SELECTED OPERATING DATA
Year Ended June 30,
(in thousands except per share data)

SELECTED QUARTERLY DATA

FISCAL 2005 QUARTERLY	Three Months Ended
STATEMENT OF OPERATIONS DATA:	September 30,	December 31	March 31,	June 30,
	(in thousands, except share amounts)
Total revenues	$179	$295	$564	$673
Costs and Expenses:
Cost of sales	130	245	448	623
Research and development	1,101	1,055	1,664	1,307
General and administrative	709	2,071	2,636	1,164
Depreciation and amortization	1	127	65	(130)
Operating loss	(1,762)	(3,203)	(4,249)	(2,291)
Interest expense, Net	(29)	(66)	(37)	21
Other Income (expense)	(41)	(37)	(60)	520
Net Loss	$(1,832)	(3,306)	$(4,346)	$(1,750)
Basic and diluted net loss per share	$(.02)	(.04)	$(.04)	$(.01)
Shares used in basic and diluted net loss per share	89,719,962	93,388,584	120,015,504	137,719,500
FISCAL 2004 QUARTERLY	Three Months Ended
STATEMENT OF OPERATIONS DATA:	September 30,	December 31	March 31,	June 30,
	(in thousands, except share amounts)
Total revenues	$2,489	$1,291	$555	$306
Costs and Expenses:
Cost of sales	2,099	1,191	484	294
Research and development	611	843	1,404	1,212
General and administrative	605	914	803	1,856
Depreciation and amortization	46	28	27	22
Operating loss	(872)	(1,685)	(2,162)	(3,078)
Interest expense, Net	(16)	(16)	(20)	(59)
Other Income (expense)	23	-	(152)	279
Net Loss	$(865)	$(1,701)	$(2,334)	$(2,858)
Basic and diluted net loss per share	$(.01)	$(.02)	$(.03)	$(.03)
Shares used in basic and dilute net loss	71,725,318	72,814,272	81,564,405	84,885,017
per share
FISCAL 2003 QUARTERLY	Three Months Ended
STATEMENT OF OPERATIONS DATA:	September 30,	December 31	March 31,	June 30,
	(in thousands, except share amounts)
Total revenues	$210	$562	$210	$600
Costs and Expenses:
Cost of sales	197	547	205	544
Research and development	803	753	906	1,076
General and administrative	893	731	544	516
Depreciation and amortization	131	129	129	127
Operating loss	(1,814)	(1,598)	(1,574)	(1,662)
Interest expense, Net	(18)	(15)	(11)	(7)
Other Income (expense)	41	-	9	11
Gain (Loss) on investments	-	(16)	(12)	17
Net Loss	$(1,791)	$(1,629)	$(1,588)	$(1,641)
Basic and diluted net loss per share	$(.03)	$(.07)	$(.02)	$(.02)
Shares used in basic and diluted net	60,881,131	65,914,466	65,956,810	68,164,160
loss per share

16

COMPANY OPERATIONS

The following is management’s discussion and analysis of the operations of mPhase, since its inception in 1996 which should be read in conjunction with the accompanying financial statements, financial data, and the related notes.

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

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

OVERVIEW

mPhase Technologies, Inc. (mPhase, the Company, we or us), a New Jersey corporation, founded in 1996 is a publicly-held company with approximately 17,000 shareholders and approximately 391 million shares of common stock outstanding as of July 9, 2007. The Company’s common stock is traded on the NASDAQ Over the Counter Bulletin Board under the ticker symbol XDSL.

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

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

   Description of Operations

mPhase Technologies, Inc. (“mPhase” or the “Company”) is a development stage technology company. The Company is a developer and seller of broadband communications products for telephone service providers. The Company’s TV+ solution is an open-standards, carrier class solution of middleware/software enabling telephone service providers to deliver broadcast television using internet protocol (IPTV), video on demand, voice and high-speed internet over such providers existing infrastructure. The Company also provides systems integration solutions for delivery of broadcast television (IPTV), video on demand, high-speed internet and voice using internet protocol over the existing infrastructure of a telephone service provider. The Company’s TV+ solution is highly scalable (compared to other middleware requires less routers and servers) with significant cost savings and  is reliable middleware designed to operate with any IP based network. In addition the Company designs, manufacturers and sells DSL component products including its new customer premises VDSL splitter. In fiscal year 2004, the Company entered into the field of nanotechnology research and development of micro power cell batteries of various voltages. In 2005, the Company expanded its products in the field of nanotechnology research and development into electronic sensors or magnetometers using micro electrical mechanical systems. 

