DSL
services over the copper loop. This streamlines the process of rolling-out and
deploying DSL services. Prior to the introduction of this product, telephone
service providers had to deploy personnel to manually intervene so that test
signals could be passed through the loop network. This product marks an
advancement in automating loop management and should reduce the cost of a
telephone service provider to deploy DSL services.

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

Business Development, Organization, and Acquisition Activities

mPhase was incorporated in New Jersey in 1979 under the name Tecma
Laboratory, Inc. In 1987, the Company changed its name to Tecma Laboratories,
Inc. As Tecma Laboratories, Inc., the Company was primarily engaged in the
research, development and exploitation of products in the skin care field. On
February 17, 1997, the Company acquired Lightpaths, Inc., a Delaware
corporation, which was engaged in the development of telecommunications
products incorporating DSL technology, and the Company changed its name to
Lightpaths TP Technologies, Inc.

On January 29, 1997, the Company formed another wholly-owned subsidiary
called TLI Industries, Inc. The shares of TLI were spun off to its
stockholders on March 31,1997 after the Company transferred the assets and
liabilities, including primarily fixed assets, patents and shareholder loans
related to the prior business of Tecma Laboratories. As a consequence of these
transactions, the Company became the holding company of its wholly-owned
subsidiary, Lightpaths, Inc. on February 17, 1997.

On May 5, 1997, the Company completed a reverse merger with Lightpaths TP
Technologies, Inc. and thereafter changed its name to mPhase Technologies,
Inc. on June 2, 1997.

On March 26, 1998 the Company entered into a Licensing Agreement with
Georgia Tech Research Corporation ("GTRC") in which mPhase became the
exclusive licensee of all patents received by GTRC in connection with
development of the Traverser(TM), GTRC receives a royalty equal to 5% of gross
sales of the Traverser(TM) and 30% of any "lump sum payments" under the terms
of its license, as amended.

On June 25, 1998, mPhase acquired Microphase Telecommunications, Inc., a
Delaware corporation, from Microphase Corporation by issuing 2,500,000 shares
of its common stock. Microphase Telecommunications' principal assets were
patents and patent applications utilized in the development of its proprietary
Traverser(TM) technology.

In March, 2000, mPhase entered into a joint venture with AlphaStar
International, Inc. to form an entity called mPhaseTelevision.Net, Inc. in
which the Company held a 50% interest. On May 1, 2000, the Company acquired an
additional 6.5% interest in mPhaseTelevision.Net, Inc. and made it one of its
consolidated subsidiaries.

On March 14, 2000, mPhase entered into an agreement with BMW Manufacturing
Corp., located in South Carolina. Under the agreement, the Company installed
version 1.0 of the Traverser(TM) for BMW's telephone transmission network. BMW
has agreed that, upon its notice and consent, mPhase will be able to
demonstrate to potential customers the functioning system at BMW's facilities.
BMW has made two (2) subsequent purchases increasing the size of the
deployment to 48 unique units.

Our flagship installation, Hart Telephone, has completed the building and
development of its digital headend during the fourth quarter of 2001. The
completion of their digital headend marks the move from beta to commercial
deployment of the Traverser(TM) platform. Hart currently has approximately 100
customers receiving about 90 channels of television services.

mPhase has initiated development of Version 2.0 of the Traverser(TM) with a
major, experienced research and development organization. Version 2.0 will be
a cost-reduced version of Version 1.0, offering similar functionality to
version 1.0. We expect Version 2.0 to be commercially available for deployment
in Hartwell, as well as other locations, in early 2003. We believe such cost
reduced product will increase the competiveness of the Traverser(TM) against
other competing technologies in the global marketplace.

Our revenue, historically, has been derived from sales of component
telephone equipment parts, the majority of which has come from our sales of
POTS Splitter Shelves. In our fiscal year ended June 30, 2002, and through the
third quarter of our fiscal year 2002 ended March 31, 2002 we generated
approximately $2.58 million and $1.95 million in revenue, respectively, from
the commercial sale of our component products. These component products,
including filters and Central Office POTS Splitter Shelves, are marketed to
other DSL equipment vendors. We do not believe that the sales of our
Traverser(TM) will be materially impaired by the sale of these component
products to these potential competitors.

Products & Services

Traverser(TM) Digital Video and Data Delivery System

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

Telcos using the mPhase Traverser(TM) System need to build a digital video
headend or programming and control center ("PCC") to downlink programmers of
broadcast television from satellites. This includes installing a satellite
receiving dish, off-the-shelf video equipment and mPhase's software to manage
the video content at the PCC. Local off-air channels are received, digitized
and combined with the signals received via satellite at the PCC. The PCC can
be co-located with a single central office or ("CO") or remotely located and
connected to each Central Office ("CO") via fiber not currently being used,
fiber optic broadband loop or networks capable of transporting digital data
utilizing standard communications protocol.

The Traverser(TM) CO equipment, known as the mPhase Universal Access Shelf,
integrates video signals from the PCC with Internet and voice signals. The
output of the Universal Access Shelf consists of DSL "lines" capable of
carrying a single digital quality broadcast television channel, high-speed
data and POTS ("Plain Old Telephone Service") to subscribers over existing
telephone lines.

Upon reaching the home or business, the DSL line is fed into the mPhase
intelligent network interface INI(TM), or digital set top box. The INI(TM)
separates the three signals and routes them to the television, PC and
telephone.

The Company believes its product is unique and offers distinct competitive
advantages for a number of reasons. Foremost, the patented bus architecture
utilized by the Traverser(TM) allows a plurality of channels to be delivered
to a plurality of users all of the time ensuring unequivocal system
reliability. Additionally, because the Traverser(TM) does not utilize IP
transport, it does not require potentially costly equipment associated with
IP-based television delivery such as Asynchronous Transfer Mode ("ATM")
switches, servers or routers, as well as other ancillary equipment. Instead,
the Traverser(TM) offers a cost-effective method to deliver realtime broadcast
television over copper phone wires. Additionally, the Traverser(TM) does not
require an upgrade of the existing infrastructure thereby avoiding the capital
expense required to support certain competing video over DSL platforms.

Relative to other platforms that deliver voice, broadcast TV and data, we
believe the Traverser(TM) is the most comprehensive solution on the market by
virtue of its unique patented design focused on the most efficient delivery of
Television. Our platform does not currently support some of the features that
some of our DSL competitors have such as access to the Internet through a
Television set, or being able to support

multiple channels of television service over a single DSL line. In addition,
our system does not currently support "video on demand" such as many cable
competitors. Nevertheless for the delivery of single-channel broadcast TV, we
believe our system is the most cost-effective, secure and highest quality
delivery currently on the market. For our targeted markets where fiber-optic
infrastructure does not exist, we believe the lack of advanced robust features
is outweighed by the reliability, simplicity and cost-effectiveness of the
Traverser(TM).

To date, Next Level Communications appears to have the lead among our
competitors in terms of the number of deployments of broadcast television over
DSL. However, this solution requires very fast DSL ("VDSL") as opposed to our
Asynametric DSL ("ADSL") solution which has a much shorter reach from its
source and requires Fiber to the Neighborhood infrastructure. We believe the
cost of such solution is prohibitive to many telecommunications service
providers in the developing international markets where such an upgrade to
such infrastructure is not economic.

The Traverser(TM) utilizes technology that mPhase licenses exclusively from
Georgia Tech Research Corporation ("GTRC") and DSL semiconductor chip
technology purchased from GlobeSpan Semiconductor, Inc. Georgia Tech Applied
Research Corporation ("GTARC") provides a significant portion of the
engineering research and design to develop the Traverser(TM). The
Traverser(TM) also utilizes component technology developed by Microphase
Corporation.

The Traverser(TM) is currently deployed with only two customers, BMW
Manfacturing in Spartanburg, South Carolina and Hart Telephone in Hartwell,
Georgia and has not, as yet, generated material revenues for the Company.

Other Products

POTS Splitter Shelves

A Plain Old Telephone Service ("POTS") Splitter Shelf is a low pass/high
pass filter that separates voice and data transmissions. POTS Splitter
Shelves, are necessary to permit simultaneous voice and data transmissions
over the same twisted copper wire pair. POTS Splitter Shelves and the
individual cards that populate the shelf, separate and re-combine traffic
traveling along each copper wire into the analog voice portion of a
transmission and the digital data portion, so that each signal can travel
independent of the other. This product allows for increased clarity of both
voice and data information and decreased "cross talk", or interference.

Our POTS Splitter products are available in a domestic and an European
Harmonized version to service the international market as well as in a version
that can support ADSL over ISDN lines.

Intelligent POTS Splitter (iPOTS(TM)) and Universal Bypass

We believe the mPhase iPOTS(TM) offers a much needed solution for the DSL
industry; the iPOTS(TM) enables telcos to remotely and cost-effectively
perform loop management and maintenance including line testing, qualification
and troubleshooting from a telecommunication service provider from a CO. Prior
to the introduction of the iPOTS(TM), loop management could not be remotely
performed through a conventional POTS Splitter without the use of expensive
cross connects or relay banks because of the mandatory direct current blocking
capacitors in traditional POTS splitters, as required by regulatory standards.
The (patent pending) iPOTS(TM) circuit allows test heads to perform both
narrow and wideband testing of a local telephone loop for DSL data
capabilities necessary to deploy DSL. This is done through the central office
POTS Splitter without having to manually intervene, thereby eliminating the need
to dispatch personnel from the telephone company to the field thus reducing the
cost of deploying DSL.

The iPOTS is a complete solution which includes a POTS Splitter as well as
the bypass or "intelligent" functionality and mPhases's UniversalBypass
product is a module containing the intelligent functionality which can be used
with any vendor's POTS Splitter.

mPhase has recently entered into a distribution agreement with Corning Cable
Systems for its line of intelligent products. mPhase has granted Corning, one
of the world's leading suppliers of Central Office DSL components, the
exclusive worldwide distribution of its intelligent line. This agreement
significantly increases

the potential exposure of this product line, as Corning has a global
salesforce and established relationships with the largest telephone companies
in the world.

mPhaseStretch

mPhase has recently developed a new product known as the mPhaseStretch. This
product is a digital loop extender that enhances the performance of the
Traverser(TM) System by extending the transmission distance for the delivery
of voice, video and data up to 30,000 feet. The mPhaseStretch is a powered
device that is placed on the line at approximately 9,000 feet or before the
signal begins to degrade. We believe, once additional testing is completed,
the addition of the Stretch will give mPhase the greatest serviceable distance
radius for the delivery of converged services over copper telephone wires. A
universal version of the Stretch(TM), or a version interoperable with other
vendor's DSLAM equipment is scheduled to be released later this year.

Microfilters

We have developed a complete line of microfilters, including a 2 and 4 pole
filter for use in single and multi-phone households, as well as a Network
Interface Device Splitter. These products, similar to POTS Splitters, ensure
clear and reliable service of voice and high-speed data when these two
services reside on the same line.

Target Market

mPhase's primary target market for the Traverser(TM) System includes
international and rural, domestic telephone companies. Specifically, we
believe the Traverser(TM) is the most competitive in markets that currently
have limited access to multi-channel television services, such as many parts
of Eastern Europe, Latin America and the Middle East, as well as parts of the
rural United States.

Our primary business is to develop and market the Traverser(TM) to domestic
and international telephone companies and other communications service
providers. We position the Traverser(TM) to be the most cost-effective,
reliable, scaleable and easiest to operate TV-over-ADSL solution on the
market.

mPhase also markets its products in the U.S. to small, independent telephone
companies. We believe our product is best suited in markets where the
population is dispersed with relatively long loop lengths due to our advantage
of having the longest serviceable distance radius. Additionally, smaller
telcos tend to be more nimble and faster in their decision-making process.
Also, many of these telcos are located in areas where the competition for
television services is less intense than larger telcos located in urban
markets.

mPhase primarily markets the Traverser(TM) System to international telephone
companies. Telephone companies around the world are experiencing negative
pressures on their calling revenues, encroaching competition from technologies
which were at one time complimentary (e.g., cable) and a need to increase
their per subscriber revenue. Outside of the United States, telcos are
particularly reliant on their copper infrastructure, as few countries have
upgraded their infrastructure to optics. Beyond that, the options for pay-tv
services outside the U.S. are, for the most part, limited. Consumers living
abroad have less access to digital television, leaving international telcos
well-positioned to capture a large percentage of the market. Hence, we believe
the market conditions that exist abroad are stronger for our product than
those that exist domestically.

While mPhase believes it will experience some success in the U.S., it
anticipates greater success in the international community. mPhase is focused
over the next several quarters on securing 1 to 2 large international
telephone companies as customers. To that end, it has several trials scheduled
with major international incumbent telcos, including one currently underway in
Ankara, Turkey.

mPhase is in the process of building reliable, reputable and productive
distributors and resellers and finalizing its certification process for
distributors and resellers. The Company then intends to aggressively pursue
relationships with distributors and resellers abroad that have
telecommunications experience and existing telephone company customers. We
believe that by capitalizing upon these kinds of relationships, mPhase will be
able to reach a greater international audience faster. An example of such a
relationship is

mPhase's recently established agreement with Corning Cable Systems for the
worldwide distribution of its intelligent line of products.

mPhase Television.Net, Inc.

mPhaseTV provides contracts, licensing agreements, marketing and legal
support to service providers interested in deploying television over DSL.
mPhaseTV has established licensing agreements and partnerships with content
originators of broadcast TV thus allowing service providers to offer its
subscribers a full complement of television programming. It is important to
note that the role of mPhaseTV has changed since its inception. Originally,
mPhaseTV was to act as a content aggregator, downlinking a complete lineup of
channels, digitizing those channels and uplinking them via satellite for
further delivery to each telco site. The benefit of mPhaseTV acting as a
content aggregator was that service providers would not have to build a full-
scale headend to downlink various broadcast programming from satellite
delivery systems. A head-end includes encoders, and other equipment. However,
recent advances in technology have significantly reduced the costs for a
telephone company to build a full scale headend. Therefore the role of
mPhaseTV is now targeted to providing the licenses as opposed to offering an
aggregated content transport solution. Telephone companies purchasing content
through mPhaseTV are thus required to build a full-scale digital headend.

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

As part of its cost reduction efforts, mPhase has renegotiated its joint
venture relationship with Alphastar International, Inc. that established
mPhaseTV. Under the original arrangement, mPhaseTV leased the rights to use
Alphastar's earth station satellite uplink and downlink facility in Oxford,
CT. Pursuant to an agreement dated as of June 18, 2002, mPhaseTV has
terminated its lease of the earth station and Alphstar and its affiliated
entity have converted certain accounts payable into shares of the Company's
common stock.

mPhaseTV continues to serve as a strategic asset for selling the
Traverser(TM) by having secured the rights to transmit over DSL over 80
television channels directly from the content providers eliminating the need
for a U.S. telco purchasing the Traverser(TM) from having to assemble such
rights itself from each of the content providers. mPhase currently owns a 56%
controlling interest in mPhaseTV.

Competitive Business Conditions

The telecommunications sector overall has experienced a significant global
downturn in spending over the past year. A number of once seemingly
powerhouses of the industry have faltered resulting in devasting effects
across the industry. The dramatic pull back in spending among service
providers, coupled with the malaise of the capital markets has halted the
growth of the sector. While the Company remains optimistic about the future of
broadband, we don't anticipate an upturn of events until service providers in
general are able to emerge from their current financial challenges.

In addition to the shifting economic climate, the telecommunications
equipment market is also characterized by swift technological change.
Currently, communications service providers have the option to offer several
broadband solutions in the last mile, including the existing ISDN or T-1
technologies, fiber optic or hybrid coaxial cable and wireless and satellite
delivery methods. Communications service providers may use these other
technologies instead of DSL to offer their subscribers broadband access. There
is currently a bill in Congress that, if passed, could have positive effects
on the telecommunications industry overall and mPhase in particular. The
Tauzin-Dingell bill basically reduces the regulatory pressures on the larger
incumbent telephone companies in the U.S. It is speculated that this reduced
pressure on the RBOCs could result in greater spending among these companies
and potentially more funding available for the Company's products.

Based upon current telecommunications industry standards and deployment
methodologies, mPhase believes that DSL can compete favorably with these other
technologies, especially outside of the United States. In particular,
telephone companies and other copper-wire based service providers, which are
interested in maximizing the installed copper wire infrastructure from the
standpoint of cost effectiveness and ease of development, will favor DSL or
other copper-based broadband technologies.

mPhase's competitors that sell DSL systems like the Traverser(TM) or other
technologies, which incorporate broadband solutions over copper wire include:
ADC, Alcatel S.A., Copper Mountain, Advanced Fiber Communications, Innovia,
Ericsson, Fujistsu, Lucent Technologies, Marconi, NEC, Next Level
Communications, Nortel, Huawei Technologies Corporation Limited, Nokia, DVTel,
Inc., Turnstone, Paradyne Networks, Samsung, 2Wire, Siemens, TUT Systems,
Motorola, and Westell. In addition, we also compete with ImagicTV, Minerva and
Myrio Corporation, which provide infrastructure software products to deliver
multi-channel digital television over telephone networks by using Internet
Protocol.

Relative to other platforms that deliver voice, video and data over DSL, we
believe that mPhase has the only non-Internet-Protocol platform that we are
aware of on the market. However, there are other IP-based platforms, such as
the system offered by Alcatel and Lucent and Innovia that enable the same
suite of services to be delivered using IP.

Next Level Communications, among others, offers a VDSL platform enabling the
delivery of voice, video and data over copper telephone wires. However,
because its platform is based on VDSL, it requires telcos to have a fiber-to-
the-neighborhood infrastructure. For some telcos the cost of this type of
infrastructure upgrade is prohibitive. Other equipment manufacturers offer
fiber-to-the-home solutions. While fiber in the home is an extremely robust
transmission medium, it is time and capital intensive to deploy.

Hybrid Fiber Coaxial Cable

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

Importantly, telephone companies have certain infrastructure advantages
compared to cable companies. A coaxial cable network is based on a shared
platform, with individual users sharing a common pipe or link between a
central node back to the Internet point-of-presence. Therefore, despite the
large bandwidth capacity of a coaxial cable infrastructure, the ultimate
bandwidth for individual users is negatively affected as more users access the
Internet simultaneously. In contrast, DSL is a point-to-point exclusive
connection. No matter how many users are accessing the Internet at the same
time, subscribers will not experience slowed data rates in the last mile due
to congestion in the pipe.

Satellite

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

Manufacturing

In late 1999, mPhase contracted with Flextronics, a major third party
contract manufacturer, to manufacture a prototype of its Traverser(TM) central
office equipment and Intelligent Network Interfaces(TM) Set

Top-Box. The Company terminated its relationship with Flextronics in March
2002. In general, mPhase subcontracts all of the manufacturing of our products
to outside sources including related parties such as Janifast Ltd.

Outsourcing

The Company practices an outsourcing model whereby it contracts with third
party vendors to perform certain functions rather than performing those
functions internally. For instance, mPhase outsources digital engineering
development for the Traverser(TM) System to GTARC. It also outsources analog
engineering development and certain administrative functions to Microphase
Corporation. With regard to manufacturing, mPhase is targeting leading
contract manufacturing companies with strategically located facilities in
North America, Mexico and Asia with which it can establish long-term
relationships. By using contract manufacturers, mPhase will attempt to avoid
the substantial capital investments required for internal production.
Additionally, mPhase has just recently entered an outsourcing arrangement for
the sales and marketing of its intelligent line of component products with
Corning Cable Systems. Corning will be exclusively reselling mPhase's
intelligent component products worldwide.

Patents and Licenses

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

Because we may license our technology and products in foreign markets, we
may also seek foreign patent protection. With respect to foreign patents, the
patent laws of other countries may differ significantly from those of the
United States as to the patentability of our products or technology. In
addition, it is possible that competitors in both the United States and
foreign countries, many of which have substantially greater resources and have
made substantial investments in competing technologies, may have applied for,
or may in the future apply for and obtain, patents which will have an adverse
impact on our ability to make and sell our products. There can also be no
assurance that competitors will not infringe on our patents or will not claim
that we are infringing on their patents. Defense and prosecution of patent
suits, even if successful, are both costly and time consuming. An adverse
outcome in the defense of a patent suit could subject us to significant
liabilities to third parties, require disputed rights to be licensed from
third parties or require us to cease our operations.

The intellectual property owned and licensed by the Company falls into two
general categories, analog and digital intellectual property.

mPhase owns the analog intellectual property which can be characterized as
filter technology. This intellectual property includes:

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

o ADSL filters, which are filters that conform to the worldwide DSL
standard and are utilized in the transmission of data and voice service;
and

o Bypass for telephone Splitter System, which enables an automated and
remote bypass of the POTS Splitter so full metallic testing can be
performed.

We have a pending patent application which was filed in June 1999 claiming
priority to three provisional patent applications for the analog portion of
our technology.

mPhase exclusively licenses our digital intellectual property from GTRC. We
also have an exclusive, worldwide license to manufacture and market products
using the technology developed by GTARC under our contract with them. The
exclusive license with GTRC is applicable for the duration of their patent
protecting the system design and other technology related to the
Traverser(TM). The digital intellectual property that we license provides
several unique aspects of the Traverser(TM). Among them is the backplane
design, which

provides every subscriber the ability to view any channel available. All
subscribers in a given system could be watching the same channel at the same
time. The intellectual property licensed exclusively to mPhase by GTRC
includes the below mentioned patents.

A patent for the System and Method for the Delivery of Digital Video and
Data over a Communications Channel was issued on November 28, 2000 to the
Georgia Tech Research Corporation.

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

A patent was issued on November 27, 2001 to the Georgia Tech Research
Corporation for the Method and Apparatus for Combining a Plurality of 8B/10B
Encoded Data Streams addresses video data transport between digital headends
and the access network serving subscribers. A further patent is pending
covering other methods of video program transport.

Another patent was recently issued on August 13, 2002 covering what mPhase
calls the System Management Workstation (SMW). Specifically, this patent
entitled, "Computer System and Method for Providing Digital Video and Data
Over a Communication Channel" addresses the means by which the computer system
and method manages the already patented bus or broadcast backplane, for the
delivery of converged voice, video and data. The management system covered by
this patent performs functions such as monitoring the health of the
Traverser(TM) system, managing a database of user information, as well as
linking multiple central offices to a master system control station.

Georgia Tech also has patents pending that protect:

o apparatus and methods of remote control of the Intelligent Network
Interface(TM); and,

o systems and methods to provide subscribers means to playback previously
recorded video content.

We also rely on unpatented proprietary technology, and we can make no
assurance that others may not independently develop the same or similar
technology to ours or otherwise obtain access to our unpatented technology. If
we are unable to maintain the proprietary nature of the Traverser(TM)
technology, our future operations would likely be adversely affected.

Government Regulation

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

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

Our products and equipment were designed to comply with the aforementioned
rules and regulations. The POTS splitter and filter products were already
certified with FCC Part 68. The Traverser(TM) is still undergoing FCC Part 15
certification process.

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

Research and Development

mPhase has designed the Traverser(TM) and its ancillary component parts in
conjunction with multiple research and development partners. GTARC conducts
the majority of our digital research and development for the Traverser(TM).
Microphase Corporation contributed the analog technology incorporated in the
design of the Traverser(TM), as well as providing ongoing development of
analog DSL components. mPhase has initiated negotiations for the development
of Version 2.0 with a well-established research and development organization
to compliment GTARC. Version 2.0 will be a cost-reduced version of Version
1.0, offering similar functionality at a significantly reduced cost. We
anticipate that GTARC will be involved in a reduced role with the development
efforts of Version 2.0.

As of June 30, 2002, we had been billed approximately $13,424,300 for
research and development conducted by GTARC.

On March 26, 1998, we entered into a license agreement with GTRC which has
the patent on the Digital Video and Data Delivery System technology. GTRC has
granted us the exclusive license to use and re-sell this technology in the
Traverser(TM). We are required to pay GTRC royalties of 5% on the sales of the
Traverser(TM). The agreement expires automatically when the patents covering
the invention expire.

Employees

mPhase presently has approximately 12 full-time employees, two of whom are
also employed by Microphase Corporation. See the description in the section
entitled "Certain Relationships and Related Transactions."

RISK FACTORS

RISKS RELATED TO FINANCIAL ASPECTS OF OUR BUSINESS

We will continue to incur losses from operations and negative cash flow for
the foreseeable future and will need to depend on external funding which may
not be available in the capital markets.

We have not been profitable from our inception in October, 1996 and through
June 30, 2002 we have (a) incurred substantial operating losses and net losses
amounting to accumulated net losses of approximately $101,370,312 million and
a stockholders' deficit of $42,849 respectively and (b) cumulative negative
cash flow of approximately $42.4 million.

The report of the Company's outside auditors' Rosenberg Rich Baker Berman &
Company with respect for the fiscal year ended June 30, 2002 stated that there
is substantial doubt of the Company's ability to continue as a going concern.

We expect to continue to have net losses for the foreseeable future and
management estimates that the Company will need to raise not less than
$1.5 million in additional cash in the next 12 months through further
offerings to continue our current level operations.

We may be forced to raise additional cash for operations by selling
additional shares of our common stock at depressed prices causing further
dilution to our shareholders.

Management estimates that the Company will need additional capital of
$1.5 million between now and June 30, 2003 to continue operations (a) through
a further reduction of our cash expenditures, (b) sales, (c) external funding
or (d) a combination of the foregoing.

We may be unsuccessful in raising additional needed capital in the current
capital markets because of the depressed price of our stock as a
telecommunications equipment provider.

Our common stock is a highly speculative investment and is suitable only for
such investors with financial resources that enable them to sustain the loss
of their entire investment in such stock.

Because the price of our common stock is less than $5.00 per share and is
not traded on either the NASDAQ National or NASDAQ Small Cap exchanges it is
considered to be a "penny stock" limiting the type of customers that broker-
dealers can sell to consisting only of established customers and Accredited
Investors (within the meaning of Rule 501 of Regulation D of the Securities
Act of 1933, as amended) thereby limiting its liquidity.

RISK FACTORS RELATED TO OUR OPERATIONS

We have had to date no material revenues derived from sales of our
Traverser(TM) or our new line of Intelligence POTS Splitters.

Sales from our POTS Splitter and other DSL products have experienced a
significant decline as a result of the significant downturn in capital
spending by telecommunications service providers during the past two years.

Our Traverser(TM) product is undergoing a significant cost-reduction that
will cost approximately $1 million which we will need to raise through the
exercise of any warrant shares or through additional private placements of our
common stock or through sales revenues of our component DDSL products.

We depend upon GTRC for continued technical assistance in connection with
deployment of the Traverser(TM) and our business would be materially adversely
affected if GTRC were to terminate our relationship.

We owe GTRC approximately $1.8 million and are attempting to finalize an
agreement in principal to convert a portion of such payables into our common
stock and a portion into a promissory note, however, no assurances can be
given that such an agreement will be reached.

Management contracts with our CEO and COO have recently expired and are
currently being renegotiated and no assurances can be given that the Company
will reach a new agreement with such key individuals.

RISK FACTORS RELATED TO OUR TARGETED MARKETS

Our sales cycle for our Traverser(TM) product is lengthy (since it involves
a major strategic decision by a telecommunications service provider or
equipment vendor) and we may incur significant marketing expenses with no
guarantee of future sales.

Our Traverser(TM) product, that delivers voice, data and television are best
suited to a telecommunications service providers outside of the United States
where coaxial cable is not present.

Selling internationally requires the ability to successfully sell
infrastructure that is subject to regulation and other risks associated with
doing business in countries outside of the United States.

A significant market for our Traverser(TM) product may never develop if
telephone service providers fail to successfully deploy broadband services
including high speed data and television.

Telephone service providers worldwide have significantly decreased capital
expenditures for broadband as a result of the current economic downturn in the
industry.

Certain telephone companies (especially in developing international
economies) may have copper wire infrastructure that is not of sufficient
quality to accommodate the Traverser(TM).

Our Traverser(TM) product may fail to meet foreign regulatory standards.

Our customers may need to build a digital head-end to download television
programming content from satellites involving a significant additional capital
expenditure to utilize the digital Television capabilities of the
Traverser(TM) product.

The telecommunications equipment industry is subject to swift and continuing
technological changes that could render the Traverser(TM) product obsolete.

Intense competition in the telecommunications equipment market could limit
or prevent our profitability.

Our competitors that sell DSL systems that compete with the Traverser(TM)
include much larger and better known and capitalized companies with
significantly greater selling and marketing experience and financial resources
such as ADC, Alcatel S.A., Calix Catena Networks, Copper Mountain, Advanced
Fiber Communications, ECT Telecommunications, Ericsson, Fujistsu, Marconi,
Motorola, NEC, Nortel, Huawei Technologies, Net to Net Technology, Nokia, UTS
Starcom, DVTEL, Inc., Turnstone, Paradyne Networks, Samsung, 2 Wire, Siemens,
TuT Systems, and Optibase Wesell.

We also face competition from companies that provide infrastructure software
products to deliver multi-channel digital television over telephone such as
Imagic TV and Myrio Corporation.

Our telephone service provider customers face competition from cable-based
technologies, fixed wireless technologies and satellite technologies which may
cause them not to deploy our Traverser(TM) product.

Although the Traverser(TM) product is patent-protected and not the subject
of any infringement allegations, the telecommunications industry, in general,
is characterized by a large number of patents and frequent patent litigation
based upon claims of patent infringement when compared to other industries.

mPhase's products are subject to various regulations and certifications in
different countries and no assumptions can be made that such products will
achieve such certifications or satisfy regulatory compliance standards.

ITEM 2. PROPERTIES

The corporate headquarters is located at 587 Connecticut Avenue, Norwalk, CT
06854-1711. The Company leases this office space from Microphase Corporation
under a facilities agreement with Microphase that provides that mPhase lease
office space, lab facilities and administrative staff on a month-to-month
basis for $11,340/month. The Company also maintains an office at the Georgia
Advanced Telecommunications Technology Center in Atlanta, Georgia.

ITEM 3. LEGAL PROCEEDINGS

The Company has recently been advised that, following an investigation by
the staff of the Securities and Exchange Commission, the staff intends to
recommend that the Commission file a civil injunctive action against
Packetport.com, Inc. (hereinafter "Packetport") and its Officers and
Directors. Such recommendation relates to alleged civil violations by
Packetport and such Officers and Directors of various sections of the Federal
Securities Laws. The staff has alleged civil violations of Sections 5 and
17(a)of the Securities Act of 1933 and Sections 10(b)and 13(d)of the
Securities Exchanges Act of 1934. As noted in other public filings of mPhase,
the CEO and COO of mPhase also serve as Directors and Officers of Packetport.
Such persons have advised mPhase that they deny any violation of law on their
part and intend to vigorously contest such recommendation.

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

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

As described in mPhase's Definitive Proxy Statement (DEF-14A), filed on
April 8, 2002, the following proposals were submitted to shareholders for
their approval at an annual meeting held on May 15, 2002: (1) a proposal to
elect seven (7) Directors to hold office until the next Annual Meeting; and
(2) a proposal to ratify the appointment of Arthur Andersen LLP or such other
qualified auditors as the Board of Directors may determine is necessary, as
the external auditors for mPhase's fiscal 2002 year. The aforementioned
proposals are explained in greater detail in the Proxy Document; shareholders
of record as of April 1, 2002 were entitled to vote before the deadline of May
15, 2002, and the proposals were approved by the shareholders on that date,
with the minor exception that the auditors appointed by the Board and the
shareholders at the meeting was in fact, Rosenberg Rich Baker Berman & Company
("other qualified auditors").

The vote was as follows: (1) Election of Directors - 32,280,669 votes were
cast in favor of the election of each of the seven directors; and (2) Ratify
Independent Auditors - 31,785,416 votes were cast in favor of ratifying
Rosenberg Rich Baker Berman & Company as the Independent Auditors. Each of the
directors was elected by the same number of votes in favor and there were no
votes against their election.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(A) MARKET PRICES OF COMMON STOCK

The primary market for mPhase's common stock is the NASDAQ OTC Bulletin
Board, where it trades under the symbol "XDSL." The Company became publicly
traded through a merger with Lightpaths TP Technologies, formerly known as
Tecma Laboratories, Inc. pursuant to an agreement dated February 17, 1997. The
following table sets forth the high and low closing prices for the shares for
the periods indicated as provided by the NASDAQ's OTCBB System. The quotations
shown reflect inter-dealer prices, without retail mark-up, markdown, or
commission and may not represent actual transactions. These figures have been
adjusted to reflect a 1 for 10 reverse stock split on March 1, 1997.

YEAR/QUARTER HIGH LOW
------ -----

Fiscal year ended June 30, 2000
First Quarter ............................................... $ 9.25 $2.97
Second Quarter .............................................. 6.19 2.50
Third Quarter ............................................... 19.13 6.50
Fourth Quarter .............................................. 14.13 6.00
Fiscal year ended June 30, 2001
First Quarter ............................................... $ 9.25 $3.00
Second Quarter .............................................. 5.94 1.47
Third Quarter ............................................... 3.38 1.22
Fourth Quarter .............................................. 2.61 1.03
Fiscal year ended June 30, 2002
First Quarter ............................................... $ 1.67 $ .31
Second Quarter .............................................. .86 .31
Third Quarter ............................................... .62 .27
Fourth Quarter .............................................. .50 .23

(B) HOLDERS

As of June 30, 2002, mPhase had 60,807,508 shares of common stock
outstanding and approximately 15,000 stockholders of record.

mPhase has never declared or paid any cash dividends on its common stock and
does not anticipate paying any cash dividends in the foreseeable future. The
Company currently intends to retain future earnings, if any, to finance
operations and the expansion of its business. Any future determination to pay
cash dividends will be at the discretion of the Board of Directors and will be
based upon mPhase's financial condition, operating results, capital
requirements, plans for expansion, restrictions imposed by any financing
arrangements and any other factors that the Board of Directors deems relevant.

Issuance of Unregistered Securities

The information required by this item is set forth in Note 10 on F-21
attached hereto and in 10-Q's dated September 30, 2001, December 31, 2001, and
March 31, 2002.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the historical financial statements and notes included in
this annual report. The statement of operations data from October 2, 1996

(date of inception) to June 30, 1997 and for the year ended June 30, 1998, and
the balance sheet data as of June 30, 1997 and 1998, are derived from
financial statements that have been audited by Schuhalter, Coughlin & Suozzo,
LLC, independent auditors, and are included in this document. The statement of
operations data for the years ended June 30, 1999, 2000, and 2001 and the
balance sheet data as of June 30, 1999, 2000, and 2001 are derived from
financial statements that have been audited by Arthur Andersen LLP.,
independent auditors. The statement of operations data for the year ended June
30, 2002 and the balance sheet data as of June 30, 2002 have been audited by
Rosenberg Rich Baker Berman & Company, independent auditors, and are included
in this document.

From Inception Year Ended June 30,
(October 2, 1996) -----------------------------------------------------
to June 30 1997 1998 1999 2000 2001 2002
----------------- ---------- ----------- ----------- ----------- -----------
(in thousands, except share data)

STATEMENT OF OPERATIONS DATA:
Total revenues ........................ $ -- $ -- $ -- $ 279 $ 10,524 $ 2,582
---------- ---------- ----------- ----------- ----------- -----------
Costs and Expenses:
Cost of sales ........................ -- -- -- 132 5,805 2,415
Research and
development......................... 192 2,297 3,563 10,157 10,780 3,820
Licensing Fees ....................... 37 450 -- -- -- --
General and
administrative...................... 541 1,710 4,683 17,516 16,151 6,490
Depreciation and
amortization........................ 11 29 410 471 660 670
Non-cash compensation
charge.............................. -- -- 13,003 10,343 1,171 548
---------- ---------- ----------- ----------- ----------- -----------
Operating loss ........................ (781) (4,036) (21,659) (38,340) (24,043) (11,361)
Other income (expense), net ........... -- (305) (1,162) 20 -- 31
Interest income (expense) ............. -- -- (18) 158 43 (26)
---------- ---------- ----------- ----------- ----------- -----------
Net loss .............................. $ (781) $ (4,341) $ (22,839) $ (38,162) $ (24,000) $ (11,356)
========== ========== =========== =========== =========== ===========
Basic and diluted net
loss per share ........................ $ (.10) $ (.46) $ (1.42) $ (1.41) $ (.72) $ (.23)
========== ========== =========== =========== =========== ===========
Shares used in basic and diluted
net loss per share .................... 7,806,487 9,336,340 16,038,009 26,974,997 33,436,641 49,617,280
========== ========== =========== =========== =========== ===========

Year ended June 30
--------------------------------------------------------
1997 1998 1999 2000 2001 2002
----- ------- ------- ------- ------- ------
(in thousands)

BALANCE SHEET DATA:
Cash and cash equivalents ............................................. $ 162 $ -- $ 7,978 $ 6,432 $ 31 $ 47
Working capital (deficit) ............................................. (212) (3,073) 4,936 3,557 (1,458) (94)
Total assets .......................................................... 369 2,175 10,624 11,184 8,997 6,942
Long-term obligations, net of current portion ......................... -- -- -- -- 90 1,625
Total stockholders' equity (deficit) .................................. $ (23) $ (915) $ 6,974 $ 7,329 $ 1,865 $ 728

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

Three months ended
-------------------------------------------------------
September 30 December 31 March 31 June 30
------------ ----------- ----------- -----------
(in thousands, except share amounts)
(unaudited)

FISCAL 2002 QUARTERLY
STATEMENT OF OPERATIONS DATA:
Total revenues ......................................................... $ 537 $ 545 $ 866 $ 634
----------- ----------- ----------- -----------
Costs and Expenses:
Cost of sales ......................................................... 457 530 724 704
Research and development .............................................. 1,111 1,257 539 912
General and administrative ............................................ 2,644 1,471 1,262 1,114
Depreciation and amortization ......................................... 193 209 136 132
Non-cash compensation charge .......................................... 217 170 93 68
----------- ----------- ----------- -----------
Operating loss ......................................................... (4,085) (3,092) (1,888) (2,296)
Interest expense ....................................................... (10) (1) (5) (10)
----------- ----------- ----------- -----------
Loss before other income (expense) ..................................... 4,095 3,093 1,893 2,306
Other income (expense), net ............................................ 32 5 86 19
----------- ----------- ----------- -----------
Net loss ............................................................... $ (4,063) $ (3,088) $ (1,807) $ (2,287)
=========== =========== =========== ===========
Basic and diluted net loss per share ................................... $ (.10) $ (.07) $ (.03) $ (.04)
=========== =========== =========== ===========
Shares used in basic and diluted net loss per share .................... 42,037,506 44,645,458 55,606,168 56,459,167
=========== =========== =========== ===========