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IPTV and TV+ Solutions

mPhase introduced its first TV over DSL platform, the Traverser™ Digital Video and Data Delivery System (“DVDDS”), in 1998. The DVDDS is a patented end to end system that enables a telecommunications service provider to deliver up to several hundred channels of motion picture experts group two (“MPEG-2”) standard broadcast digital television, high speed internet and voice over copper telephone lines between a central office facility of the provider and a customer’s premise. mPhase has not, as yet, derived any material revenues from sales of the DVDDS. The DVDDS is a proprietary technology developed in conjunction with Georgia Tech Research Corporation (GTRC) and is one of the first systems of its kind developed. The system is the only system on the market that utilizes non- Internet Protocol (“IP”) transmission over ADSL.  The legacy DVDDS platform has been replaced by the Company’s TV+ solution. 

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

 Our TV+ solution is an open standards-based carrier class technology that may be used over any infrastructure such as fiber, coax, or copper. The TV+ solution may be used in combination with the set top box of any vendor and will operate with any DSLAM or multicast routers transport equipment used for delivery of IPTV.  We believe the system’s architecture is the most reliable and highly scalable solution available for IPTV. Our solution enables a telecommunications service provider to custom tailor the deployment of feature rich IP television, video on demand, high-speed internet and voice. The solution allows a service provider to start small and test its take rate among customers with a maximum of flexibility of design, features and cost allowing it to enter the market for converged services to its customers on an optimal basis.

mPhase DSL Component Products.

mPhase continues to design and market a line of DSL component products. mPhase is currently developing and marketing a new VDSL customer premises splitter designed to meet the current migration of deployments by telephone service providers from ADSL to VDSL.

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 Nanotechnology

Effective February 3, 2004, mPhase entered into a Development Agreement with Lucent Technologies, Inc. to commercialize the use of nano power cell technology. The initial agreement was for a 12 month period of exploratory development at the cost of $100,000 per month of a new form of power cell having a shelf life far in excess of conventional battery technology. In March of 2005 the Company extended such Agreement for another 12 months at the cost of $100,000 per month to continue development of the nano power cell product and the Company in currently negotiating with Lucent to extend the Agreement upon the same terms through March of 2006 and in May of 2006 extended such Agreement through February of 2007. We have extended such Agreement through April 27, 2007. We believe that this arrangement with the Bell Labs division of Lucent will give mPhase the opportunity to develop and offer breakthrough battery technology and other potential applications, initially to the government market for defense and homeland security and ultimately to the commercial market. It is anticipated that the initial applications for nano power cells will address the need to supply emergency and reserve power to a broad range of products for the defense department.

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

On March 10, 2005 the Company announced and agreement with the Bell Labs research and development arm of Lucent Technologies, Inc. to co develop using the science of nanotechnology and commercialize uncooled magnetic ultra-sensitive sensors for a host of defense and civilian applications. The agreement with Bell Labs is for a 12 month period at a cost of $100,000 per month to the Company and was renewed in May of 2006 through March of 2007 upon the same terms. The sensors, technically referred to as magnetometers, are based upon Micro Electro Mechanical Systems (MEMS) using designs based upon fundamental breakthroughs made in the past few years at Bell Labs as part of the New Jersey Nanotechnology Consortium. Initial tests of theses MEMS magnetometers indicate sensitivities 1000 times those achieved in presently available uncooled magnetometers. Such devices are designed to create a new generation of  magnetometers suitable for navigation based applications as well as ultra sensitive magnetic field sensors that will enable military combatants to detect with greater accuracy and range hostile military forces. Commercial applications may include inexpensive navigational components for mobile phones to sensing devices for identification used in homeland security products, as well as sensors used in diagnostic systems for detection of metal fatigue for numerous industrial applications.