FISCAL 2001 QUARTERLY
STATEMENT OF OPERATIONS DATA:
Total revenues ......................................................... $ 1,865 $ 5,231 $ 2,959 $ 469
----------- ----------- ----------- -----------
Costs and Expenses:
Cost of sales ......................................................... 872 2,779 1,689 465
Research and development .............................................. 3,162 3,318 2,220 2,080
General and administrative ............................................ 3,125 2,968 2,873 7,185
Depreciation and amortization ......................................... 123 136 200 201
Non-cash compensation charge .......................................... 362 356 232 221
----------- ----------- ----------- -----------
Operating loss ......................................................... (5,779) (4,326) (4,255) (9,683)
Interest income ........................................................ 28 8 4 3
----------- ----------- ----------- -----------
Net loss ............................................................... $ (5,751) $ (4,318) $ (4,251) $ (9,680)
=========== =========== =========== ===========
Basic and diluted net loss per share ................................... $ (.18) $ (.13) $ (.12) $ (.27)
=========== =========== =========== ===========
Shares used in basic and diluted net loss per share .................... 31,562,727 32,324,964 34,205,000 35,702,797
============ =========== =========== ===========

FISCAL 2000 QUARTERLY
STATEMENT OF OPERATIONS DATA:
Total revenues ......................................................... $ -- $ -- $ 40 $ 240
----------- ----------- ----------- -----------
Costs and Expenses:
Cost of sales ......................................................... -- -- 19 113
Research and development .............................................. 1,491 1,904 2,858 3,904
General and administrative ............................................ 1,164 1,184 7,542 7,626
Depreciation and amortization ......................................... 114 116 118 123
Non-cash compensation charge .......................................... 46 42 5,234 5,022
----------- ----------- ----------- -----------
Operating loss ......................................................... (2,815) (3,246) (15,731) (16,548)
Other income, net ...................................................... -- -- -- 20
Interest income ........................................................ 18 41 57 42
----------- ----------- ----------- -----------
Net loss ............................................................... $ (2,797) $ (3,205) $ (15,674) $ (16,486)
=========== =========== =========== ===========
Basic and diluted net loss per share ................................... $ (.11) $ (.12) $ (.56) $ (.55)
=========== =========== =========== ===========
Shares used in basic and diluted net loss per share .................... 24,942,965 25,907,602 27,743,996 29,729,060
=========== =========== =========== ===========

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS AND PLAN OF OPERATIONS

The following is management's discussion and analysis of certain significant
factors, which have affected mPhase's financial position and should be read in
conjunction with the accompanying financial statements, financial data and the
related notes.

RESULTS OF OPERATIONS

OVERVIEW

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

mPhase was organized on October 2, 1996. On February 17, 1997, the Company
acquired Tecma Laboratories, Inc., a public corporation in a reverse merger
transaction. This resulted in the Company's stock becoming publicly traded on
the NASDAQ Over-the-Counter Bulletin Board. On June 25, 1998, the Company
acquired Microphase Telecommunications, Inc. in a stock for stock exchange,
whose principal assets included patents and patent applications utilized in
the Company's Traverser(TM) product. On August 21, 1998, mPhaseTV.net, Inc.
was organized as a wholly-owned subsidiary to market interactive television
and e-commerce revenue opportunities. This subsidiary is dissolved. On March
2, 2000, mPhase acquired an interest in mPhaseTelevision.Net, Inc., a joint
venture organized to provide digital television programming content to service
providers deploying TV over DSL.

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

The Company has incurred net losses totaling approximately $101.4 million
during the development of its flagship product. In fiscal 2001, the Company
had anticipated that the sales of its component products would be able to
supplement the underwriting of the completion of our flagship product, the
Traverser(TM). In fiscal 2002 these sales declined with the overall decline of
DSL deployments and spending in the telephonic industry. The Company believes
that sales of its POTS splitter product will continue to be slow during most
of fiscal year 2003 until telecommunications spending increases. The Company
believes that its new iPOTS product will benefit from some of the existing DSL
deployments in the future. Until such time such revenues are realized, the
Company intends on maintaining its reduced cost structure to minimize its
losses, which management believes will permit the Company to ultimately
achieve profitability. The Company believes the initial major deployments and
the resultant revenues of its flagship product, the Traverser(TM), are not
expected until late in fiscal year 2003 or the first part of its fiscal year
2004, which along with any upturn of spending in the telephonic industry will
increase sales and improve the Company's margins and provide the Company the
opportunity to attain profitability.

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

Cost of revenues. The costs necessary to generate revenues from the sale of
POTS Splitter Shelves and other DSL component products include direct
material, labor and manufacturing. mPhase paid these costs to Janifast, Ltd.,
which has facilities in the People's Republic of China and is owned by and
managed by certain senior executives of the Company. The cost of revenues also
includes certain royalties paid to Microphase Corporation, a privately held
corporation organized in 1955, which shares certain common management with the
Company. Costs for future production of the Traverser(TM) product will consist
primarily of payments to manufacturers to acquire the necessary components and
assemble the products and future patent royalties payable to GTRC.

Research and development. Research and development expenses consist
principally of payments made to GTRC and Microphase Corporation for
development of the Traverser(TM) product. All research and development costs
are expensed as incurred.

General and administrative. Selling, general and administrative expenses
consist primarily of salaries and related expenses for personnel engaged in
direct marketing of the Traverser(TM), the POTS Splitter Shelves and other DSL
component products, as well as support functions including executive, legal
and accounting personnel. Certain administrative activities are outsourced on
a monthly fee basis to Microphase Corporation. Finally, mPhase leases the
principal office from Microphase Corporation.

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

Non-cash compensation charge. mPhase incurred non-cash compensation charges
of $1,170,903 and $548,550, for the fiscal years ended 2001 and 2002,
respectively. The Company makes extensive use of stock options and warrants as
a form of compensation to employees, directors and outside consultants.

TWELVE MONTHS ENDED JUNE 30, 2002 VS. JUNE 30, 2001

Revenues. Total revenues for the year ended June 30, 2002 decreased to
$2,582,446 from $10,524,134 for the year ended June 30, 2001. The decrease was
primarily attributable to slowing sales of the Company's POTS Splitter product
line, caused by the general downturn in the telecommunications market,
including among customers that order component products from the Company. The
Company continues to believe that its line of POTS Splitter products is
positioned to be competitively priced with high reliability and connectivity,
and as such has the potential to be significant part of DSL deployment
worldwide. The

Company cannot predict when the demand for telecommunication equipment will
resume, however we do not expect significant sales in the first two quarters
of fiscal 2003.

Cost of revenues. Cost of sales was $2,415,129 for the year ended June 30,
2002 as compared to $5,804,673 in the year ended June 30, 2001. Cost of
revenues declined for the twelve months ended June 30, 2002 compared to the
prior period ending June 30, 2001 primarily because of decreased sales.
Operating margins for the period ended June 30, 2002 were 6%. The margins have
varied dramatically as spending among telecommunication providers has
contracted, coupled with downward pressures related to the supply and demand
of telecommunications products. The single most significant reason the margins
decreased dramatically was due to the reduced selling price of our POTS
Splitter product. Additionally, the Company has offered discounts to certain
customers in the period ended June 30, 2002 causing the margin to decrease.
These discounts were to exisiting customers to accelerate collections and
amounted to $14,389 for the period.

Research and Development. Research and development expenses were $3,819,583
for the year ended June 30, 2002 as compared to $10,779,570 in the year ended
June 30, 2001. Such expenditures include $450,000 incurred with GTRC for the
year ended June 30, 2002 as compared to $3,814,000 during the comparable
period in 2001. In addition we incurred $1,212,594 with Microphase and
additional expenses with other strategic vendors for the year ended June 30,
2002 as compared to $3,405,975 during the comparable period in 2001.

The decrease in research and development expenses with Microphase is due to
the completion of the development of the POTS Splitter product line. The
decrease in research and development expense of approximately $3.1 million is
due to the termination of the Company's relationship with a third party
manufacturer, Flextronics, with whom the Company had incurred substantial
costs for prototypes and pre-manufacturing costs.

The decrease in research expenditures incurred with GTRC is due to the
Company's nearing completion of the design and manufacture of proptypes of the
set top box and the central office equipment associated with its Traverser(TM)
product in 2002. Generally, as the Company anticipates the completion of its
Traverser(TM) product, overall research and development expenses are expected
to decline, with variations based upon product cost reductions, product
enhancements, if any, when such are undertaken. The Company anticipates the
completion of its flagship product line and a leveling off of research and
development costs to reduce the demands on working capital and in turn, this
will have a positive effect on the Company's financial position going forward.

Research expenditures incurred with Microphase were related to the
continuing development of the Company's DSL component products, including the
Company's line of POTS Splitters and Microfilters and the Company's newest
products, the iPOTS(TM) and mPhase Stretch. We believe the mPhase iPOTS(TM)
offers a much needed solution for the DSL industry; the iPOTS(TM) enables
telcos to remotely and cost-effectively perform loop management and
maintenance including line testing, qualification and troubleshooting. Prior
to the introduction of the iPOTS(TM), loop management could not be remotely
performed through a conventional POTS Splitter without the use of expensive
cross connects or relay banks because of the mandatory direct current blocking
capacitors in traditional POTS splitters, as required by various regulatory
standards. The unique (patent pending) iPOTS(TM) circuit allows most test
heads to perform both narrow and wideband testing of the local loop through
the central office POTS Splitter without having to physically disconnect the
POTS Splitter, thereby eliminating the need to dispatch personnel and a
truckroll. The Company anticipates significant demand for this product, as it
significantly reduces the cost of deploying and maintaining DSL services. Also
recently developed is the DSL loop extender product called mPhaseStretch. This
product extends the service distance for the mPhase Traverser(TM) and can be
used in conjunction with other DSL services. The Company anticipates
significant demand for the Stretch loop extender product as it addresses a
primary issue in DSL services.

General and Administrative Expenses. Selling, general and administrative
expenses were $6,490,373 for the year ended June 30, 2002 down from
$16,150,711 for the comparable period in 2001. The decrease in the selling,
general and administrative costs included a decrease of non-cash charges
relating to the issuance of common stock and options to consultants, which
totaled $2,445,561 for the year ended June 30, 2002 as compared to $6,227,552
during the comparable period in 2001. The decrease also occurred as a result
of the

reduction in workforce in Fiscal 2002 and the reduction in marketing expenses
in Fiscal 2002 in response to the current contraction in the
telecommunications equipment market. Other components of the decrease in
selling, general and administrative expenses were a substantial decrease in
payroll of approximately $1,100,000 to $450,000, use of outside consultants of
approximately $870,000 to $70,000, marketing expenses such as trade shows of
$1,200,000 to $270,000, and advertising expenses of $415,000 to $13,000, all
of which approximated $2,800,000.

Net loss. mPhase recorded a net loss of $11,245,361 for the year ended June
30, 2002 as compared to a loss of $23,998,734 for the same period ended June
30, 2001. This represents a loss per common share of $(.23) in 2002 as
compared to $(.72) in 2001, based upon weighted average common shares
outstanding of 49,617,280 and 33,436,641 during the periods ending June 30,
2002 and June 30, 2001, respectively.

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

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

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

Research and development. Research and development expenses increased from
$10,156,936 in the year ended June 30, 2000 to $10,779,570 for the year ending
June 30, 2001. Such amount includes $4,564,000 incurred with GTRC for such
twelve-month period ended in 2000 as compared to $3,814,000 during the
comparable period in 2001. Research and development expenses incurred
primarily with respect to Microphase Corporation and Flextronics increased
from $3,328,443 to $3,405,975 for the twelve-month period ended June 30, 2000
as compared to the twelve-month period ended June 30, 2001.

Research expenditures incurred with Flextronics were due to our increased
efforts in the deployment of the Traverser(TM), including the design and
manufacture of prototypes of the set-top box. Increased research and
development expenditures incurred with Microphase Corporation and Janifast
Corporation were primarily related to development work associated with the
POTS Splitter, and other DSL components.

The increase in other research and development expenses during Fiscal 2001
was due to a full year of operations of the Company's joint venture, mPhase
Television.Net. The major costs incurred by this joint venture were payroll
expenses attributable to research and development of the Company's
transmission capabilities and acquisition of television content.

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

Net loss. mPhase recorded a net loss of $23,998,734 for the year ended June
30, 2001 as compared to a loss of $38,161,542 for the same period ended June
30, 2000. This represents a loss per common share of $(.72) in 2001 as
compared to $(1.41) in 2000, based upon weighted average common shares
outstanding of $41,344,367 and 31,404,540 during the periods ending June 30,
2001 and June 30, 2000, respectively.

PLAN OF OPERATIONS

RESEARCH AND DEVELOPMENT ACTIVITIES

GTARC has conducted a significant amount of research and development for
mPhase pursuant to a research agreement comprised of a series of delivery
orders, which outline the timing, necessary actions and form of payment for
specific tasks related to the completion of certain components of the
Traverser(TM).

For the years ended June 30, 2001 and 2002 and for the period since
inception (October 2, 1996) to June 30, 2002, approximately $3,814,000,
$450,000 and $13,424,300 respectively, has been billed to mPhase for research
and development conducted by GTARC. Subsequent to June 30, 2002, the Company
and GTRC and GTARC entered into a Memorandum of Intention to convert all
amounts outstanding and exchange mutual releases in consideration for two term
Notes totaling $624,235 with varied payments through 2007 and warrants to
purchase shares of the Company's common stock through 2007, at a price and
formula to be agreed upon. mPhase is the sole, worldwide licensee of the
technology developed by GTARC in conjunction with the Traverser(TM) product
line. Upon completion of the commercial product, GTRC may receive a royalty of
up to 5% of product sales.

The amount of research and development costs the Company has expended from
October 2, 1996, its inception date, through June 30, 2002 was $30,808,774.
During the year ended June 30, 2002, the Company incurred research and
development expenses of $3,819,583 related to the continued development of its
current DSL products and services.

STRATEGIC ALLIANCES IMPLEMENTED

mPhase Technologies, Inc. has signed a worldwide distribution agreement with
Corning Cable Systems, an industry-leading manufacturer of fiber optic and
copper communications network solutions and pioneer of DSL POTS splitter
applications. This agreement enables Corning Cable Systems to resell mPhase's
line of "intelligent" DSL component products including the recently released
Intelligent POTS Splitter (iPOTS(TM)) and UniversalBypass(TM), as well as
future "intelligent" products. This relationship expands mPhase's distribution
network extensively via Corning Cable Systems' worldwide sales force.

Based on this agreement, mPhase will act as the original equipment
manufacturer for Corning Cable Systems, jointly manufacturing the iPOTS
product set, as well as providing sales support and continuing product design
and development work. mPhase is already engaged with Corning Cable Systems in
the development of a next generation iPOTS for a major RBOC.

CRITICAL ACCOUNTING POLICIES

REVENUE RECOGNITION

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

As required, mPhase has adopted the Securities and Exchange Commission
("SEC") Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements", which provides guidelines on applying generally
accepted accounting principals to revenue recognition based upon the
interpretations and practices of the SEC. The Company recognizes revenue for
its POTS Splitter Shelf and other DSL component products at the time of
shipment, at which time, no other significant obligations of the Company
exist, other than normal warranty support.

The deferred revenues balance recorded on the Balance Sheet for the fiscal
year ended June 30, 2002 is made up of three customer deposits consisting of
$156,180 in the aggregate for the POTS product and of $58,000 for final
customer acceptance of the Traverser(TM) product which will occur upon
commercial production of such product.

RESEARCH AND DEVELOPMENT

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

INCOME TAXES

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

Utilization of net operating losses generated through June 30, 2002 may be
limited due to "changes in control" of our common stock that occurred.

STOCK-BASED COMPENSATION

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

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

INVENTORY RESERVE AND VALUATION ALLOWANCE

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

MATERIAL RELATED PARTY TRANSACTIONS

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

Hart Telephone, which is scheduled to commence upon the commercial production
of the Traverser(TM). A member of mPhase's Board of Directors is employed by
Lintel, Inc., the parent corporation of Hart Telephone.

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

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2002 mPhase had working capital of $399,321 as compared to
working capital deficit of $1,458,227 at June 30, 2001. The Company believes
this will be sufficient for its short-term liquidity. During fiscal year
ending June 30, 2003 it is estimated that the Company will need to raise
approximately $1.5 million to meet longer term liquidity needs. The primary
reason for the improvement in the Company's working capital position at June
30, 2002, were the conversions of approximately $2.7 million of accounts
payable and accrued expenses due to related parties and strategic vendors to
equity, $1.5 million of accounts payable and accrued expenses due to strategic
vendors into Notes payable and $1.8 million of accounts payable and accrued
expenses due to related parties and strategic vendors expected to be converted
to equity in fiscal 2003. Through June 30, 2002, the Company had incurred
development stage losses totaling approximately $101,366,000. At June 30,
2002, the Company had cash and cash equivalents of $47,065 compared to $31,005
at June 30, 2001. Historically, mPhase had funded its operations and capital
expenditures primarily through private placements of common stock. Management
expects that its ongoing financial needs will be provided by financing
activities and believes that the sales of its line of POTS Splitter products
and other related DSL component products will provide some offset to cashflow
used in operations, although there can be no assurance as to the level and
growth rate of such sales in future periods as seen with quarter to quarter
fluctuations in component sales. At June 30, 2002, the Company had accounts
receivable of approximately $273,780 and inventory of $3.3 million. This
compared to approximately $300,000 of accounts receivable and $4.3 million of
inventory at June 30, 2001.

Cash used in operating activities was $2.7 million during the twelve months
ending June 30, 2002. The cash used by operating activities principally
consists of the net loss, the net decrease in inventory, the net decrease in
accounts receivable offset by the increase in depreciation and amortization,
and by non-cash charges for common stock options and warrants issued for
services and increased accrued expenses. In the year ended June 30, 2002, net
cash of approximately $106,000 was used in investing activities.

The Company has entered into various agreements with GTARC, pursuant to
which the Company receives technical assistance in developing the Digital
Video and Data Delivery System. The Company has incurred expenses in
connection with technical assistance from GTARC totaling approximately
$4,563,560, $3,813,683, and $450,000 for the years ended 2000, 2001 and 2002,
respectively, and $13,424,300 from the period from inception through June 30,
2002. Subsequent to June 30, 2002, the Company and GTRC and GTARC entered into
a Memorandum of Intent to convert all amounts outstanding and exchange mutual
Releases in consideration for two term Notes totaling $624,235 with varied
payments through 2007 and warrants to purchase shares of the Company's common
stock through 2007, at a price and formula to be agreed upon. mPhase is the
sole, worldwide licensee of the technology developed by GTARC in conjunction
with the Traverser(TM) product line. Upon completion of the commercial
product, GTRC may receive a royalty of up to 5% of product sales.

During the quarter ended, December 31, 2001, certain officers, directors and
related parties were issued 2,000,000 restricted shares of the Company's
common stock for the investment of $1,000,000 in cash.

During the twelve-month period ended June 30, 2002, the Company raised
capital through private placements with accredited investors, whereby the
Company issued 6,404,174 shares of the Company's common stock and 6,329,174
warrants each to purchase one share of the Company's common stock at an
exercise price of $.30 per share and 75,000 warrants to purchase one share of
the Company's common stock at an exercise price of $3.00 per share, generating
gross proceeds of $1,973,750. The Company incurred no cash expenses and issued
576,469 shares of its common stock and 576,469 warrants each to purchase one
share of its common stock at $.30 per share to finders, consultants and
investment banking firms in connection with these private placements.

In addition, certain strategic vendors and related parties converted
approximately $2.7 million of accounts payable and accrued expenses into
7,492,996 shares of the Company's common stock and 5,953,490 warrants. Such
vendors include Microphase Corporation, Janifast, Ltd., and Piper Rudnick LLP,
mPhase's outside counsel.

As of June 30, 2002, mPhase had no material commitments for capital
expenditures.

LOSSES DURING THE DEVELOPMENT STAGE AND MANAGEMENT'S PLANS

Through June 30, 2002, the Company had incurred development stage losses
totaling approximately $101,366,000, and at June 30, 2002 had working capital
of $399,321. The primary reason for the improvement in the Company's working
capital position at June 30, 2002, were the conversions of approximately $2.7
million of accounts payable and accrued expenses due to related parties and
strategic vendors to equity, $1.5 million of accounts payable and accrued
expenses due to strategic vendors into Notes payable and $1.9 million of
accounts payable and accrued expenses due to related parties and strategic
vendors expected to be converted to equity in fiscal 2003. At June 30, 2002,
the Company had approximately $47,065 of cash, cash equivalents and
approximately $273,780 of trade receivables to fund short-term working capital
requirements. The Company's ability to continue as a going concern and its
future success is dependent upon its ability to raise capital in the near term
to: (1) satisfy its current obligations, (2) continue its research and
development efforts, and (3) the successful wide scale development, deployment
and marketing of its products.

The Company believes that it will be able to complete the necessary steps in
order to meet its cash flow requirements throughout fiscal 2003 and continue
its development and commercialization efforts. Management's plans in this
regard include, but are not limited to, the following:

We intend to continue to invest in technology and telecommunications
hardware and software in connection with the full commercial production of the
cost-reduced version of the Traverser(TM). Since we have strategically
determined that the cost to a prospective telco to build a master headend is
substantially reduced owing to new developments in technology, we have decided
that mPhaseTV no longer requires access to a satellite uplink facility. Thus
the amount of capital necessary to fund mPhaseTV and mPhase has been
substantially reduced.

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

We have evaluated our cash requirements for fiscal year 2003 based upon
certain assumptions, including our ability to raise additional financing and
increased sales of our POTS splitter. The Company anticipates that it will
need to raise approximately $1.5 million additional monies primarily in
private placements of its common stock with accredited investors, and/or a
Rights Offering to all of the Company's current shareholders during the fiscal
year which will end June 30, 2003, or alternatively we will need to curtail
certain expenses as incurred at the present levels including marketing and
research and development expenses. We have no commitments from affiliated or
third parties to provide additional financing. In the event that we do not
receive any proceeds from additional financings, we will attempt to further
reduce expenditures and continue to operate the Company from sales revenue and
any funding that may be available

from affiliated companies. Additional investment in technology design to
reduce the cost of the Traverser(TM) will be necessary over the next 12
months. In the long term, the Company may continue to invest additional funds
annually on research and development of the Traverser(TM) product line based
upon sales levels, changes to technology and the overall success of the
Company attaining sufficient financing until such time as it achieves
profitable operations.

Should these cash flows not be available to us, we believe we would have the
ability to revise our operating plan and make certain further reductions in
expenses, so that our resources available at June 30, 2002, plus financing to
be secured during fiscal year 2003, and expected POTS splitter revenues, will
be sufficient to meet our obligations until the end of fiscal year 2003. We
have continued to experience operating losses and negative cash flows. To
date, we have funded our operations with a combination of component sales,
debt conversions with related parties and strategic vendors and private equity
offerings. Management believes that we will be able to secure the necessary
financing in the short term to fund our operations into our next fiscal year.
However, failure to raise additional funds, or generate significant cash flows
through revenues, could have a material adverse effect on our ability to
achieve our intended business objectives.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item is set forth on pages F1-F28 attached
hereto.

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

Executive officers are selected by the Board of Directors. No family
relationships exist between any of the executive officers or directors. The
following table sets forth certain information with respect to each person,
who is an executive officer or director. mPhase's executive officers and
directors as of June 30, 2002 are as follows:

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

Necdet F. Ergul ................................ 78 Chairman of the Board and Director
Ronald A. Durando .............................. 45 Chief Executive Officer and Director
Gustave T. Dotoli (2) .......................... 66 Chief Operating Officer and Director
David Klimek ................................... 49 Chief Technology Officer and Director
Executive Vice President, General Counsel and Chief Financial
Martin Smiley .................................. 54 Officer
OUTSIDE DIRECTORS
Michael McInerney .............................. 46 Director
Anthony H. Guerino (1)(2) ...................... 56 Director
Abraham Biderman (1)(2) ........................ 54 Director

---------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee

All of the directors were elected by the shareholders on May 15, 2002. The
current executive officers and directors, along with their backgrounds, are
set forth below:

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

RONALD A. DURANDO is a co-founder of mPhase and has served as the Company's
President, Chief Executive Officer and Director since its inception in October
1996. Since 1994, Mr. Durando has been an Officer of Microphase Corporation.
Mr. Durando is not a Director of Microphase Corporation. From 1986-1994, Mr.
Durando was President and Chief Executive Officer of Nutley Securities, Inc.,
a registered broker-dealer. In addition, Mr. Durando is also Chairman of the
Board of Janifast, Ltd., a Hong Kong company, for operational and
manufacturing companies in China. Mr. Durando is also President and a Director
of PacketPort.com, Inc. ("Packet Port").

GUSTAVE T. DOTOLI has served as mPhase's Chief Operating Officer since
October 1996 and has been a Director since October 1996. Prior to joining the
Company, Mr. Dotoli was President and CEO of State Industrial Safety, Inc.
from 1986-1996. In addition, Mr. Dotoli currently serves as the Vice President
of Corporate Development of Microphase Corporation. Mr. Dotoli is also a
Director and Vice President of Packet Port. He is formerly the President and
Chief Executive Officer of the following corporations: Imperial Electro-
Plating, Inc., World Imports USA, Industrial Chemical Supply, Inc., SISCO
Beverage, Inc. and Met Pack, Inc. Mr. Dotoli received a B.S. in Industrial
Engineering from Fairleigh Dickenson University in 1959.

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

MICHAEL P. MCINERNEY is President of Lintel, Inc. subsidiaries; Hart
Telephone Company, a 10,000-line local exchange carrier in Northeast Georgia,
Hart Communications, a telecommunications company, Hart Cable, a cable
television company and Diversified Golf. Mr. McInerney was Executive Vice
President of Lintel, Inc. from 1994 until he became President in 2001. From
1991 to 1994, Mr. McInerney was Executive Director of Standard Telephone
Company. In the period from 1980-1991, Mr. McInerney was a regional manager,
state manager and an account executive with AT&T. Mr. McInerney earned a
Masters of Business Administration degree at Winthrop College and a B.S.
degree at the University of Vermont.

ANTHONY H. GUERINO has been a member of the Board since February 23, 2000.
Since December 1997, Mr. Guerino has been an attorney in private practice in
New Jersey. Prior thereto, Mr. Guerino served as a judge of the Newark
Municipal Courts for over twenty (20) years, periodically sitting in the Essex
County Central Judicial Processing Court at the Essex County Courthouse. Mr.
Guerino has been a chairperson for and member of several judicial committees
and associations in New Jersey, and has been an instructor for the Seton Hall
School of Law's Trial Moot Court Program.

ABRAHAM BIDERMAN has been a member of the Board since August 3, 2000. Since
1990, Mr. Biderman has been employed by Lipper & Co. as Executive Vice
President; Executive Vice President, Secretary and Treasurer of the Lipper
Funds; and Co-Manager of Lipper Convertibles, L.P. Prior to joining Lipper &
Co. in 1990, Mr. Biderman was Commissioner of the New York City Department of
Housing, Preservation and Development from 1988 to 1989 and Commissioner of
the New York City Department of Finance from 1986 to 1987. He was Chairman of
the New York City Retirement System from 1986 to 1989. Mr. Biderman was
Special Advisor to former Mayor Edward I. Koch from 1985 to 1986 and assistant
to former Deputy Mayor Kenneth Lipper from 1983 to 1985. Mr. Biderman is a
Director of the Municipal Assistance Corporation for the City of New York. Mr.
Biderman graduated from Brooklyn College and is a certified public accountant.

MARTIN SMILEY joined mPhase as Executive Vice President, Chief Financial
Officer and General Counsel in August 2000. Mr. Smiley has over twenty years
experience as a corporate finance and securities attorney and as an investment
banker. Prior to joining the company, Mr. Smiley served as a Principal at
Morrison & Kibbey, Ltd., a mergers and acquisitions and investment banking
firm from 1998 to 2000, and as a Managing Director for CIBC Oppenheimer
Securities from 1994 to 1998. He served as a Vice President of Investment
Banking at Chase Manhattan Bank from 1989 to 1994, and as a Vice President and
Associate General Counsel for Chrysler Capital Corporation from 1984 to 1989.
Mr. Smiley graduated with a B.A. in Mathematics from the University of
Pennsylvania and earned his law degree from the University of Virginia School
of Law.

At each annual meeting of stockholders, the newly elected directors' terms
begin on the date of election and qualification, and continue through the next
annual meeting following election. Terms may differ in the case where a
director resigns, is removed from office, or until the time when a successor
director is elected and qualified.

SECTION 16 (A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Directors, executive officers, and individual owning more than 10 percent of
mPhase common stock are required to file initial reports of ownership and
changes in ownership with the SEC under Section 16(a) of the Securities
Exchange Act of 1934, as amended. The SEC regulations also require those
persons to provide copies of all filed Section 16(a) reports to the Company.
mPhase has reviewed the report copies filed in 2001, and based also on written
representations from those persons, the Company believes that there was
compliance with Section 16(a) filing requirements for 2002. All the officers
and directors filed all of the required forms, but in certain instances the
directors were late with respect to the filing of Form 4s.

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth, for the fiscal year ended June 30, 2002 and
the two previous fiscal years, the compensation earned by mPhase's chief
executive officer and the four other executive officers, whose compensation
was greater than $100,000 for services rendered in all capacities to the
Company for the year ended June 30, 2002.

SUMMARY COMPENSATION TABLE

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

Ronald A. Durando (1)................................................ 2002 $388,504 -- 1,850,000
Chief Executive Officer and President 2001 $395,004 -- -- 1,225,000
2000 312,920 $2,398,032 157,500 250,000
Gustave Dotoli (1)................................................... 2002 313,504 -- -- 1,225,000
Chief Operating Officer 2001 342,917 -- -- 860,000
2000 231,670 362,000 232,500 175,000
David Klimek (1)..................................................... 2002 106,606 -- -- 162,500
Chief Technology Officer 2001 175,577 -- -- 110,000
2000 106,500 30,000 -- 50,000
Martin Smiley........................................................ 2002 158,712 540,000
Executive Vice President 2001 163,435 -- -- 670,000
Chief Financial Officer and General Counsel 2000 -- -- -- --

---------------
(1) Includes $7,500 annual stipend as a director.

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

STOCK OPTIONS

The following table contains information regarding options granted in the
fiscal year ended June 30, 2002 to the executive officers named in the summary
compensation table above. For the fiscal year ended June 30, 2002, mPhase
granted options to acquire up to an aggregate of shares to employees and
directors.

OPTION GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)

Number of % of Total Weighted Potential Realizable Value
Securities Option/SARS Average Weighted of Assumed Annual
Underlying Granted to Exercise or Average Rates of Stock Price
Options/SARS Employees in Base Price Market Price Expiration Appreciation for
Name Granted (#) Fiscal Year ($/Share) on Grant Dates Date 5 Year Option Term
0% 5% 10%
------------------------ ------------ ------------ ----------- -------------- ---------- --- -------- --------

Ronald A. Durando ....... 1,850,000 28.1% $.40 $.39 2007 0 $180,850 $421,975
-----------------------------------------------------------------------------------------------------------------------------------
Gustave T. Dotoli ....... 1,225,000 18.6% $.41 $.40 2007 0 $123,137 $286,895
-----------------------------------------------------------------------------------------------------------------------------------
David Klimek ............ 162,500 2.5% $.64 $.63 2007 0 $ 26,661 $ 60,875
-----------------------------------------------------------------------------------------------------------------------------------
Martin Smiley ........... 540,000 8.2% $.37 $.36 2007 0 $ 48,313 $113,281
-----------------------------------------------------------------------------------------------------------------------------------

The following table sets forth information with respect to the number and
value of outstanding options held by executive officers named in the summary
compensation table above at June 30, 2002. During the fiscal year ended June
30, 2002, No options were exercised. The value realized is the difference
between the closing price on the date of exercise and the exercise price. The
value of unexercised in-the-money options is based upon the difference between
the closing price of mPhase's common stock on June 30, 2002, and the exercise
price of the options.

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

Shares Value NUMBER OF SECURITIES VALUE OF UNEXERCISED
Acquired Realized UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
on Exercise $ OPTIONS AT YEAR END (#) AT YEAR END ($)
----------- -------- ----------- ------------- ----------- -------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------

Ronald A. Durando ......................... -- -- 4,775,000 -- $-- $--
Gustave T. Dotoli ......................... -- -- 3,035,000 -- $-- $--
David Klimek .............................. -- -- 947,500 -- $-- $--
Martin Smiley ............................. -- -- 1,210,000 -- $-- $--

Compensation of Directors

mPhase pays each of the directors $7,500 annually for their services as a
director and for their attendance of Board and committee meetings.
Additionally, some of the directors have been granted options under the
Company's Stock Incentive Plan and the Company has included those grants in
the table entitled "Security Ownership of Certain Beneficial Owners and
Management" and the notes thereto.

Employment Agreements

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

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

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

mPhase also had an employment agreement with Gustave T. Dotoli, the Chief
Operating Officer and Director, which agreement expired on June 30, 2002. Mr.
Dotoli received a base annual salary of $200,000, a bonus and a salary
increase based upon performance review every six months, beginning six months
from the effective date of the agreement, as well as health benefits, vacation
and such other fringe benefits as would be paid to mPhase's similarly situated
senior management. The employment agreement is terminable upon Mr. Dotoli's
death, permanent disability, or for "just cause" (defined below), and is
renewable within two months of the expiration date of the agreement upon the
mutual terms agreed to by Mr. Dotoli and mPhase. Mr. Dotoli shall be deemed
"permanently disabled" under the agreement if he shall fail to render and
perform the executive services required under the agreement for a continuous
period of three consecutive months. "Just cause" is defined under the
agreement as the commission of acts constituting theft, embezzlement, the
receipt of funds or property under false pretenses or similar acts of gross
misconduct with respect to the Company's

property, or the conviction of a felony involving matters not directly related
to the Company's business if, in the Board's discretion, it adversely affects
his ability to perform his executive duties. The agreement also contains work-
for-hire, confidentiality and non-disclosure provisions.

mPhase had an employment agreement with Martin Smiley, the Executive Vice
President, Chief Financial Officer and General Counsel, which expired on
August 20, 2002. Mr. Smiley received a base annual salary of $175,000, a bonus
and a salary increase based upon performance review every twelve months,
beginning twelve months from the effective date of the agreement, as well as
health benefits, vacation and such other fringe benefits as would be paid to
the Company's similarly situated senior management.

mPhase had an employment agreement with David Klimek, the Chief Technical
Officer and a Director, which agreement expired on April 1, 2002. Mr. Klimek
received an annual salary of $170,000 per annum and a bonus based upon
performance as well as health benefits, vacation and such other fringe
benefits as would be paid to the Company's similarly situated senior
management. In addition, in the event of a change of control that is not
approved by Mr. Klimek as one or the Company's directors or shareholders, he
is entitled to exercise an option to purchase 150,000 shares at $1.00 per
share.

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

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of the Compensation Committee during fiscal 2002 were Messrs.
Dotoli, Biderman and Guerino. Mr. Dotoli is the Chief Operating Officer.
Neither Messrs. Biderman nor Guerino has been one of mPhase's officers or
employees. Mr. Vickers resigned from the Board of Directors after fiscal year
2001 and has been replaced by Mr. Biderman on the Compensation Committee
effective March 2002. None of the Company's directors or executive officers
served as a member of the Compensation Committee (or other board committee
performing equivalent functions or, in the absence of such committee, the
entire Board of Directors) of another entity during fiscal 2002 that has a
director or executive officer serving on mPhase's Board of Directors, except
that Mr. Dotoli is also a member of the Board of Directors of PacketPort, a
company in which Mr. Durando serves as Chief Executive Officer. Mr. Dotoli,
together with Mr. Durando, is a controlling shareholder of Janifast. Janifast
has produced components for the Traverser(TM), and may produce such components
for mPhase in the future.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of August 26, 2002 certain information
regarding the beneficial ownership of shares of our common stock:

o by each of mPhase's directors;

o by each person who is known by the Company to beneficially own 5% or more
of the outstanding shares of common stock;

o by each of the Company's executive officers named in the summary
compensation table; and,

o by all of the Company's executive officers and directors as a group.

OPTIONS AMOUNT
AND NATURE
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OF BENEFICIAL PERCENTAGE OF
--------------------------------------- OWNERSHIP COMMON STOCK(2)
-------------- -------------

Necdet F. Ergul (7)(10).................... 9,319,118 14.5%
Ronald A. Durando (3)(7)(8)................ 13,884,148 20.7%
Gustave Dotoli (7)(8)(12).................. 4,051,366 6.3%
J. Lee Barton (4)(6)(7)(9)................. 7,703,219 12.6%
David Klimek (7)(8)........................ 1,340,000 2.1%
Craig Vickers (9).......................... 159,000 *
Lintel, Inc. (6)........................... 4,114,219 6.7%
Abraham Biderman (5)(7).................... 277,733 *
J. Allen Layman (7)(9)..................... 140,000 *
Anthony Guerino (7)........................ 267,500 *
Martin Smiley.............................. 2,417,048 3.9%
Michael McInerney (7)...................... 124,500 *
All executive officers and directors as a
group (11) (eleven people) ............... 39,683,632 60%

---------------
* Less than 1%
(1) Unless otherwise indicated, the address of each beneficial owner is 587
Connecticut Avenue, Norwalk, Connecticut 06854-1711.
(2) Unless otherwise indicated, mPhase believes that all persons named in the
table have sole voting and investment power with respect to all shares of
the Company shares beneficially owned by them. The percentage for each
beneficial owner listed above is based on 60,807,508 shares outstanding
on August 26, 2002, and, with respect to each such person holding options
or warrants to purchase shares that are exercisable within 60 days after
August 26, 2002, the number of options and warrants are deemed to be
outstanding and beneficially owned by the person for the purpose of
computing such person's percentage ownership, but are not deemed to be
outstanding for the purpose of computing the percentage ownership of any
other person.