On June 8, 2007, the Company and Bell Labs extended at a cost of $100,000 per month for 12 months the Development Agreement with respect to the nano power cell technology that had expired on April 27 of 2007. The Company is currently in discussions with Bell Labs to renew for an additional twelve months the Development Agreement for the Magnetometer product that expired in March of 2007 on similar terms.

Nano Battery :

mPhase Technologies along with its partner Alcatel Lucent/Bell Labs has been jointly conducting research since February 2004 that demonstrates control and manipulation of fluids on superhydrophobic surfaces to create power cells by controlling wetting behavior of electrolyte on nanostructured electrode surfaces. The scientific research conducted this year has set the groundwork for continued exploration in the development of intelligent nanotechnology power cells (nano-batteries), and forms a path to commercialization of the technology for a broad range of market opportunities. During the first half of calendar year 2005 the battery team has been testing modifications and enhancements to the internal design of the battery to optimize its power and energy density characteristics, as well as making engineering improvements that will assist in making the battery easier to manufacture when the project research that level of maturity. In the second half of calendar year 2005, the technical team has improved the robustness and manufacturability of the prototype battery by designing a porous membrane structure with honeycomb features. A successful demonstration of this working prototype battery using these new modifications was demonstrated in January of 2006 and subsequently highlighted in the February 2006 issue of Scientific American magazine.  

In June of 2005 the battery project was expanded to include a joint technical development effort through December 2005 between mPhase and Rutgers University to potentially incorporate a Lithium based design. This work program has initially started as a modest technology effort to help characterize and test the nano battery design using Lithium chemistry and determine if the current design is capable of supporting the lithium based chemistry. The Company continued its work with Rutgers University in 2006 where a number of important scientific tests were conducted. Based upon the results of these on going tests, the Company may decide to accelerate the work effort beyond its current level of funding.

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Magnetomete r:

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

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

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

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

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

The mPhase and Lucent magnetometer team has successfully reached an early milestone and have produced a number MEM based sensor samples from the clean room facilities and are working on integrating them into the surrounding electronic circuitry so that measurement, characterization and sensitivity testing can be conducted. We are currently able to achieve sensitivities at room temperature of better than .1 micro gauss per root hertz squared and with additional development the goal is improvement of at least one order of magnitude.

The Company is currently negotiating the extension through June of 2008 with Bell Labs of its Magnetometer Development Agreement and its Battery Development Agreement each at a cost of $100,000 per month.

20

NOTES ON OPERATIONS

Revenues . To date, all material revenues have been generated from sales of the POTS Splitter Shelves and other DSL component products to a small number of telecommunications companies. mPhase believes that future revenues are difficult to predict because of  the length and variability of the commercial roll-out of the IPTV to various telecommunications service providers and  the Company’s recent entry into the NanoTechnology business that is essentially exploratory research both with respect to the potential battery and magnetometer applications. Since the Company believes that there may be a significant international market for its TV+ IPTV solution involving many different countries, with different regulations, certifications and commercial practices than the United States, future revenues are highly subject to the changing variables and uncertainties. The Company is negotiating a  royalty on gross revenues received by Janifast Ltd. in connection with sales of the new VDSL customer premises splitter product.

Cost of revenues . The costs necessary to generate revenues from the sale of POTS Splitter Shelves and other related DSL component products include direct material, labor and manufacturing. mPhase paid these costs to Janifast Ltd., which has facilities in the People’s Republic of China and is owned by and managed by certain senior executives of the Company. The cost of revenues also includes certain royalties paid to Microphase Corporation, a privately held corporation organized in 1955, which shares certain common management with the Company and is majority-owned by a director of mPhase. Costs for future production of the TV + solution will consist primarily of payments to selected software vendors and developers for the development of custom features required by a particular purchaser of the IPTV middleware. Such major vendors include Espial Group and Magpie Telecom Insiders, Inc and systems integration by Velankani Systems. mPhase is currently negotiating a payment in shares of stock to Microphase in connection with the design of its new VDSL customer premises splitter product.