The number of shares indicated in the table include the following number of
shares issuable upon the exercise of warrants or options:

Necdet F. Ergul ................................................. 1,216,250
Ronald A. Durando ............................................... 4,775,000
Gustave Dotoli .................................................. 3,035,000
J. Lee Barton ................................................... 295,000
David Klimek .................................................... 947,500
Martin Smiley ................................................... 1,085,000
J. Allen Layman ................................................. 140,000
Craig Vickers ................................................... 159,000
Abraham Biderman ................................................ 272,500
Anthony Guerino ................................................. 267,500
Michael McInerney ............................................... 120,500

(3) Includes 1,396,148 shares held by Durando Investment LLC, which Mr.
Durando controls and 5,850,000 shares and 1,200,000 warrants held by
Janifast and 230,000 shares owned by Karen and Ronald Durando Foundation;
and 95,000 shares owned by Durando Charitable Remainder Trust.
(4) Includes 100,000 shares owned by Kim Barton, his wife and 100,000 shares
owned by Betty Barton, his mother. Mr. Barton resigned in March 2002.
(5) Includes 5,233 shares of common stock, options and warrants for 195,000
shares of common stock. Does not include 1,103,225 shares held by Lipper
& Co, where Mr. Biderman is a director.
(6) The address for Lintel, Inc. and J. Lee Barton, who is the Chief
Executive Officer of Lintel, Inc. is 196 North Forest Avenue, P.O. Box
388, Hartwell, GA 30643.
(7) Includes options for 25,000 shares of common stock received as
compensation for participation on the Board of Directors.
(8) Does not include contingent options exercisable only upon a change in
control of our Company, not voted for by such person as a stockholder or
director, Ronald Durando-3,000,000; Gustave Dotoli-1,500,000; David
Klimek-150,000.
(9) Craig Vickers resigned as a Director in September 2001. J. Allen Layman
and J. Lee Barton also resigned as Directors in 2002. Mr. Michael P.
McInerney, President of Lintel, Inc. subsidiaries, was appointed to the
Board at the Annual Shareholders Meeting.
(10) Includes 200,000 shares owned by Berrin Snyder, his daughter and 150,000
owned by Eda Peterson, his daughter. Also includes 4,469,534 shares and
2,200,000 warrants owned by Microphase Corporation, a company in which
Mr. Ergul is the President and Chief Executive Officer.
(11) Includes Mr. Vickers and Mr. Layman, who resigned in September 2001 and
March 2002, respectively.
(12) Includes 190,000 shares owned by Patricia and Gustave Dotoli Foundation;
and 30,000 shares owned by Dotoli Charitable Remainder Trust.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

mPhase's President and Chairman of the Board of the Company are also
officers of Microphase. (See Footnote 11 to Financial Statement entitled
"Related Party Transactions".) On May 1, 1997, the Company entered into an
agreement with Microphase, whereby it will use office space as well as the
administrative services of Microphase, including the use of accounting
personnel. This agreement was for $5,000 per month and was on a month-to-month
basis. In July 1998, the office space agreement was revised to $10,000 and in
January 2000 to $11,050 per month. Additionally, in July 1998, mPhase entered
into an agreement with Microphase, whereby mPhase reimburses Microphase
$40,000 per month for technical research and development assistance.
Microphase also charges fees for specific projects on a project-by-project
basis. During the years ended June 30, 2000, 2001, 2002 and for the period
from inception (October 2, 1996) to June 30, 2001, $2,547,847, $2,128,983,
1,212,594 and $6,576,424, respectively, have been charged to expense or
inventory under these Agreements and is included in operating expenses in the
accompanying consolidated statements of operations. Management believes that
amounts charged to the Company by Microphase are commensurate to amounts that
would be incurred if outside third parties were used.

Also, during the fiscal year ended June 30, 2000, $2,600,000 was advanced to
Microphase in the form of a note, which was repaid by Microphase during the
year. mPhase recorded $39,000 of interest income on this note for the year
ended June 30, 2000. The Company is obligated to pay a 3% royalty to
Microphase on revenues from its proprietary Traverser(TM) Digital Video and
Data Delivery System and DSL component products. During the year ended June
30, 2001 and 2002, mPhase recorded royalties to Microphase totaling $297,793
and $78,762, respectively. Pursuant to a debt conversion agreement between the
Company and Microphase for the year ended June 30, 2001, Microphase received
1,278,000 shares of mPhase common stock. For the year ended June 30, 2002, in
consideration for a direct investment of $100,000 and pursuant to debt
conversion agreements, Microphase received 2,900,000 shares of mPhase common
stock and 2,200,000 warrants to purchase mPhase common stock. As of June 30,
2001, the Company had $70,799 payable to Microphase, which is included in
amounts due to related parties in the accompanying consolidated balance sheet.
As of June 30, 2002, the Company had $92,405 included in other liabilities-
related parties in the accompanying consolidated balance sheet as discussed in
Note 14.

During the year ended June 30, 2000, mPhase advanced money to Janifast
Limited, which is a related party of which three directors of mPhase are
significant shareholders, in connection with the manufacturing of POTS
Splitter Shelves and DSL component products. As of June 30, 2000 the amount
advanced to Janifast was approximately $1,106,000, which is included in
production advances-related parties on the accompanying balance sheet. There
were no such advances as of June 30, 2001 and June 30, 2002.

Pursuant to a debt conversion agreement between the Company and Janifast,
for the year ended June 30, 2001, Janifast received 1,200,000 shares of the
Company's common stock. For the year ended June 30, 2002 pursuant to debt
conversion agreements, Janifast received 3,450,000 shares of mPhase common
stock and 1,200,000 warrants to purchase mPhase common stock. During the years
ended June 30, 2000, 2001 and 2002 and the period from inception (October 2,
1996 to June 30, 2002) $0, $8,932,378, $1,759,308 and $10,691,686,
respectively have been charged to inventory or expense and is included in
operating expenses in the accompanying statements of operations. As of June
30, 2002, the Company had $260,159 included in other liabilities-related
parties in the accompanying consolidated balance sheet as discussed in Note
14.

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

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

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

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

During the year ended June 30, 2002, certain officers, directors and related
parties were issued 8,150,000 shares of mPhase common stock and 3,400,000
warrants in consideration of the investment of $1,000,000 cash and the
conversion of $1,460,000 accounts payable.

Effective March 31, 2002, the Company converted $420,872 of liabilities due
to Piper Rudnick LLP, outside legal counsel to mPhase into a warrant to
purchase up to a total of 1,683,490 shares of the Company's common stock which
pursuant to EITF 96-18, has an approximate value of $.30 per share; and a
warrant to purchase 550,000 shares of the Company's common stock at an
exercise price of $.30 per share pursuant to the terms of payment agreement.
In addition, Piper agreed to accept a Promissory note for $420,872 of current
payables at an interest rate of 8% with payments of $5,000 per month
commencing June 1, 2002 and continuing through December 1, 2003, with a final
payment of principal plus accrued interest due at maturity on December 31,
2003.

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

Necdet F. Ergul, Ronald A. Durando and Gustave T. Dotoli, our Chairman,
Chief Executive Officer and Chief Operating Officer, respectively, are
executive officers and shareholders of Microphase and Ronald Durando and
Gustave T. Dotoli are president and vice-president of PacketPort.com.,
respectively.

We reimburse Microphase $51,340 per month for research and development
services and administrative expenses incurred for the use of Microphase's
office space, lab facilities and administrative staff.

Ronald A. Durando is the owner/sole shareholder of Nutley Securities, Inc.,
a former registered broker-dealer, which is not a private investment company
under the Investment Advisors Act of 1940.

One of our former directors, J. Lee Barton, Chairman of the Board of Lintel,
Inc. Lintel is the parent corporation of Hart Telephone Company, our beta
customer located in Hartwell, Georgia, where we installed our prototype
product and commenced beta testing. In December 1998, we issued 3,115,000
shares in a private placement to J. Lee Barton, several members of his family,
Lintel, several employees of Lintel and two employees of Microphase for a
purchase price of approximately $1.03 per share, or an aggregate purchase
price of $3,197,416. Mr. Barton has received a $285,000 bonus, a stock award
of 140,000 shares and options to purchase 295,000 shares, which includes
options to Hart Telephone. Michael McInerney, one of our directors, is the
president of Lintel, Inc. Mr. McInerney has been awarded 5,000 shares and
options to purchase 120,500 shares.

Janifast Ltd., a Hong Kong corporation manufacturer, which has produced
components for our prototype Traverser(TM) DVDDS product, and may produce such
components for us in the future. Necdet F. Ergul, Ronald A. Durando and
Gustave T. Dotoli are controlling shareholders of Janifast Ltd. with an
aggregate ownership interest of greater than 75% of Janifast Ltd. Mr. Durando
is Chairman of the Board of Directors and Mr. Ergul is a Director of Janifast.

On November 26, 1999, Mr. Durando acquired, via a 100% ownership of
PacketPort, Inc., a controlling interest in Linkon Corporation, now known as
PacketPort.com, Inc. On November 26, 1999, PacketPort, Inc., a company owned
100% by Mr. Durando, acquired controlling interest in Linkon Corp., which
subsequently changed its name to PacketPort.com, Inc. In connection with this
transaction, Mr. Durando transferred 350,000 shares of our common stock to
PacketPort, Inc.

Abraham Biderman became a member of our Board in August 2000. Mr. Biderman
is the Executive Vice President of Lipper & Company, L.P., which received a
total of 265,125 shares of common stock for its services as a placement agent
for our May 2000, September 2000 and January 2001 private placements. In July,
2001 and November, 2001 Lipper and Company received 138,000 shares and 300,000
shares in additional common stock in mPhase for services rendered to the
Company as placement agent in a Private Placement and for general investment
banking and financial advice services.

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

(a)(1) The following is a list of the financial statements, financial
statement schedules and exhibits, which are included in this Annual Report on
Form 10-K. Where so indicated by footnote, exhibits, which were previously
filed, are incorporated by reference.

FINANCIAL STATEMENTS

PAGE
----

Report of Rosenberg Rich Baker Berman & Company .................... F-1
Report of Arthur Andersen LLP ...................................... F-2
Report of Schuhalter, Coughlin & Suozzo, LLC ....................... F-3
Consolidated Balance Sheets as of June 30, 2001 and 2002 ........... F-4
Consolidated Statements of Operations for the years ended June 30,
2000, 2001 and 2002 and for the period from inception (October 2,
1996) through June 30, 2002....................................... F-5
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the period from inception (October 2, 1996) to June
30, 1997 and for each of the four years in the period ended June
30, 2002.......................................................... F6-10
Consolidated Statements of Cash Flows for the years ended June 30,
2000, 2001 and 2002 and for the period from inception (October 2,
1996) through June 30, 2002....................................... F-11
Notes to Consolidated Financial Statements ......................... F-12

FINANCIAL STATEMENT SCHEDULES:

EXHIBITS

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

2.1* Exchange of Stock Agreement and Plan of Reorganization (incorporated
by reference to Exhibit 2(a) to our registration statement on Form
10SB-12G filed on October 16, 1998 (file no. 000-24969)).

2.2* Exchange of Stock Agreement and Plan of Reorganization dated June 25,
1998 (incorporated by reference to Exhibit 2(b) to our registration
statement on Form 10SB-12G filed on May 6, 1999 (file no.
000-24969)).

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

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

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

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

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

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

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

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

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

10.1* License Agreement, dated March 26, 1998, between the Company and
Georgia Tech Research Corporation (incorporated by reference to
Exhibit 10(e) to our registration statement on Form 10SB-12G filed on
October 16, 1998 (file no. 000- 24969)).

10.2 First Amendment to the License Agreement, dated January 8, 2001,
between the Company and Georgia Tech Research Corporation
(incorporated by reference to Exhibit 10.2 to our registration
statement on Form S-1 filed on June 18, 2001 (file no. 33-63262)).

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

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

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

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

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

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

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

10.9* Facilities/Services Agreement between the Company and Microphase
Corporation, dated as of July 1, 1998. (incorporated by reference to
Exhibit 10.9 to our registration statement on Form S-1 filed on June
18, 2001 (file no. 33-63262)).

10.10* Company's 2001 Stock Incentive (incorporated by reference to Exhibit
C to our preliminary proxy statement on Form Pre 14A filed on March
21, 2001 (file no.000-30202)).

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

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

21* List of Subsidiaries (incorporated by reference to Exhibit 21 to our
registration statement on Form S-1 filed on June 18, 2001 (file no.
33-63262)).

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

23.2* Consents of Schuhalter, Coughlin & Suozzo, LLC dated April 23, 1999
and Mauriello, Franklin & LoBrace, P.C. dated April 23, 1999
(incorporated by reference to Exhibit 23 to our registration
statement on Form 10SB-12G filed on May 6, 1999 (file no.
000-24969)).

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

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

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

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

---------------
* Incorporated by reference.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of mPhase Technologies, Inc.:

We have audited the accompanying consolidated balance sheets of mPhase
Technologies, Inc. (a New Jersey corporation in the development stage) and
subsidiaries as of June 30, 2002, and the related consolidated statements
of operations, changes in stockholders' equity (deficit), cash flows and
Schedule II (Valuation and Qualifying Accounts, Item 14B) for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
mPhase Technologies, Inc. for the period from inception to June 30, 1999, 2000,
2001. Such amounts are included in the cumulative from inception to June 30,
2002 totals of the statements of operations, changes in stockholders' equity and
cash flows and reflect total net loss of 89 percent of the related cumulative
totals. Those statements were audited by other auditors whose report has been
furnished to us and our opinion, insofar as it relates to amounts for the period
from inception to June 30, 2001, included in the cumulative totals, is based
solely upon the report of the other auditors.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits and the
report of other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of mPhase Technologies, Inc. and subsidiaries
as of June 30, 2002 and the results of their operations and their cash flows
for each of the three years in the period ended June 30, 2002 and for the
period from inception to June 30, 2002, in conformity with accounting
principles generally accepted in the United States.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and is in a working capital deficit position that raises
substantial doubt about its ability to continue as a going concern.
Management's plans concerning these matters are also described in Note 2. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

As discussed in note 15 to the consolidated financial statements, management
has expanded certain disclosures in the accompanying consolidated financial
statements. The resulting changes from these expanded disclosures and additional
schedules have no effect on the financial position and results of operations for
the year ended June 30, 2002. As a result of these expanded disclosures,
management has reissued the June 30, 2002 consolidated financial statements to
reflect these expanded disclosures.

Rosenberg Rich Baker Berman & Company
Bridgewater, NJ

August 26, 2002, except for note 14 as to which the date is October 14, 2002 and
except for note 15 as to which the date is July 28, 2003.

F-1

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of mPhase Technologies, Inc.:

We have audited the accompanying consolidated balance sheets of mPhase
Technologies, Inc. (a New Jersey corporation in the development stage) and
subsidiaries as of June 30, 2001 and 2000, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the three years in the period ended June 30, 2001 and for the period
from inception (October 2, 1996) to June 30, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We did
not audit the financial statements of mPhase Technologies, Inc. for the period
from inception to June 30, 1998. Such amounts are included in the cumulative
from inception to June 30, 2001 totals of the statements of operations,
changes in stockholders' equity and cash flows and reflect total net loss of 6
percent of the related cumulative totals. Those statements were audited by
other auditors whose report has been furnished to us and our opinion, insofar
as it relates to amounts for the period from inception to June 30, 1998,
included in the cumulative totals, is based solely upon the report of the
other auditors.

In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of mPhase Technologies, Inc. and subsidiaries
as of June 30, 2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended June 30, 2001 and
for the period from inception to June 30, 2001, in conformity with accounting
principles generally accepted in the United States.

Arthur Andersen LLP

Stamford, Connecticut
October 12, 2001

PURSUANT TO SEC RELEASE NO. 33-8070 AND RULE 437A UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, mPHASE TECHNOLOGIES, INC. HAS NOT RECEIVED WRITTEN
CONSENT AFTER REASONABLE EFFORT TO USE THIS REPORT. THIS REPORT IS A COPY OF A
PREVIOUSLY ISSUED ARTHUR ANDERSEN LLP REPORT. THIS REPORT HAS NOT BEEN
REISSUED BY ARTHUR ANDERSEN LLP. WITH RESPECT TO THIS INSTANT 10K/A, YOU WILL
NOT BE ABLE TO RECOVER AGAINST ARTHUR ANDERSEN LLP UNDER SECTION 11 OF THE
SECURITIES ACT FOR ANY UNTRUE STATEMENTS OF A MATERIAL FACT CONTAINED IN THE
FINANCIAL STATEMENTS AUDITED BY ARTHUR ANDERSEN LLP OR ANY OMISSIONS TO STATE
A MATERIAL FACT REQUIRED TO BE STATED THEREIN.

F-2

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of mPhase Technologies, Inc.:

We have audited the statements of operations, changes in stockholders'
equity, and cash flows for the period October 2, 1996 (date of inception)
through June 30, 1998 of mPhase Technologies, Inc. (a development stage
company). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the results of its operations and its cash flows for the period of
October 2, 1996 (date of inception) through June 30, 1998 in conformity with
generally accepted accounting principles.

Schuhalter, Coughlin & Suozzo, LLC

Raritan, New Jersey
January 28, 1999

F-3

mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002

JUNE 30,
----------------------------
2001 2002
------------ -------------

ASSETS
Current assets:
Cash and cash equivalents ...................... $ 31,005 $ 47,065
Accounts receivable, net of bad debt reserve of
$29,218 and $2,906 respectively............... 292,434 273,780
Due from officer ............................... 100,000 --
Inventory ...................................... 4,303,895 3,342,716
Prepaid expenses and other current assets ...... 856,979 830,589
------------ -------------
Total current assets .......................... 5,584,313 4,494,150
------------ -------------
Property and equipment, net .................... 2,198,845 1,742,186
Patents and licenses, net ...................... 1,026,524 685,349
------------ -------------
Other assets ................................... 187,500 20,830
------------ -------------
Total assets .................................. $ 8,997,182 $ 6,942,515
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................... 5,116,029 2,819,245
Accrued expenses ............................... 1,742,138 673,065
Due to related parties ......................... 184,373 35,000
Note payable, current .......................... -- 353,339
Deferred revenue ............................... -- 214,180
------------ -------------
Total current liabilities ..................... 7,042,540 4,094,829
------------ -------------
Other liabilities .............................. 90,000 1,211,249
Other liabilities, related parties ............. -- 665,068
Long-term debt, net of current portion ......... -- 1,014,218
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY:
Common Stock, stated value $.01, 150,000,000
shares authorized; 41,344,467, in 2001, and
60,807,508 in 2002, shares issued and
outstanding, respectively..................... 413,445 608,075
Additional paid-in capital ..................... 92,293,370 100,751,284
Deferred compensation .......................... (713,275) (23,923)
Deficit accumulated during development stage ... (90,120,925) (101,366,286)
Unrecognized capital losses .................... -- (4,026)
Less-treasury stock, 13.750 shares, at cost .... (7,973) (7,973)
------------ -------------
Total stockholders' equity (deficit) ........... 1,864,642 (42,849)
------------ -------------
Total liabilities and stockholders' equity ..... $ 8,997,182 $ 6,942,515
============ =============

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

F-4

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

For the Years Ended From Inception
June 30, (October 2, 1996)
------------------------------------------- to June 30,
2000 2001 2002 2002
------------ ------------ ------------ -----------------

TOTAL NET REVENUES $ 279,476 $ 10,524,134 $ 2,582,446 $ 13,386,056
------------ ------------ ------------ -------------
COSTS AND EXPENSES:
Cost of Sales (see also note 11 Related Party Transactions) .... 131,756 5,804,673 2,415,129 8,351,558
Research and development (including non-cash stock related
charges of $1,010,375, $0, $267,338 and $1,660,174,
respectively, see also note 11 Related Party Transactions).... 10,156,936 10,779,570 3,819,583 30,808,774
General and administrative (including non-cash stock related
charges of $9,078,311, $6,227,552, $2,445,561 and $20,246,337
respectively, see also note 11 Related Party Transactions).... 17,516,216 16,150,711 6,490,373 47,128,430
Non-cash charges for administrative stock-based employee
compensation ................................................. 10,343,114 1,170,903 548,550 25,065,172
Depreciation and amortization .................................. 471,101 660,372 670,183 2,251,612
------------ ------------ ------------ -------------
Total costs and expenses ...................................... 38,619,123 34,566,229 13,943,818 113,605,546
------------ ------------ ------------ -------------
Loss from operations ........................................... (38,339,647) (24,042,095) (11,361,372) (100,219,490)
------------ ------------ ------------ -------------
OTHER (EXPENSE) INCOME:
Gain On Extinguishments ........................................ -- -- 142,236 142,236
Minority interest loss in consolidated subsidiary .............. 20,000 -- -- 20,000
Loss from unconsolidated subsidiary ............................ -- -- -- (1,466,467)
Interest income (expense), net ................................. 158,105 43,361 (26,225) 157,435
------------ ------------ ------------ -------------
Total other income (expense) .................................. 178,105 43,361 116,011 (1,146,796)
------------ ------------ ------------ -------------
NET LOSS ....................................................... $(38,161,542) $(23,998,734) $(11,245,361) $(101,366,286)
============ ============ ============ =============
Unrealized holding loss on securities .......................... -- -- (4,026) (4,026)
------------ ------------ ------------ -------------
COMPREHENSIVE LOSS ............................................. $(38,161,542) $(23,998,734) $(11,249,387) $(101,370,312)
============ ============ ============ =============
LOSS PER COMMON SHARE, basic and diluted ....................... $ (1.41) $ (0.72) $ (.23)
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, basic and diluted .. 26,974,997 33,436,641 49,617,280
============ ============ ============

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

F-5

mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION (OCTOBER 2, 1996)
TO JUNE 30, 1997 AND FOR EACH OF THE FOUR YEARS
IN THE PERIOD ENDED JUNE 30, 2002

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

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

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

F-6

BALANCE, JUNE 30, 1998...... 13,579,711 $135,797 $(7,973) $ 4,079,692 $ -- $ (5,122,305) $ (914,789)
Issuance of common stock
with warrants in private
placements, net of
offering costs of $107,000 3,120,000 31,200 -- 2,981,800 -- -- 3,013,000
Issuance of common stock for
services.................. 1,599,332 15,993 -- 8,744,873 -- -- 8,760,866
Issuance of common stock
with warrants in private
placement, net of offering
costs of $45,353.......... 642,000 6,420 -- 1,553,227 -- -- 1,559,647
Issuance of common stock in
private placement, net of
offering costs of $679,311 4,426,698 44,267 -- 10,343,167 -- -- 10,387,434
Issuance of stock options
for services.............. -- -- -- 7,129,890 -- -- 7,129,890
Issuance of warrants for
services.................. -- -- -- 16,302 -- -- 16,302
Deferred employee stock
option compensation....... -- -- -- -- (140,000) -- (140,000)
Net loss.................... -- -- -- -- -- (22,838,344) (22,838,344)
---------- -------- ------- ----------- ------------ ------------ ------------
BALANCE, JUNE 30, 1999...... 23,367,741 233,677 $(7,973) $34,848,951 $ (140,000) $(27,960,649) $ 6,974,006
Issuance of common stock and
options in settlement..... 75,000 750 -- 971,711 -- -- 972,461
Issuance of common stock
upon exercise of warrants
and options............... 4,632,084 46,321 -- 5,406,938 -- -- 5,453,259
Issuance of common stock in
private placement, net of
cash offering costs of
$200,000.................. 1,000,000 10,000 -- 3,790,000 -- -- 3,800,000
Issuance of common stock in
private placement, net of
cash offering costs of
$466,480.................. 1,165,500 11,655 -- 9,654,951 -- -- 9,666,606
Issuance of common stock for
services.................. 1,164,215 11,642 -- 8,612,265 -- -- 8,623,907
Issuance of options for
services.................. -- -- -- 9,448,100 -- -- 9,448,100
Deferred employee stock
option compensation -- -- -- 1,637,375 (1,637,375) -- --
Amortization of deferred
employee stock option
compensation.............. -- -- -- -- 551,707 -- 551,707
Net loss.................... -- -- -- -- -- (38,161,542)
---------- -------- ------- ----------- ------------ ------------ ------------
BALANCE, JUNE 30, 2000...... 31,404,540 $314,045 $(7,973) $74,370,291 $(1,225,668) $(66,122,191) $ 7,328,504

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

F-7

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

BALANCE, JUNE 30, 2000...... 31,404,540 $314,045 $(7,973) $74,370,291 $(1,225,668) $(66,122,191) $ 7,328,504
Issuance of common stock
upon exercise of options.. 320,000 3,200 -- 324,300 -- -- 327,500
Issuance of common stock
with warrants in private
placements, net of cash
offering costs of $512,195 4,329,850 43,298 -- 7,766,547 -- -- 7,809,845
Issuance of common stock for
services.................. 450,000 4,500 -- 1,003,125 -- -- 1,007,625
Issuance of options and
warrants for services..... -- -- -- 5,849,585 -- -- 5,849,585
Deferred employee stock
option compensation....... -- -- -- 607,885 (607,885) -- --
Amortization of deferred
employee stock option
compensation.............. -- -- -- -- 1,120,278 -- 1,120,278
Issuance of common stock in
settlement of debt to
directors and related
parties................... 4,840,077 48,402 -- 2,371,637 -- -- 2,420,039
Net Loss -- -- -- -- -- (23,998,734) (23,998,734)
---------- -------- ------- ----------- ---------- ------------ ------------
BALANCE, JUNE 30, 2001...... 41,344,467 $413,445 $(7,973) $92,293,370 $ (713,275) $(90,120,925) $ 1,864,642
========== ======== ======= =========== ========== ============ ============

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

F-8

mPHASE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION (OCTOBER 2, 1996)
TO JUNE 30, 1997 AND FOR EACH OF THE FOUR YEARS
IN THE PERIOD ENDED JUNE 30, 2002

$.01 Stated Treasury Additional Deferred
Shares Value Stock Paid-in Stock Compensation
---------- ----------- -------- ------------- ------------

Balance June 30, 2001...................................... 41,344,467 $413,445 $(7,973) $ 92,293,370 $(713,275)
Sale of Common stock with warrants in private placement.... 6,980,643 69,807 -- 1,903,943 --
Issuance of Common stock for services...................... 2,976,068 29,760 -- 1,169,241 --
Issuance of options and warrants for services.............. -- -- -- 1,877,937 --
Cancellation of unearned options to former employees....... -- -- -- (140,802) 140,802
Amortization of deferred employee stock option compensation -- -- -- -- 548,550
Issuance of common stock and warrants in settlement of debt
to related parties and strategic vendors................. 7,492,996 74,930 -- 2,663,728 --
Sale of Common stock to certain Officers and Directors in
private placement........................................ 2,000,000 20,000 -- 980,000 --
Issuance of Common stock upon exercise of options 13,334 133 -- 3,867 --
Net Loss................................................... -- -- -- -- --
Other comprehensive loss................................... -- -- -- -- --
---------- -------- ------- ------------ ---------
Balance, June 30, 2002..................................... 60,807,508 $608,075 $(7,973) $100,751,284 $(23,923)
========== ======== ======= ============ =========

F-9

TOTAL
Accumulated Comprehensive STOCKHOLDERS
Deficit Loss EQUITY (DEFICIT)
------------- ------------- ----------------

Balance June 30, 2001......................................................... $(90,120,925) -- $ 1,864,642
Sale of Common stock with warrants in private placement....................... -- -- 1,973,750
Issuance of Common stock for services......................................... -- -- 1,199,001
Issuance of options and warrants for services................................. -- -- 1,877,937
Cancellation of unearned options to former employees.......................... -- -- --
Amortization of deferred employee stock option compensation................... -- -- 548,550
Issuance of common stock and warrants in settlement of debt to related parties
and strategic vendors....................................................... -- -- 2,738,658
Sale of Common stock to certain Officers and Directors in private placement... -- -- 1,000,000
Issuance of Common stock upon exercise of options............................. -- -- 4,000
Net Loss...................................................................... (11,245,361) -- (11,245,361)
Other comprehensive loss...................................................... -- (4,026) (4,026)
------------- ------- ------------
Balance, June 30, 2002........................................................ $(101,366,286) $(4,026) $ (42,849)
============= ======= ============

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

F-10

mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS

Inception
For the Years Ended (October 2,
June 30, 1996) to
--------------------------- June 30,
2000 2001 2002 2002
------------ ------------ ------------ -------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................... $(38,161,542) $(23,998,734) $(11,245,361) $(101,366,286)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ..................................... 756,055 1,235,213 1,653,346 4,168,188
Book value of fixed assets disposed ............................... 5,796 61,414 -- 74,272
Loss on unconsolidated subsidiary ................................. -- -- -- 1,466,467
Provision for doubtful accounts ................................... -- 29,218 2,906 32,124
Impariment of note receivable ..................................... -- 212,500 20,250 232,750
Gain on Extinguishments ........................................... -- -- (142,236) (142,236)
Non-cash common stock, common stock option and warrant expense .... 20,431,800 7,398,455 3,261,449 47,009,762
Changes in operating assets and liabilities:
Accounts receivable ............................................... (151,186) (170,466) 15,748 (305,904)
Inventory ......................................................... -- (4,303,895) 961,179 (3,342,716)
Prepaid expenses and other
current assets .................................................... (730,626) 88,280 173,649 (566,797)
Production advances-related parties ............................... (1,109,641) 1,109,641 -- --
Other assets ...................................................... -- (150,000) 146,420 (3,580)
Receivables from subsidiary ....................................... -- -- -- (150,000)
Due from officer .................................................. -- (100,000) 100,000 --
Accounts payable .................................................. 1,086,736 2,802,008 (340,057) 3,982,456
Accrued expenses .................................................. (391,997) (482,394) 332,819 1,538,585
Deferred revenue .................................................. -- -- 214,180 214,180
Due to related parties:
Microphase....................................................... (14,335) 709,832 864,555 1,574,405
Janifast......................................................... -- 1,272,709 907,450 2,180,159
Officers......................................................... 412,400 (412,400) 312,504 312,504
Accrued expense, Lintel.......................................... -- 477,000 -- 477,000
Due to Others.................................................... 85,300 59,566 25,794 211,972
------------ ------------ ------------ -------------
Net cash used in operating activities............................ (17,781,240) (13,685,053) (2,735,405) (42,402,695)
------------ ------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in patents and licensing rights ........................ (38,272) (148,127) (74,649) (375,720)
Purchase of property and equipment ................................ (1,348,210) (705,577) (31,445) (2,463,800)
------------ ------------ ------------ -------------
Net cash used in investing activities............................ (1,386,482) (853,704) (106,094) (2,839,520)
------------ ------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from private placement
of common stock and exercise of
options and warrants............................................. 17,622,279 8,137,345 2,977,750 45,417,444
Repurchase of treasury stock at cost .............................. -- -- -- (7,973)
Repayment of note payable ......................................... -- -- (120,191) (120,191)
------------ ------------ ------------ -------------
Net cash provided by financing activities........................ 17,622,279 8,137,345 2,857,559 45,289,280
------------ ------------ ------------ -------------
Net increase (decrease) in cash (1,545,443) (6,401,412) 16,060 47,065
CASH AND CASH EQUIVALENTS, beginning of period .................... 7,977,860 6,432,417 31,005 --
------------ ------------ ------------ -------------
CASH AND CASH EQUIVALENTS, end of period .......................... $ 6,432,417 $ 31,005 $ 47,065 $ 47,065
============ ============ ============ =============

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

F-11

mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002

1. ORGANIZATION AND NATURE OF BUSINESS

mPhase Technologies, Inc. ("mPhase" or the "Company") was organized on
October 2, 1996. The primary business of mPhase is to design, develop,
manufacture and market high-bandwidth telecommunications products
incorporating digital subscriber line ("DSL") technology. The present
activities of the Company are focused on the deployment of its proprietary
Traverser(TM) System, which delivers MPEG2, non-Internet Protocol-based
television, high-speed Internet and voice over copper wire. Additionally, the
Company sells a line of DSL component products.

On February 17, 1997, mPhase acquired Tecma Laboratories, Inc., ("Tecma") in
a transaction accounted for as a reverse merger.

On June 25, 1998, the Company acquired Microphase Telecommunications, Inc.
("MicroTel") a Delaware corporation, through the issuance of 2,500,000 shares
of its common stock in exchange for all the issued and outstanding shares of
MicroTel (Note 4). The assets acquired in this acquisition were patents and
patent applications utilized in the Company's proprietary Traverser(TM)
Digital Video and Data Deliver System ("Traverser(TM)").

On August 21, 1998, the Company incorporated a 100% wholly-owned subsidiary
called mPhaseTV.net, Inc., a Delaware corporation, to market interactive
television and e-commerce revenue opportunities. This subsidiary is dissolved.

On March 2, 2000 the Company acquired a 50% interest in
mPhaseTelevision.Net, Inc., an incorporated joint venture with AlphaStar
International, Inc. (Note 8). The Company acquired an additional interest in
the joint venture of 6.5% in April of 2000 for $1.5 million. Based on its
controlling interest in mPhaseTelevision.Net, the operating results of
mPhaseTelevision.Net are included in the consolidated results of the Company
since March 2, 2000.

The Company is in the development stage and its present activities are
focused on the commercial deployment of its proprietary Traverser(TM) and
associated DSL component products. Since mPhase is in the development stage,
the accompanying consolidated financial statements should not be regarded as
typical for normal operating periods.

2. LOSSES DURING THE DEVELOPMENT STAGE AND MANAGEMENT'S PLANS

Through June 30, 2002, the Company had incurred development stage losses
totaling approximately $101,366,000, and at June 30, 2002 had a stockholders'
deficit of $42,849. At June 30, 2002, the Company had approximately $47,065 of
cash, cash equivalents and approximately $273,780 of trade receivables to fund
short-term working capital requirements.

The Company's ability to continue as a going concern and its future success
is dependent upon its ability to raise capital in the near term to: (1)
satisfy its current obligations, (2) continue its research and development
efforts, and (3) the successful wide scale development, deployment and
marketing of its products.

During the quarter ended December 31, 2001, certain officers, directors and
related parties were issued 2,000,000 restricted shares of the Company's
common stock for the investment of $1,000,000 in cash. The Company also
completed private placements of its common stock during the fiscal year ended
June 30, 2002, generating proceeds of approximately $2.7 million, and
converted certain payables and accrued expenses with related parties and
strategic vendors to equity, approximately $3.6 million, and to long-term
notes,

F-12

mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002

2. LOSSES DURING THE DEVELOPMENT STAGE AND MANAGEMENT'S PLANS -- (Continued)

approximately $1.5 million. In addition, subsequent to June 30, 2002, related
parties agreed in principle and strategic vendors executed a Memorandum of
Intention to convert a total of approximately $1.9 million to equity.

Management estimates that the Company will need additional minimum capital
of $1.5 million by June 30, 2003 to continue its operations either through
revenues from sales, external independent or related party funding including
some combination thereof (and further reduction in our cash expenses currently
running at approximately $175,000 per month).

The Company presently has ongoing discussions and negotiations with a number
of additional financing alternatives, one or more of which it believes will be
able to successfully close to provide necessary working capital, while
maintaining sensitivity to shareholder dilution issues including the
possibility of a Rights Offering with the Company's existing shareholders.

In addition to the above financing activities, the following business
initiatives are also ongoing and are expected to provide additional working
capital to the Company.

The Company is currently negotiating with several organizations for the
commencement of commercial sales of its Traverser(TM) products, including
deployment at existing test sites. The Company has had discussions with
certain companies for increasing sales of its POTS splitter and other
component products.

Management believes that actions presently being taken to complete the
Company's development stage through the commercial roll-out of its
Traverser(TM) Digital Video and Data Delivery System will be successful.
However, there can be no assurance that mPhase will generate sufficient
revenues to provide positive cash flows from operations or that sufficient
capital will be available, when required, to permit the Company to realize its
plans. The accompanying financial statements does not include any adjustments
that might result from the outcome of this uncertainty.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of mPhase, its
wholly-owned and majority owned subsidiaries. Significant intercompany
accounts and transactions have been eliminated in consolidation.

USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

RECLASSIFICATIONS
Certain reclassifications have been made in the prior period consolidated
financial statements to conform to the current period presentation.

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

F-13

mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)

PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of three to five years.

SHORT-TERM INVESTMENTS
Short-term investments principally consist of highly-liquid shares of
corporate securities. The Company classifies all these short-term investments
as available-for-sale securities. Unrealized gains and losses on these
investments are recorded in accumulated other comprehensive income (loss) as a
separate component of shareholders' equity. Any decline in market value judged
to be other than temporary is recognized in determining net income. Realized
gains and losses from the sale of these investments are included in
determining net income (loss).

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

As required, mPhase has adopted the Securities and Exchange Commission
("SEC") Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements", which provides guidelines on applying generally
accepted accounting principles to revenue recognition based on the
interpretations and practices of the SEC. The Company recognizes revenue for
its POTS Splitter Shelf and other DSL component products at the time of
shipment, at which time, no other significant obligations of the Company
exist, other than normal warranty support.

SHIPPING AND HANDLING CHARGES
The Company includes costs of shipping and handling billed to customers in
revenue and the related expense of shipping and handling costs is included in
cost of sales.

BUSINESS CONCENTRATIONS AND CREDIT RISK
To date the Company's products have been sold to a limited number of
customers, primarily in the telecommunications industry. The Company had
revenues from two customers representing 64% and 19% of total revenues during
the year ended June 30, 2001. The Company had revenues from two customers
representing 39% and 21% of total revenues during the year ended June 30,
2002.

ADVERTISING COSTS
Advertising costs are expensed as incurred.

COMPREHENSIVE INCOME (LOSS)
In addition to net loss, comprehensive income (loss) includes all changes in
equity during a period, except those resulting from investments by and
distributions to owners. Items of comprehensive income include foreign
currency exchanges and unrealized gains and losses on investments classified
as available for sale.