Research and development . Research and development expenses consist principally of the payments made to  Magpie Telecom Insiders, Inc., Espial, Bitband and Velankani , for development of the  TV+ IPTV solution and the Bell Labs division of Alcatel/Lucent for development of our nanotechnology products respectively. The IPTV+ solution consists primarily of middleware/software designed for the delivery of feature rich, carrier class, broadcast TV, high speed internet and voice by telecommunications service providers open using standards based equipment and transport configurations.  There are a number of potential military and commercial applications for our nanotechnology products. All research and development costs are expensed as incurred.

General and administrative . Selling, general and administrative expenses consist primarily of salaries and related expenses for personnel engaged in direct marketing of the TV+ solution for IPTV and  DSL component products including our new VDSL customer premises splitter, as well as support functions including executive, legal and accounting personnel. Certain administrative activities are outsourced on a monthly fee basis to Microphase and mPhase leases its principal office in Norwalk, Connecticut from Microphase.

Non-Cash compensation charges . The Company makes extensive use of common stock grants, options and warrants as a form of compensation to employees, directors and outside consultants. We incurred non-cash compensation charges totaling $59,071,377 from inception (October 2, 1996) through June 30, 2006, of which $2,318,519 was included in research and development expenses and $56,752,858 was included in general and administrative expenses. We incurred non-cash compensation charges of $60,196,024 from inception (October 2, 1996) through March 31, 2007 (unaudited), of which $2,318,519 was included in research and development expenses and $58,319,301 was included in general and administrative expenses.

21

TWELVE MONTHS ENDED JUNE 30, 2006 VS. JUNE 30, 2005

Revenues. Total revenues for the year ended June 30, 2006 decreased to $975,482 from $1,711,085 for the year ended June 30, 2005. The decrease was primarily attributable to decreased sales of the Company’s POTS Splitter product line caused by a downturn of orders from one customer that orders component products from the Company. The Company also recognized $280,000 of revenue in connection with the first sale of 1000 ports of Release 2.0 its TV+ solution to a major telecommunications service provider in Russia in fiscal year 2005 but received no additional orders for Version 3.0 of its TV+ solution in fiscal year 2006. The Company cannot predict when the demand for telecommunication equipment will resume, however we do expect certain added revenue in fiscal year 2007 from deployments of our TV+ solution.

Cost of revenues. Cost of sales was $974,583 for the year ended June 30, 2006 as compared to $1,446,151 in the year ended June 30, 2005. Cost of revenues decreased for the twelve months ended June 30, 2006 compared to the prior period ending June 30, 2005 primarily because of decreased sales. Gross margins for the period ended June 30, 2006 were 1.0%. The gross 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.

Research and Development. Research and development expenses were $8,034,964 for the year ended June 30, 2006 as compared to $5,127,438 in the year ended June 30, 2005, an increase of $2,907,526. Such expenditures included $4,384,749 incurred with Lucent Technologies, Inc. for the year ended June 30, 2006 as compared to $3,319,280 during the comparable period in 2005. In addition we incurred $2,346,875 with Microphase and other strategic vendors for the year ended June 30, 2006 as compared to $919,937 during the comparable period in 2005.

The significant increase in research and development expenses with Lucent Technologies, Inc. is due to the $1.2 million per month Development Agreement for the battery and power pack product utilizing nanotechnology. In addition, the Company has extended its research with Lucent Technologies related to the ultra electronic sensor devices for 12 months at a total cost of $1.2 million.

The elimination in research expenditures incurred with GTRC is due to the Company’s refocus in development from its legacy Traverser DVDDS television delivery platform to its TV+ product.

Research expenditures incurred with Microphase sharply declined as the Company reexamined the viability of it Broadband Loop Watch product during the second half of fiscal year 2006. Expenditures that were incurred in fiscal year 2006 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 the Broadband Loop Watch.

General and Administrative Expenses. Selling, general and administrative expenses were $11,121,235 for the year ended June 30, 2006 up from $6,579,761 for the comparable period in 2005, an increase of $4,541,474. 