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

PATENTS AND LICENSES
Patents and licenses are capitalized when mPhase determines there will be a
future benefit derived from such assets, and are stated at cost. Amortization
is computed using the straight-line method over the estimated useful life of
the asset, generally five years.

F-14

mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)

Amortization expense was $442,444, $460,121 and $471,629 for the years ended
June 30, 2000, 2001, and 2002, respectively.

INVENTORIES

Inventory consists mainly of the Company's POTS Splitter Shelf and Filters.
Inventory is comprised of the following:

June 30
------------------------
2001 2002
---------- -----------

Raw materials ...................................... $ 639,524 $ 266,748
Work in Progress ................................... -- 1,045,679
Finished goods ..................................... 3,978,923 3,273,644
---------- -----------
Total .............................................. $4,618,447 $ 4,586,071
Less: Reserve for obsolescence ..................... (314,552) (1,243,355)
---------- -----------
$4,303,895 $ 3,342,716
========== ===========

LONG-LIVED ASSETS
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of," the Company reviews
its long-lived assets for impairment when changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Such changes in
circumstances may include, among other factors, a significant change in
technology that may render an asset or an asset group obsolete or
noncompetitive, a significant change in the extent or manner in which an asset
is used, evidence of a physical defect in an asset or asset group or an
operating loss.

If changes in circumstances indicate that the carrying amount of an asset
may not be recoverable, then the Company estimates the fair value based on the
undiscounted future cash flows expected to result from the use of the asset
and its eventual disposition, and would record an impairment loss (equal to
the amount by which the carrying amount of the asset exceeds the fair value of
the asset) if such estimated cash flows are less than the carrying amount of
the asset. Fair value would be determined, if necessary, based on an outside
appraisal.

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

The carrying amounts reported in the consolidated balance sheets for
mPhase's notes payable, long-term debt, amounts due to related parties
approximate their fair values as they represent the amount the Company expects
to liquidate these obligations with cash or cash equivalents, and the amounts
recorded as other liabilities and other liabilities -- related parties
approximate their fair values as they represent the amount in which the
Company expects to satisfy these obligations by the issuance of the Company's
equity without material gain or loss.

LOSS PER COMMON SHARE, BASIC AND DILUTED
mPhase accounts for net loss per common share in accordance with the
provisions of SFAS No. 128, "Earnings per Share" ("EPS"). SFAS No. 128
requires the disclosure of the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. Common equivalent shares have been
excluded from the computation of diluted EPS since their effect is
antidilutive.

F-15

mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)

WARRANTY RESERVE
The Company warrants that all equipment manufactured by it will be free from
defects in material and workmanship under normal use for a period of one year
from the date of shipment. Through June 30, 2002, substantially all sales by
the Company have been from component telephone equipment parts, primarily the
Company's POTS Splitter Shelves. The Company's' actual experience for cost and
expenses in connection with such warranties have been immaterial and through
June 30, 2002 no additional amounts have been considered necessary to reserve
for additional warranty costs at this time.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS
141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142").
SFAS 141 required all business combinations initiated after June 30, 2001 to
be accounted for using the purchase method. Under SFAS 142, goodwill and
intangible assets with indefinite lives are no longer amortized but are
reviewed annually (or more frequently if impairment indicators arise) for
impairment. Separable intangible assets that are not deemed to have indefinite
lives will continue to be amortized over their useful lives (but with no
maximum life). The amortization provisions of SFAS 142 apply to goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, the Company is required to
adopt SFAS 142 effective January 1, 2002 and accordingly, during the period
ended June 30, 2002, the adoption of SFAS had no material effect on the
Company's results of operations or financial position.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of", and provides
guidance on classification and accounting for such assets when held for sale
or abandonment. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. Management does not expect that adoption of SFAS No. 144
will have a material effect on the Company's results of operations or
financial position effective July 1, 2002.

In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections", which recinds SFAS No. 4 and No. SFAS 44 and SFAS No. 64 which
relates to circumstances whereby the Company would determine when the
settlement of debt or other liabilities would be considered extraordinary or
recurring. Management does not expect that adoption of SFAS No. 145 will have
a material effect on the Company's results of operations or financial position
effective July 1, 2002.

STATEMENT OF CASH FLOW SUPPLEMENTAL INFORMATION

JUNE 30 JUNE 30
2001 2002
---------- ----------

Interest paid ....................................... $ 1,201 $ 21,760
========== ==========
Taxes paid .......................................... $ -- $ --
========== ==========
Schedule of Non-Cash
Investing and Financing Activities:
Conversion of accounts payable and accrued expenses
to equity.......................................... $2,420,039 $2,738,658
========== ==========
Conversion of accounts payable and accrued expenses
to notes payable................................... $ -- $1,487,747
========== ==========
Investments in Patents and Licenses paid with equity $ -- $ 43,750
========== ==========

F-16

mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002

4. ACQUISITION OF MICROTEL

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

5. NOTE RECEIVABLE
As consideration for a letter of settlement with a former consultant of
mPhase, the Company had loaned the former consultant $250,000 in the form of a
Note (the "Note") secured by 75,000 shares of the former consultants common
stock of mPhase. The Note was due April 7, 2001. The Company decreased the
Note to $37,500, representing the estimated value of the underlying stock at
June 30, 2001. The Company charged $212,500 to administrative expense as a
result of this impairment. The Company has included the $37,500, in long-term
assets in the accompanying consolidated balance sheet for the year ended June
30, 2001. The Company decreased the Note to $17,250, representing the
estimated value of the underlying stock at June 30, 2002. The Company charged
$20,250 to administrative expenses as a result of the further impairment of
the underlying stock value at June 30, 2002. The Company has included the
$17,250 in long-term assets in the accompanying consolidated balance sheet for
the year ended June 30, 2002.

6. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consist of the following:

June 30
-------------------------
2001 2002
---- ----

Equipment ......................................... $ 2,879,738 $ 3,593,418
Office and marketing equipment .................... 471,086 482,464
----------- -----------
3,350,824 4,075,882
Less-Accumulated depreciation ..................... (1,151,979) (2,333,696)
----------- -----------
$ 2,198,845 $ 1,742,186
=========== ===========

Depreciation expense for the years ended June 30, 2000, 2001, and 2002, was
$313,611, $775,092, and $1,181,717, respectively of which $284,954, $501,676,
and $983,163, respectively is included in research and development expense.

7. ACCRUED EXPENSES
Accrued expenses consist of the following:

June 30
---------------------
2001 2002
---- ----

GTRC (Notes 13, 14) ................................... 400,000 --
Other ................................................. 1,342,138 $673,065
---------- --------
$1,742,138 $673,065
========== ========

8. JOINT VENTURE

In March 2000, mPhase acquired a 50% interest in mPhaseTelevision.Net
(formerly Telco Television Network, Inc.), an incorporated joint venture, for
$20,000. The agreement provided for the grant of warrants to the joint venture
partner in consideration of the execution of the Joint Venture Agreement, to
purchase 200,000 shares of the Company's common stock for $4.00 per share
(valued at $2,633,400). This non-cash charge is included in general and
administrative expenses in the accompanying statement of operations for the

F-17

mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002

8. JOINT VENTURE -- (Continued)

year ended June 30, 2000. The fair value of the warrants granted to the joint
venture partner as of the date of grant was based on the Black-Scholes stock
option pricing model, using the following weighted average assumptions: annual
expected rate of return of 0%, annual volatility of 115%, risk free interest
rate of 5.85% and an expected option life of 3 years.

The agreement stipulates for mPhase's joint venture partner, AlphaStar
International, Inc., ("Alphastar"), to provide mPhaseTelevision.Net right of
first transmission for its transmissions of MPEG-2 digital satellite
television. In addition, in March 2000, mPhase loaned the joint venture
$1,000,000 at 8% interest per annum. The loan is repayable to the Company from
equity infusions to the subsidiary, no later than such time that
mPhaseTelevision.Net qualifies for a NASDAQ Small Cap Market Listing. During
April 2000, the Company acquired an additional 6.5% interest in
mPhaseTelevision.Net for $1,500,000.

As of June 30, 2002 mPhase owns a 56.5% interest in mPhaseTelevision.net.
The Company terminated the lease of the earth station for business reasons,
and there was no material impact on mPhaseTelevision.net's operating
activities.

During the fiscal year ended June 30, 2001 and ended June 30, 2002, the
joint venture was charged $1,009,420 and $64,039, respectively for fees and
costs by its joint venture partner and its affiliates.

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

9. LONG TERM DEBT
Long-term debt is comprised of the following:

June 30,
2002
----

Settlement Agreements:
Accounts payable expected to be converted to Note payable to GTRC
bearing 7% interest, amortized in equal monthly payments of
$4,167 and a lump sum payment of $75,000 due twelve months from
Sept. 15, 2002 (see also--Note 14--Subsequent Events)............ $ 150,000
Accounts payable expected to be converted to Note payable to GTRC
bearing 7% interest, amortized in average monthly payments of $0
in 2003, $39,568 in 2004, $56,085 in 2005 $60,140 in 2006,
$64,487 in 2007, and a lump sum payment of $253,955 due at
maturity in September 2007 (see also--Note 14--Subsequent Events) $ 474,235
Note payable to law firm bearing 8% interest, monthly installments
of $5,000 per month commencing in June 2002 and continuing
through December 1, 2003 with a final payment of principal plus
accrued interest due at maturity on December 31, 2003............ $ 415,887
Note payable to vendor bearing 8% interest due in weekly payments
of $5,000 including accrued interest. These payments commenced in
January 2002 and continue until June 2003........................ $ 237,169
Note payable to vendor non interest bearing average monthly
payments of $4,167 in 2003 and $3,660 in 2004. These payments
commenced in April 2002 and continue until May 2004.............. $ 90,266
----------
Total ............................................................. 1,367,557
Less: Current portion ............................................. (353,339)
----------
Long-term Debt, non-current portion ............................... $1,014,218
==========

F-18

mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002

9. LONG TERM DEBT -- (Continued)

At June 30, 2002 total maturities of long-term debt are as follows:

2003 .............................................................. $ 353,339
2004 .............................................................. 575,052
2005 .............................................................. 55,760
2006 .............................................................. 59,791
2007 .............................................................. 64,113
2008 and thereafter ............................................... 259,502
----------
TOTAL ............................................................. $1,367,557
==========

10. STOCKHOLDERS' EQUITY

mPhase initially authorized capital of 50,000,000 shares of common stock
with no par value. On February 23, 2000, the Board of Directors proposed and
on May 22, 2000 the shareholders approved an increase in the authorized
capital to 150,000,000 shares of common stock.

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

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

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

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

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

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

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

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

In April, May and June of 1999, mPhase sold a total of 642,000 shares of
common stock at $2.50 per share, together with 642,000 warrants for
$1,559,647, net of offering costs of $45,353 in private transactions pursuant
to Rule 506 of Regulation D of the Securities Act of 1933, as amended, with
accredited investors.

F-19

mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002

10. STOCKHOLDERS' EQUITY -- (Continued)

The warrants expire in June 2004. By June 30, 2000, 148,000 of these warrants
were exercised, generating proceeds to the Company of $370,000.

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

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

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

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

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

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

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

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

F-20

mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002

10. STOCKHOLDERS' EQUITY -- (Continued)

Effective June 30, 2001 the Company issued 4,840,077 shares of the Company's
common stock in settlement of debt totalling $2,420,039 to directors and
related parties, based upon the fair market value of the common stock issued
which approximated the debt settled.

In July 2001, the Company sold 75,000 shares of its common stock and a like
amount of warrants to purchase one share each of the Company's common stock at
an exercise price of $3.00 generating proceeds of $75,000 in a private
transaction with accredited investors.

In December 2001, the Company issued 3,474,671 shares of its common stock
and a like amount of warrants to purchase one share each of the Company's
common stock at an exercise price of $.30 generating gross proceeds of
$1,042,000 in a private transaction pursuant to Rule 506 of Regulation D of
the Securities Act of 1933, as amended with accredited investors, which
included a subscription receivable of $440,200, which was collected in January
2002.

In January 2002, the Company issued 2,754,503 shares of its common stock and
a like amount of warrants to purchase one share each at an exercise price of
$.30 generating gross proceeds of $826,351 and June 2002, the Company issued
100,000 shares of its common stock and a like amount of warrants to purchase
one share each at an exercise price of $.30, generating gross proceeds of
$30,000 in a private placements pursuant to Rule 506 of Regulation D of the
Securities Act of 1933, as amended, with accredited investors.

In connection with the December 2001, January 2002, and June 2002, private
placements, the Company issued 576,469 shares of its common stock and a like
amount of warrants to purchase one share each at an exercise price of $.30 to
finders and consultants whom assisted in the transaction.

During the year ended June 30, 2002 the Company issued 7,492,996 shares of
its common stock, and 5,953,490 warrants to related parties and strategic
vendors, in connection with the conversion of $2,738,658 of accounts payable
and accrued expenses, of which 6,150,000 shares of common stock and 3,400,000
warrants were issued in settlement of $1,460,000 of accounts payable to
related parties is discussed below.

Related parties and strategic vendors converted debt aggregating
approximately $1,020,000 and $96,000 respectively into approximately (a)
3,400,000 shares and of common stock plus warrants to purchase another
3,400,000 shares of common stock at $.30 for a term of 5 years and (b) plus
320,000 shares of common stock plus warrants to purchase another 320,000
shares of common stock at $.30 for a term of 5 years, respectively. Such
conversions were upon the same terms of a concurrent private placement of
common stock by the Company of approximately $1.8 million in cash received for
6 million shares of common stock plus warrants to purchase another 6 million
shares of the Company's common stock for 5 years at $.30 per share. No gain or
loss was recognized in connection with conversions by related parties and
strategic vendors of the above total of $1,116,000 of debt.

In addition, 3,772,996 shares of common stock were issued to related parties
and strategic vendors, the value of which was based upon the price of the
Company's common stock on the effective date of settlement with each party.
Finally, two warrants to purchase 2,233,490 issued the Company's outside
counsel to settle outstanding indebtedness of approximately $450,000 as of
March 15, 2002. The aggregate value of such warrants was estimated using the
Black Scholes options pricing model, assuming an annual expected return of 0%,
annual Beta volatility of 125.4 and a risk free interest rate of 5.9% pursuant
to EITF 96-18, for the conversion of $1,622,658 of such liabilities which
resulted in an aggregate gain on extinguishments of $142,236.

F-21

mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002

10. STOCKHOLDERS' EQUITY -- (Continued)

During the year ended June 30, 2002, certain officers, directors and related
parties were issued 2,000,000 and 6,150,000 shares of mPhase common stock and
3,400,000 warrants in consideration of the investment of $1,000,000 cash and
the conversion of $1,460,000 accounts payable. (see Note 11).

The Company granted 1,505,000 options, and 48,068 warrants of its common
stock and 48,068 to employees and 5,065,000 options to consultants for
services performed during the fiscal year ended June 30, 2002. Compensation
expense for the options granted to consultants was recorded based on the fair
value of the options at the date of grant. Also, during the fiscal year ended
June 30, 2002, the Company granted 2,923,000 shares of its common stock and
1,675,000 warrants to consultants for services performed.

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

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

On May 30, 2001, mPhase established the 2001 Stock Incentive Plan (the "2001
Plan"), in which incentive stock options and non-qualified stock options may
be granted to officers, employees and consultants of the Company. The total
shares eligible under the 2001 Plan is 20,000,000 shares, in addition to the
shares previously authorized for issuance under the prior plan. Vesting terms
of the options range from immediately to two years and options generally
expire in five years. The maximum number of shares that may be granted during
any one fiscal year to any one individual under the 2001 Plan is limited to
2,500,000 shares.

A summary of the stock option activity for the years ended June 30, 2000,
2001, 2002 pursuant to the terms of both plans, which include incentive stock
options and non-qualified stock options, is set forth on the below:

WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISE PRICE
---------- --------------

Outstanding at June 30, 2000 .................... 7,462,500 $ 2.09
Granted ......................................... 5,618,000 1.56
Exercised ....................................... (320,000) 1.02
Canceled ........................................ (180,000) 2.39
---------- ------
Outstanding at June 30, 2001 .................... 12,580,500 $ 1.94
Granted ......................................... 6,570,000 .43
Exercised ....................................... -- --
Canceled ........................................ (43,500) (4.26)
---------- ------
Outstanding at June 30, 2002 .................... 19,107,000 $ 1.27
========== ======
Exercisable at June 30, 2002 .................... 19,096,385 $ 1.27
========== ======

The fair value of options granted in 2000, 2001 and 2002 was estimated as of
the date of grant using the Black-Scholes stock option pricing model, based on
the following weighted average assumptions: annual

F-22

mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002

10. STOCKHOLDERS' EQUITY -- (Continued)

expected return of 0%, annual volatility of 115% in 2000, 113% in 2001, and
125.4% in 2002 risk-free interest rate ranging from 3.2% to 6.18% and expected
option life of three years.

The per share weighted average fair value of stock options granted during
2000, 2001, and 2002 was $6.99, $1.16, and $.26, respectively. The per share
weighted average remaining life of the options outstanding at June 30, 2000,
2001, and 2002 is 3.86, 3.66 and 3.29 years, respectively.

mPhase has elected to continue to account for stock-based compensation under
APB Opinion No. 25, under which no compensation expense has been recognized
for stock options granted to employees at fair market value. Had compensation
expense for stock options granted under the Plan been determined based on fair
value at the grant dates, mPhase's net loss for 2000, 2001 and 2002 would have
been increased to the pro forma amounts shown below.

JUNE 30
----------------------------------------
2000 2001 2002
----------- ----------- -----------

Net Loss:
As reported........................................................................... $38,161,542 $23,998,734 $11,245,361
Proforma.............................................................................. $40,097,570 $25,243,270 $11,673,091
Net Loss Per Share
As reported........................................................................... $ (1.41) $ (.72) $ (.23)
=========== =========== ===========
Pro forma............................................................................. $ (1.49) $ (.75) $ (.24)
=========== =========== ===========

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

For the year ended June 30, 2001, the Company recorded non-cash charges and
deferred compensation totaling $2,955,964 and $607,885, respectively, in
connection with the grant of 5,618,000 options to employees and options to
consultants for services rendered or to be rendered. Such charges are the
result of the differences between the quoted market value of the Company's
common stock on the date of grant and the exercise price for options issued to
employees and Black-Scholes stock option pricing calculations for options
issued to consultants.

For the year ended June 30, 2002, the Company recorded non-cash charges and
deferred compensation totaling $927,420 and $0, respectively, in connection
with the grant of 6,570,000 options to employees and consultants for services
rendered or to be rendered. Such charges are the result of the differences
between the quoted market value of the Company's common stock on the date of
grant and the exercise price for options issued to employees and Black-Scholes
stock option pricing calculations for options issued to consultants.