 Included is an increase of non-cash charges relating to the issuance of common stock and options to consultants, and employees which totaled $6,276,423 for the year ended June 30, 2006 as compared to $3,336,064 during the comparable period in 2005. Other components of the increase in selling, general and administrative expenses were increases in payroll of approximately $128,000 to $1,603,000,  an increase in the use of outside consultants of approximately $399,000 to $1,103,000, marketing expenses such as trade shows of $104,000 to $372,000.

Other Income and Expense for the year ended June 30, 2006 reflects a non recurring charge of $5,530,504 for the value of shares issued to investors to reflect market changes in the common stock.

Net loss. mPhase recorded a net loss of $24,450,650 for the year ended June 30, 2006 as compared to a loss of $11,234,324 for the same period ended June 30, 2005. This represents a loss per common share of  $(.12) in 2006 as compared to $(.10) in 2005, based upon weighted average common shares outstanding of 199,610,372 and 108,657,578 during the periods ending June 30, 2006 and June 30, 2005 respectively.

22

NINE MONTHS ENDED MARCH 31, 2007 VS. MARCH 31, 2006

REVENUE

Total revenues were $135,743 for the nine months ended March 31, 2007 compared to $832,999 for the nine months ended March 31, 2006. The decrease was attributable primarily to the phasing out of the Company’s ADSL POTS Splitter line of products and its emphasis on developing a new VDSL customer premises POTS Splitter product to meet market advancements in technology.

COST OF SALES

Cost of sales was $88,207 for the nine months ended March 31, 2007 as compared to $729,475 in the comparable prior period. The decrease is a direct result of the aforementioned phasing out of the POTS Splitter line of business.

RESEARCH AND DEVELOPMENT

Research and development expenses were $4,964,404 for the nine months ended March 31, 2007 as compared to $6,120,253 during the comparable period in 2006; or a decrease of $1,155,849. The Company incurred most of its research and development expenses with vendors including Lucent, Microphase, Magpie Insiders, Inc., Bitband, Espial, Velankani and other strategic vendors. In the nine month period ended March 31, 2007 such charges totaled approximately $4.4 million as compared to $5.3 million during the comparable period in 2006. During the nine month period ended March 31, 2007, expenses incurred to third party vendors amounted to $1.6 million and $2.8 million for services related to Nanotechnology and IPTV, respectively. During the nine month period ended March 31, 2006, expenses incurred to third party vendors amounted to $2.0 million and $3.3 million for services related to Nanotechnology and IPTV, respectively.

GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses were $5,012,073 for the nine months ended March 31, 2007 down from $8,002,079 or an decrease of $2,990,006 from the comparable period in 2006. Included in selling, general and administrative costs are non-cash charges relating to the issuance of common stock and options to employees and consultants, which totaled $1,124,647 for the nine months ended March 31, 2007 as compared to $4,510,350 for the comparable period ended March 31, 2006 resulting in a decrease of $3,385,703. This decrease was offset by increases in payroll related costs which increased by approximately $383,304, investor relations and marketing which increased by $130,115 and legal and professional which increased by approximately $296,456.

OTHER INCOME AND (EXPENSE)

Other Income and (Expense) amounted to net expense of $1,065,117 for the nine months ended March 31, 2007 compared to a net expense of $4,927,800 for the comparable period ended March 31, 2006. This decrease is primarily owing to reparation expense which declined from $5,167,740 in 2006 versus $1,202,730 in 2007.

NET LOSS

The Company recorded a net loss of $11,060,372 for the nine months ended March 31, 2007 as compared to a loss of $19,004,252 for the nine months ended March 31, 2006. This represents a loss per common share of $.04 for the nine month period ended March 31, 2007 as compared to a loss per common share of $.09 for the nine months ending March 31, 2006; based upon weighted average common shares outstanding of 309,018,261 and 211,186,500 during the periods ending March 31, 2007 and 2006, respectively. Approximately $4.0 million of the decrease in the Company’s net loss was the result of reparation cost in connection with the reduction in the strike price of certain warrants and issuance of additional shares in connection with private placements.

TWELVE MONTHS ENDED JUNE 30, 2005 VS. JUNE 30, 2004

Revenues. Total revenues for the year ended June 30, 2005 decreased to $1,711,085 from $4,641,346 for the year ended June 30, 2004. The decrease was primarily attributable to decreased sales of the Company’s POTS Splitter product line especially during the first quarter of fiscal year 2004, caused by a downturn of orders from one customer that orders component products from the Company. The Company recognized $280,000 of revenue in connection with the first sale of 1000 ports of Release 2.0 its TV+ solution to a major telecommunications service provider in Russia. 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. The Company cannot predict when the demand for telecommunication equipment will resume, however we do expect certain added revenue in fiscal year 2006 from the completion of Release 3.0 of our TV+ solution and Broadband Loop Watch Products.

23

Cost of revenues. Cost of sales was $1,446,151 for the year ended June 30, 2005 as compared to $4,068,255 in the year ended June 30, 2004. Cost of revenues decreased for the twelve months ended June 30, 2005 compared to the prior period ending June 30, 2004 primarily because of decreased sales. Gross margins for the period ended June 30, 2005 were 15.5%. The gross 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. Discounts, consisting of a 2% discount from the amount invoiced if paid within 10 days were offered during fiscal year 2005 .  Such discounts amounted to $1,447 for the period ended June 30, 2005, and were offered to Covad Communication our leading telecommunications service provider customer .  Discounts were offered in fiscal 2004 to Covad Communications amounting to 2% from the amount invoiced if paid within 10 days were offered to Covad Communications and amounted to $71,425.

Research and Development. Research and development expenses were $5,127,438 for the year ended June 30, 2005 as compared to $4,069,721 in the year ended June 30, 2004, an increase of $1,057,717. Such expenditures included $3,319,280 incurred with Lucent Technologies, Inc. for the year ended June 30, 2005 as compared to $2,328,602 during the comparable period in 2004. In addition we incurred $919,937 with Microphase and other strategic vendors for the year ended June 30, 2005 as compared to $99,494 during the comparable period in 2004.

 The significant increase in research and development expenses with Lucent Technologies, Inc. is due to the continued and accelerated development of the TV+ product together with the extension of the $1.2 million month Development Agreement for an additional 12 months related to the battery and power pack product development utilizing nanotechnology and the entering into a second one year $1.2 million Development Agreement with Lucent to develop magnetic sensor devices also using nanotechnology. Such expenditures may increase in fiscal year 2006 since the Company’s strategy is to further enhance the features and cost reduce its TV+ and expand its product line in the Nanotechnology area.

The elimination in research expenditures incurred with GTRC is due to the Company’s refocus in development from its legacy Traverser DVDDS television delivery platform to its TV+ product.

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 Broadband Watch.

General and Administrative Expenses. Selling, general and administrative expenses were $6,579,761 for the year ended June 30, 2005 up from $4,177,961 for the comparable period in 2004, a decrease of $2,401,800.  The increase in the selling, general and administrative costs was primarily the result of the addition of a number of new employees critical to the Company’s needs in developing, marketing and selling the TV+ and NanoTechnology product lines with Lucent.

Included is an increase of non-cash charges relating to the issuance of common stock and options to consultants, which totaled $2,948,083 for the year ended June 30, 2005 as compared to $1,242,793 during the comparable period in 2004. Other components of the increase in selling, general and administrative expenses were increases in payroll of approximately $503,000 to $1,456,000, increase in the use of outside consultants of approximately $284,000 to $704,002, marketing expenses such as trade shows of $118,000 to $158,000, and advertising expenses of $68,000 to $90,000.

Depreciation and amortization. Total depreciation for the year ended June 30, 2005 was $227,629 of which $218,911 was charged against research and development. In 2004, total depreciation for the year ended June 30, 2004 was $649,704 of which $613,221 was charged against research and development. As a result, depreciation and amortization expense was $62,679 for the year ended June 30, 2005 compared to $122,878 for the year ended June 30, 2004. This decrease of depreciation and amortization expense totaled $60,199 is the result of reduced outlays for capital expenditures by the Company in its two most recent fiscal years. We expect to increase capital expenditures in connection with the deployment of equipment at test sites with various telecommunications service providers globally as deployment of our TV+ product progresses.