The following summarizes information about stock options outstanding at June
30, 2002:

WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE WEIGHTED
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
---------------------------------------------------------------- ----------- ----------- -------- ----------- --------

$0 - $.50 6,322,500 4.53 $ .37 6,322,500 $ .37
$.51 - $1.50 8,640,500 2.40 $ .92 8,640,500 $ .92
$1.50 - $16.38 4,144,000 2.75 $3.59 4,133,385 $3.59

F-23

mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002

10. STOCKHOLDERS' EQUITY -- (Continued)

WARRANTS

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

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

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

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

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

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

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

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

F-24

mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002

10. STOCKHOLDERS' EQUITY -- (Continued)

During the year ended June 30, 2002, the Company issued 75,000 and 6,797,643
warrants to investors and to finders, consultants and investment banking
firms, each of these warrants to purchase one share each of the Company's
common stock at $3.00 and $.30, for five years, in connection with private
placements. The Company also issued 13,334 shares of its common stock
following the exercise of warrants resulting in gross proceeds $4,000. Also,
during the year ended June 30, 2002, the Company granted 1,675,000 warrants to
consultants for services performed and 6,043,490 warrants to creditors,
including related parties, in connection with the conversion of outstanding
liabilities.

As of June 30, 2002, 21,965,260 warrants remain outstanding with a weighted
average exercise price of $1.05.

The following summarizes information about warrants issued pursuant to
various financing transactions through June 30, 2002.

WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
---------------------------------------------------------------- ----------- ----------- -------- ----------- --------

$.30 14,703,535 4.43 $0.30 14,703,535 $0.30
$0.45 - $0.50 370,000 4.59 $0.48 370,000 $0.48
$1.25 - $2.50 1,244,000 2.70 $2.00 1,244,000 $2.00
$3.00 - $5.00 5,647,725 4.03 $3.14 5,647,725 $3.14

11. RELATED PARTY TRANSACTIONS

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

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

mPhase's President, Executive Vice President and Chairman of the Board of
the Company are also officers of Microphase (Note 4). On May 1, 1997, the
Company entered into an agreement with Microphase, whereby it will use office
space as well as the administrative services of Microphase, including the use
of

F-25

mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002

11. RELATED PARTY TRANSACTIONS -- (Continued)

accounting personnel. This agreement was for $5,000 per month and was on a
month-to-month basis. In July 1998, the office space agreement was revised to
$10,000 and in January 2000 to $11,050 per month. In July 2001, the agreement
was revised to $11,340 a month. Additionally, in July 1998, mPhase entered
into an agreement with Microphase, whereby mPhase reimburses Microphase
$40,000 per month for technical research and development assistance.
Microphase also charges fees for specific projects on a project-by-project
basis. During the years ended June 30, 2000, 2001, and 2002 and for the period
from inception (October 2, 1996) to June 30, 2002, $2,547,847, $2,128,983,
$1,212,594 and $6,576,424, respectively, have been charged to expense or
inventory under these Agreements and is included in operating expenses in the
accompanying consolidated statements of operations.

Also, during the fiscal year ended June 30, 2000, $2,600,000 was advanced to
Microphase in the form of a note, which was repaid by Microphase during the
year. mPhase recorded $39,000 of interest income on this note for the year
ended June 30, 2000. The Company is obligated to pay a 3% royalty to
Microphase on revenues from its proprietary Traverser(TM) Digital Video and
Data Delivery System and DSL component products. During the year ended June
30, 2002, mPhase recorded royalties to Microphase totaling $78,762. Pursuant
to a debt conversion agreement between the Company and Microphase, for the
year ended June 30, 2001, Microphase received 1,278,000 shares of mPhase
common stock as discussed in Note 10. For the year ended June 30, 2002, in
consideration for a direct investment of $100,000 and pursuant to debt
conversion agreements, Microphase received 2,900,000 shares of mPhase common
stock and 2,200,000 warrants to purchase mPhase common stock. As of June 30,
2001, the Company had $70,799 payable to Microphase, which is included in
amounts due to related parties in the accompanying consolidated balance sheet.
As of June 30, 2002, the Company had $92,405 included in other liabilites-
related parties in the accompanying consolidated balance sheet as discussed in
Note 14. Additionally, at June 30, 2002, approximately $142,000 of undelivered
purchase orders remain outstanding to Microphase.

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

During the year ended June 30, 2000, mPhase advanced money to Janifast
Limited, which is owned by U.S. Janifast Holdings, Ltd, a related party of
which three directors of mPhase are significant shareholders, in connection
with the manufacturing of POTS Splitter shelves and DSL component products. As
of June 30, 2000 the amount advanced to Janifast was approximately $1,106,000,
which is included in production advances-related parties on the accompanying
balance sheet. There were no such advances as of June 30, 2002.

Pursuant to a debt conversion agreement between the Company and Janifast,
for the year ended June 30, 2001, Janifast received 1,200,000 shares of mPhase
common stock as discussed in Note 10. For the year ended June 30, 2002,
pursuant to debt conversion agreements, Janifast received 3,450,000 shares of
mPhase common stock and 1,200,000 warrants to purchase mPhase common stock.
During the years ended June 30, 2000, 2001 and 2002 and the period from
inception (October 2, 1996 to June 30, 2002) $0, $8,932,378, $1,759,308 and
$10,691,686, respectively have been charged to inventory or expense and is
included in operating expenses in the accompanying statements of operations.
As of June 30, 2002, the Company had $260,159 included in other liabilites-
related parties in the accompanying consolidated balance sheet as discussed in
Note 14. Additionally, at June 30, 2002, approximately $1,614,000 of
undelivered purchase orders remain outstanding to Janifast.

F-26

mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002

11. RELATED PARTY TRANSACTIONS -- (Continued)

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

On November 26, 1999, PacketPort, Inc., a company owned by Mr. Durando, the
President and CEO of mPhase, acquired a controlling interest in Linkon Corp.,
which subsequently changed its name to PacketPort.com, Inc. In connection with
this transaction, Mr. Durando transferred 350,000 of his own shares of mPhase's
common stock to Packet Port, Inc.

In July 2000, mPhase added a member to the Board of Directors who is
employed by an investment-banking firm that has assisted and is expected to
continue to assist the Company in raising capital through private financing.
During the year ended June 30, 2001, the company issued 140,350 shares of
common stock for investment banking services rendered during the period and
recorded an additional $69,000 of fees which is included in accrued expenses
at June 30, 2001. The Company has installed its prototype product and
commenced beta testing at Hart Telephone. In addition, the Company has entered
into a supply agreement with Hart Telephone upon the completion of beta
testing and the commencement of production of the Traverser(TM). As
consideration for the execution of the agreement with Hart Telephone, in May
2000, mPhase issued Hart Telephone 125,000 options each to purchase one share
of common stock at an exercise price of $1.00 (valued at $1,010,375), which is
included in research and development expenses in the accompanying statement of
operations as of June 30, 2000. A member of mPhase's Board of Directors is
employed by Lintel, Inc, the parent corporation of Hart Telephone. Prior to
becoming a director, this individual received 25,000 options during the fiscal
year ended June 30, 1999, of which 5,000 options were exercised during the
fiscal year ended June 30, 2000; 23,000 options during the fiscal year ended
June 30, 2001 and 15,000 options as a consultant for beta testing service
during fiscal year ended June 30, 2002. In addition, during the year ended
June 30, 2002 he received 62,500 options for services as a director.

12. INCOME TAXES

No provision has been made for corporate income taxes due to cumulative
losses incurred. At June 30, 2002, mPhase has operating loss carryforwards of
approximately $56.8 million and $56.5 million to offset future federal and
state income taxes respectively, which expire at various times from 2016
through 2022. Certain changes in stock ownership can result in a limitation in
the amount of net operating loss and tax credit carryovers that can be
utilized each year.

F-27

mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002

12. INCOME TAXES -- (Continued)

At June 30, 2002 the Company has net deferred income tax assets of
approximately $21.9 million comprised principally of the future tax benefit of
net operating loss carryforwards, which represents an increase of $1.0 million
for the fiscal year ended June 30, 2002. A full valuation reserve has been
recorded against such assets due to the uncertainty as to their future
realizability.

13. COMMITMENTS AND CONTINGENCIES

COMMITMENTS

mPhase has entered into various agreements with GTRC and its affiliate,
Georgia Tech Applied Research Corporation, ("GTARC"), pursuant to which the
Company receives technical assistance in developing the commercialization of
its Digital Video and Data Delivery System. The amount incurred by the Company
for GTRC technical assistance with respect to its research and development
activities during the years ended June 30, 2000, 2001, and 2002 totaled
$4,563,560, $3,814,300, and $450,000 respectively, and $13,424,300 from the
period from inception through June 30, 2002. Subsequent to June 30, 2002, the
Company and GTRC and its affiliate, GTARC, entered into a Memorandum of
Intention to exchange warrants and promissory notes for all amounts
outstanding and to exchange mutual Releases.

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

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

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

14. SUBSEQUENT EVENTS

On October 11, 2002, the Company, subject to the Company's and the counter
parties respective board of director's approval, entered into an agreement in
principle with the Company's officers and affiliates, including Janifast Ltd.
and Microphase Corporation, to convert up to an amount equal to the unpaid
compensation and accounts payable through September 30,2002. In the
accompanying balance sheet for June 30, 2002 the Company has reclassified
$312,504 due to officer's and $352,564 due to related parties to other
liabilities-related parties for amounts due through June that are expected to
be converted to equity.

On October 14, 2002, the Company entered into a memorandum of intention with
Georgia Tech Research Corporation, (GTRC), and its affiliate, Georgia Tech
Applied Research Corporation, (GTRAC), subject to the approval of the
respective board of director's, together with the exchange of mutual releases,
to convert all amounts outstanding as of June 30, 2002, in consideration for
two term notes totaling $624,235 with interest at 7% and varied payments
through 2007 and warrants to purchase shares of the Company's common stock
through 2007, at a price and formula to be agreed upon. In the accompanying
balance sheet for June 30, 2002 the Company has reclassified $624,235 and
$1,211,249 of accounts payable and accrued

F-28

expenses due to GTRC and GTRAC to long term debt and other liabilities for the
amounts expected to be converted to notes payable and equity, respectively.

15. RESTATEMENT

Management has reevaluated the adequacy and completeness of certain
disclosures in the accompanying consolidated financial statements including
Schedule II (Valuation and Qualifying Accounts, Item 14B). As a result of this
reevaluation, management has reissued the June 30, 2002 consolidated financial
statements in an effort to clarify and more completely disclose the Company's
presentation of the consolidated financial statements at June 30, 2002.

The aforementioned changes to the consolidated financial statements have no
effect on the financial position and results of operations for the year ended
June 30, 2002.

F-29

SCHEDULE II

ITEM 14B. VALUATION AND QUALIFYING ACCOUNTS

mPHASE TECHNOLOGIES, INC.

VALUATION AND QUALIFYING ACCOUNTS

Years Ended June 30, 2002, 2001 and 2000

(In Thousands)

Additions
-----------------------
Balance at Charged to Charged to
beginning costs and other Balance at
Description of year expenses accounts Deductions end of year
---------- ---------- ---------- ---------- -----------

Year ended June 30, 2002

Allowance for doubtful accounts (deducted from accounts
receivable)................................................ 29 3 (29) 3

=== === === =====

Allowance for obsolescence (deducted from inventory)........ 315 0 1,243

=== === === =====
Year ended June 30, 2001

Allowance for doubtful accounts (deducted from accounts
receivable)................................................ 0 29 0 29

=== === === =====

Allowance for obsolescence (deducted from inventory)........ 0 315 0 315

=== === === =====

Year ended June 30, 2000

Allowance for doubtful accounts (deducted from accounts
receivable)................................................ 0 0 0 0

=== === === =====

Allowance for obsolescence (deducted from inventory)........ 0 0 0 0

=== === === =====

PURSUANT TO SEC RELEASE NO. 33-8070 AND RULE 437A UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, mPHASE TECHNOLOGIES, INC. HAS NOT RECEIVED WRITTEN
CONSENT AFTER REASONABLE EFFORT TO OBTAIN CONFIRMATION OF AUDIT PROCEDURES FOR
THE ABOVE SCHEDULES FOR THE TWO YEARS ENDED JUNE 30, 2001. THIS REPORT IS A
COPY OF A PREVIOUSLY ISSUED ARTHUR ANDERSEN LLP REPORT. THIS REPORT HAS NOT
BEEN REISSUED BY ARTHUR ANDERSEN LLP. WITH RESPECT TO THIS INSTANT 10K/A, YOU
WILL NOT BE ABLE TO RECOVER AGAINST ARTHUR ANDERSEN LLP UNDER SECTION 11 OF
THE SECURITIES ACT FOR ANY UNTRUE STATEMENTS OF A MATERIAL FACT CONTAINED IN
THE FINANCIAL STATEMENTS AUDITED BY ARTHUR ANDERSEN LLP OR ANY OMISSIONS TO
STATE A MATERIAL FACT REQUIRED TO BE STATED THEREIN.

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: July 28, 2003 By: /s/ RONALD A. DURANDO
----------------------
Ronald A. Durando
President, CEO

Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

Necdet F. Ergul, Chairman of the Board July 28, 2003

Ronald A. Durando, Chief Executive Officer, Director July 28, 2003

Gustave T. Dotoli, Chief Operating Officer, Director July 28, 2003

Martin S. Smiley, Chief Financial Officer July 28, 2003

Anthony Guerino, Director July 28, 2003

Abraham Biderman, Director July 28, 2003

Michael McInerney, Director July 28, 2003

MPHASE TECHNOLOGIES, INC.

Certification of Procedures Followed in Connection with Sarbanes-Oxley Act
Certification

The undersigned, the Chief Executive Officer of mPhase Technologies Inc., a
New Jersey Corporation (the "Company") hereby certifies, for purposes of
documenting the steps followed by the officer in connection with the execution
and delivery to the Securities and Exchange Commission of the attached
certification, as follows:

(1) I reviewed in detail the Annual Report on Form 10K for the year ended
June 30, 2002, (the "Report") shortly before the certification was provided.

(2) I discussed the substance of the Report with each of the Company's
outside auditors and the Chief Financial Officer. These discussions took place
at various times and covered principally the financial statement portions of
the reports (including the notes which are an integral part of the financial
statements) and related financial disclosures. These discussions included my
verifying that the financial statements included in the report are accurate
and complete, and are properly prepared and consolidated. I confirmed that
each of the outside auditors and Chief Financial Officer were satisfied that
the notes to the financial statements read clearly and that the notes fairly
explain the company's significant accounting principles and significant
estimates, as well as disclose all material contingencies and "off balance
sheet" transactions and commitments known to them. In addition, my discussions
with outside auditors included a discussion of any material issues that came
up in their review of the financial statements and the resolution of those
issues. I also verified with the outside auditors and Chief Financial Officer
that internal controls are in place and operating to warrant reliance upon the
financial and business information provided to me by management.

(3) I confirmed that the consolidated financial statements included in the
Report are accurate and complete in all material respects, reflect all
transactions of the Company during and for the statement period following
accounting principles consistent with those applied in prior periods, and that
all period end adjustments have been made in a manner consistent with the
accounting principles in prior periods (other than usual and customary year
end adjustments in the case of interim statements).

(4) I informed the heads of the Company's primary business units and
divisions, as well as any officers of those business units or divisions who
have the primary financial reporting responsibility that I would be providing
a certification regarding the accuracy of the Report and confirmed orally and
in writing with each such head and financial officer that insofar as they
knew, the Report did not include any untrue statement of a material fact or
omit to state a material fact.

(5) As a result of the foregoing procedures, I concluded that, to the best
of my knowledge, I was able to provide the certification without exception.

I have executed this certification as of the 28th day of July 2003.

/s/ Ronald A. Durando
-----------------------
Name: Ronald A. Durando
Chief Executive Officer

mPhase Technologies Inc.

Certification of Procedures Followed in Connection with Sarbanes-Oxley Act
Certification

The undersigned, Chief Operating Officer of mPhase Technologies Inc., a New
Jersey Corporation (the "Company") hereby certifies, for purposes of
documenting the steps followed by the officer in connection with the execution
and delivery to the Securities and Exchange Commission of the attached
certification, as follows:

(1) I reviewed in detail the Annual Report on Form 10-K for the year ended
June 30, 2002, (the "Report") shortly before the certification was provided.

(2) I discussed the substance of the Report with each of the Company's
outside auditors and chief financial officer. These discussions took place at
various times and covered principally the financial statement portions of the
reports (including the notes which are an integral part of the financial
statements) and related financial disclosures. These discussions included my
verifying that the financial statements included in the report are accurate
and complete, and are properly prepared and consolidated. I confirmed that
each of the outside auditors and the Chief Financial Officer were satisfied
that the notes to the financial statements read clearly and that the notes
fairly explain the company's significant accounting principles and significant
estimates, as well as disclose all material contingencies and "off balance
sheet" transactions and commitments known to them. In addition, my discussions
with outside auditors included a discussion of any material issues that came
up in their review of the financial statements and the resolution of those
issues. I also verified with the outside auditors and acting controller that
internal controls are in place and operating to warrant reliance upon the
financial and business information provided to me by management.

(4) I informed the heads of the Company's primary business units and
divisions, as well as any officers of those business units or divisions who
have the primary financial reporting responsibility, that I would be providing
a certification regarding the accuracy of the Report and confirmed orally and
in writing with each such head and financial officer that insofar as they
knew, the Report did not include any untrue statement of a material fact or
omit to state a material fact.

(5) As a result of the foregoing procedures, I concluded that, to the best
of my knowledge, I was able to provide the certification without exception.

I have executed this certification as of the 28th day of July 2003.

/s/ Gustave T. Dotoli
-----------------------
Name: Gustave T. Dotoli
Chief Operating Officer

mPhase Technologies Inc.

Certification of Procedures Followed in Connection with Sarbanes-Oxley Act
Certification

The undersigned, Chief Financial Officer of mPhase Technologies Inc., a New
Jersey Corporation (the "Company") hereby certifies, for purposes of
documenting the steps followed by the officer in connection with the execution
and delivery to the Securities and Exchange Commission of the attached
certification, as follows:

(1) I reviewed in detail the Annual Report on Form 10-K for the year ended
June 30, 2002, (the "Report") shortly before the certification was provided.

(2) I discussed the substance of the Report with each of the Company's
outside auditors and assistant controller. These discussions took place at
various times and covered principally the financial statement portions of the
reports (including the notes which are an integral part of the financial
statements) and related financial disclosures. These discussions included my
verifying that the financial statements included in the report are accurate
and complete, and are properly prepared and consolidated. I confirmed that
each of the outside auditors and acting controller were satisfied that the
notes to the financial statements read clearly and that the notes fairly
explain the company's significant accounting principles and significant
estimates, as well as disclose all material contingencies and "off balance
sheet" transactions and commitments known to them. In addition, my discussions
with outside auditors included a discussion of any material issues that came
up in their review of the financial statements and the resolution of those
issues. I also verified with the outside auditors and assistant controller
that internal controls are in place and operating to warrant reliance upon the
financial and business information provided to me by management.

(4) I informed the heads of the Company's primary business units and
divisions, as well as any officers of those business units or divisions who
have the primary financial reporting responsibility, that I would be providing
a certification regarding the accuracy of the Report and confirmed orally and
in writing with each such head and financial officer that insofar as they
knew, the Report did not include any untrue statement of a material fact or
omit to state a material fact.

(5) As a result of the foregoing procedures, I concluded that, to the best
of my knowledge, I was able to provide the certification without exception.

I have executed this certification as of the 28th day of July 2003.

/s/ Martin S. Smiley
-----------------------
Name: Martin S. Smiley
Chief Financial Officer