Net loss. mPhase recorded a net loss of $11,234,324 for the year ended June 30, 2005 as compared to a loss of $7,758,586 for the same period ended June 30, 2004. This represents a loss per common share of  $(.10) in 2005 as compared to $(.10) in 2004, based upon weighted average common shares outstanding of 108,657,578 and 77,677,120 during the periods ending June 30, 2005 and June 30, 2004 respectively.

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TWELVE MONTHS ENDED JUNE 30, 2004 VS. JUNE 30, 2003

Revenues. Total revenues for the year ended June 30, 2004 increased to $4,641,346 from $1,581,639 for the year ended June 30, 2003. The increase was primarily attributable to increased sales of the Company’s POTS Splitter product line especially during the first quarter of fiscal year ended June 30, 2004, caused by an upturn in July and August of 2004 of orders from one customer that orders 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. 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 2005.

Cost of revenues. Cost of sales was $4,068,255 for the year ended June 30, 2004 as compared to $1,493,394 in the year ended 30, 2003. Cost of revenues increased for the twelve months ended June 30, 2004 compared to the prior period ending June 30, 2003 primarily because of increased sales. Gross margins for the period ended June 30, 2004 were 12%. The gross 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. Discounts, consisting of a 2% discount from the amount invoiced if paid within 10 days were offered during fiscal year 2004 .  Such discounts amounted to $71,425 for the period ended June 30, 2004, and were offered to Covad Communication our leading telecommunications service provider customer .  Discounts were offered in fiscal 2003 to an existing customer to accelerate collections in connection with an order of our POTS Splitter product and was treated as a purchase discount to each of customers, and the reduction to net sales lowered the gross margins in the period.

Research and Development. Research and development expenses were $4,069,721 for the year ended June 30, 2004 as compared to $3,538,305 in the year ended June 30, 2003, an increase of $531,416. Such expenditures included $2,328,602 incurred with Lucent Technologies, Inc. for the year ended June 30, 2004 as compared to $1,112,500 during the comparable period in 2003. In addition we incurred $99,494 with Microphase and other strategic vendors for the year ended June 30, 2004 as compared to $528,434 during the comparable period in 2003.

The significant increase in research and development expenses with Lucent Technologies, Inc. is due to the continued and accelerated development of the TV+ product together with the entry into a $1.2 million 12 month Development Agreement for battery and power pack product development utilizing Nanotechnology. Such expenditures are expected to increase in fiscal year 2005 since the Company’s strategy is to further enhance the features and cost reduce its TV+ and expand its product line in the Nanotechnology area. The elimination in research expenditures incurred with GTRC is due to the Company’s refocus in development from its legacy Traverser DVDDS television delivery platform to its TV+ product.  

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 iPOTS3.

General and Administrative Expenses. Selling, general and administrative expenses were $4,177,961 for the year ended June 30, 2004 up from $2,683,534 for the comparable period in 2003, an increase of $1,494,427. The increase in the selling, general and administrative costs was primarily the result of the addition of a number of new employees critical to the Company’s needs in developing, marketing and selling the TV+ and NanoTechnology product lines with Lucent.

Included is an increase of non-cash charges relating to the issuance of common stock and options to consultants, which totaled $1,242,793 for the year ended June 30, 2004 as compared to $748,840 during the comparable period in 2003. Other components of the increase in selling, general and administrative expenses were increases in payroll of approximately $461,226 to $953,602, increase in the use of outside consultants of approximately $251,103 to $987,720, marketing expenses such as trade shows of $30,148 to $40,347, and advertising expenses of $20,439 to $21,948, all of which approximated $1,295,975 or 87% of the increase in spending.

Depreciation and amortization. Total depreciation for the year ended June 30, 2004 was $649,704 of which $613,221 was charged against research and development. In 2003, total depreciation for the year ended June 30, 2003 was $957, 457 of which $442, 040 was charged against research and development. As a result, depreciation and amortization expense was $122, 878 for the year ended June 30, 2004 compared to $515,417 for the year ended June 30 2003. This decrease of depreciation and amortization expense totaled $392,539 and is the result of reduced outlays for capital expenditures by the Company in its two most recent fiscal years. We expect to increase capital expenditures in connection with the deployment of equipment at test sites with various telecommunications service providers globally as deployment of our TV+ product progress.

Net loss. mPhase recorded a net loss of $7,758,586 for the year ended June 30, 2004 as compared to a loss of $6,650,211 for the same period ended June 30, 2003. This represents a loss per common share of $(.10) in 2004 as compared to $(.10) in 2003, based upon weighted average common shares outstanding of 77,677,120 and 65,217,088 during the periods ending June 30, 2004 and June 30, 2003 respectively.

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The Outlook for the Company’s Flagship Product

The Company believes significant deployments and resultant revenues of its  TV+  solution are not expected until the second quarter of fiscal year 2008, which, if accompanied by a material upturn in spending in the telephone industry, could lead to increased sales, improve the Company’s margins and provide the Company with the opportunity to become profitable.

  Research and Development Activities

 mPhase throughout its history has outsourced its research and development activity with respect to its IPTV solution as well as its POTS splitter products. GTARC conducted a significant amount of research and development for mPhase for the  DVDDS legacy product. Microphase has performed research and development for mPhase with respect to certain component DSL products including the Company’s current new VDSL customer premises splitter, low pass filters and POTS Splitters and the legacy DVDDS product.  mPhase  engaged Lucent for initial development of  its TV+ solution and for development of two new products using the science of nanotechnology. Currently mPhase has transferred development work for the TV systems software development from Lucent to Velankani and has also engaged Magpie Insiders, Inc and Espial as significant vendors in the development of its TV+ solution.  

For the year ended June 30, 2006, the Company spent $1,776,800 with Lucent Technologies, Inc. for its TV+ solution, compared to $1,584,800 for the period ended June 30, 2005. For the fiscal 2007, the Company has shifted its development work for the TV+ from Lucent Technologies, Inc. and Velankani Communications System, Inc. and has also engaged Magpie Insiders, Inc. and Espial for significant software development for the TV+ solution.

The Company expects to expand its research and development efforts with Lucent Technologies with respect to its NanoTechnology business segment. For fiscal years ended June 30, 2006, June 30, 2005 and June 30, 2004, the Company incurred research and development expenses of $8,034,964, $5,127,438 and $4,069,721, respectively, of which $2,500,000, $1,500,000 and $500,000, respectively, related to its nanotechnology product line.    

Strategic Alliances Implemented

The Company has entered into Systems Integration Agreements with UKRCOM and NetDialogue, major systems integrators and resellers in the Ukraine and Russia, respectively, that are two key markets for the Company’s IPTV solution.

Critical Accounting Policies

Revenue Recognition

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.

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.” Because of the uncertainty as to their future realizability of net operating loss carry forwards, no income tax benefit has been recorded in the accompanying financial statements. Utilization of net operating losses generated through March 31, 2007 may be limited due to “changes in control” of our common stock that occurred.

Stock-based Compensation

Financial Accounting Statement No. 123, Accounting for Stock Based Compensation, encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. For the periods prior to October 1, 2005, the Company had chosen to continue to account for stock-based compensation for grants to employees using the intrinsic method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of the grant over the amount an employee must pay to acquire the stock. The Company had adopted the “disclosure only” alternative described in SFAS 123 and SFAS 148, which require pro forma disclosures of net income and earnings per share as if the fair value method of accounting had been applied.

On October 1, 2005, the Company adopted the provisions of Financial Accounting Standards Board Statement No. 123R, “Share-Based Payment” (SFAS 123R).  SFAS 123R revised SFAS 123, “Accounting for Stock Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires companies to measure and recognize compensation expense for all employee stock-based payments at fair value over the service period underlying the arrangement.  Therefore, the Company is now required to record the grant-date fair value of its stock-based payments (i.e., stock options and other equity-based compensation) in the statement of operations,  The Company adopted FAS 123R using the “modified prospective” method, whereby fair value of all previously-granted employee stock-based arrangements that remained unvested at October 1, 2005 and all grants made on or after October 1, 2005 have been included in the Company’s determination of stock-based compensation expense. 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.

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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. Historically, inventory consisted mainly of the Company’s POTS Splitter Shelf and Filters. As of March 31,2007 inventory consist primarily of equipment necessary for deployment of its IPTV product line to specifically identified customers.