<html>

<head>

<title>mPhase Technologies Inc.: Form S-1 - Prepared by TNT Filings Inc.</title>
</head>

<body>

<b>

<font FACE="Times New Roman" style="font-size: 11pt" SIZE="5">
<p>&nbsp;</p>
<hr>
<p align="center">As filed with the Securities and Exchange Commission on April
26, 2004 </p>
<p align="right">Registration No. 333- </p>
<p align="center">SECURITIES AND EXCHANGE COMMISSION </p>
<p align="center">Washington, D.C. 20549 </p>
</font>

<font FACE="Times New Roman PS" SIZE="6">
<p align="center">FORM S-1 </p>
</font>

<font FACE="Times New Roman PS" SIZE="5">

<font FACE="Times New Roman" style="font-size: 11pt">
<p ALIGN="CENTER">REGISTRATION STATEMENT <br>
UNDER <br>
THE SECURITIES ACT OF 1933 </p>
</font>
</font>

<font FACE="Times New Roman PS" SIZE="6">
<p align="center">mPHASE TECHNOLOGIES, INC. </font>

<font FACE="Times New Roman" style="font-size: 11pt" SIZE="5"><br>
</font>

<font FACE="Times New Roman PS" SIZE="2">(Exact name of registrant as specified in its charter) </p>
</font>

<font FACE="Times New Roman PS" SIZE="5">
<div align="center">
  <center>
  <table CELLSPACING="0" BORDER="0" WIDTH="80%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
    <tr>
      <td WIDTH="275" align="center">
      <font FACE="Times New Roman" style="font-size: 11pt"><b>New Jersey</b></font></td>
      <td WIDTH="243" align="center">
      <font FACE="Times New Roman" style="font-size: 11pt"><b>7385</b></font></td>
      <td WIDTH="274" align="center">
      <font FACE="Times New Roman" style="font-size: 11pt"><b>22-2287503</b></font></td>
    </tr>
    <tr>
      <td WIDTH="275" align="center">
      <font FACE="Times New Roman" size="2">(State or other
      jurisdiction</font></td>
      <td WIDTH="243" align="center">
      <font FACE="Times New Roman" size="2">(Primary Standard
      Industrial</font></td>
      <td WIDTH="274" align="center">
      <font FACE="Times New Roman" size="2">(I.R.S. Employer</font></td>
    </tr>
    <tr>
      <td WIDTH="275" align="center">
      <font FACE="Times New Roman" size="2">of incorporation or
      organization)</font></td>
      <td WIDTH="243" align="center">
      <font FACE="Times New Roman" size="2">Classification Code
      Number)</font></td>
      <td WIDTH="274" align="center">
      <font FACE="Times New Roman" size="2">Identification
      Number)</font></td>
    </tr>
  </table>
  </center>
</div>
<font FACE="Times New Roman" style="font-size: 11pt">
<p ALIGN="CENTER">587 Connecticut Avenue <br>
Norwalk, Connecticut 06854-1711 <br>
Telephone: (203) 838-2741 <br>
</font></font>

<font FACE="Times New Roman PS" SIZE="2">(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices) </p>
</font>

<font FACE="Times New Roman PS" SIZE="5">
<font FACE="Times New Roman" style="font-size: 11pt">
<p ALIGN="CENTER">Martin S. Smiley <br>
Chief Financial Officer <br>
mPHASE TECHNOLOGIES, INC. <br>
587 Connecticut Avenue <br>
Norwalk, Connecticut 06854-1711 <br>
Telephone: (203) 831-2242 <br>
Telecopy: (203) 853-3304 <br>
</font></font>

<font FACE="Times New Roman PS" SIZE="2">(Name, address, including zip code, and telephone number, including area code,
of agent for service) </p>
</font>
</b>

<font FACE="Times New Roman" size="2">
<p>Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement. </p>
<p>If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. </p>
<p ALIGN="JUSTIFY">If this form is filed to register additional securities for
an offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. </p>
<p ALIGN="JUSTIFY">If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. </p>
<p ALIGN="JUSTIFY">If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. </p>
<p>If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. </p>
</font>

<b>

<font FACE="Times New Roman PS" SIZE="5"><hr><p Style='page-break-before:always'><font FACE="Times New Roman" style="font-size: 11pt">
<p align="center">CALCULATION OF REGISTRATION FEE </p>
</font>
<div align="center">
  <center>
<table CELLSPACING="0" BORDER="0" WIDTH="80%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="235">&nbsp;</td>
    <td WIDTH="152" align="center">&nbsp;</td>
    <td WIDTH="119" align="center">
    <font FACE="Times New Roman" size="2">Proposed</font></td>
    <td WIDTH="127" align="center">
    <font FACE="Times New Roman" size="2">Proposed</font></td>
    <td WIDTH="131" align="center">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="235">&nbsp;</td>
    <td WIDTH="152" align="center">&nbsp;</td>
    <td WIDTH="119" align="center">
    <font FACE="Times New Roman" size="2">maximum</font></td>
    <td WIDTH="127" align="center">
    <font FACE="Times New Roman" size="2">maximum</font></td>
    <td WIDTH="131" align="center">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="235">&nbsp;</td>
    <td WIDTH="152" align="center">&nbsp;</td>
    <td WIDTH="119" align="center">
    <font FACE="Times New Roman" size="2">offering</font></td>
    <td WIDTH="127" align="center">
    <font FACE="Times New Roman" size="2">aggregate</font></td>
    <td WIDTH="131" align="center">
    <font FACE="Times New Roman" size="2">Amount of</font></td>
  </tr>
  <tr>
    <td WIDTH="235"><font FACE="Times New Roman" size="2">Title
    of each class of</font></td>
    <td WIDTH="152" align="center">
    <font FACE="Times New Roman" size="2">Amount to be</font></td>
    <td WIDTH="119" align="center">
    <font FACE="Times New Roman" size="2">price per</font></td>
    <td WIDTH="127" align="center">
    <font FACE="Times New Roman" size="2">offering</font></td>
    <td WIDTH="131" align="center">
    <font FACE="Times New Roman" size="2">Registration</font></td>
  </tr>
  <tr>
    <td WIDTH="235" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">securities to be
    registered</font></td>
    <td WIDTH="152" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">Registered</font></td>
    <td WIDTH="119" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">share(1)</font></td>
    <td WIDTH="127" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">price(1)</font></td>
    <td WIDTH="131" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">fee</font></td>
  </tr>
  <tr>
    <td WIDTH="235" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="152" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="119" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="127" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="131" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="235">&nbsp;</td>
    <td WIDTH="152" align="right">&nbsp;</td>
    <td WIDTH="119" align="right">&nbsp;</td>
    <td WIDTH="127" align="right">&nbsp;</td>
    <td WIDTH="131" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="235" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">Stock, no par value</font></td>
    <td WIDTH="152" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">29,027,026</font></td>
    <td WIDTH="119" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">$0.39</font></td>
    <td WIDTH="127" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">$11,320,540</font></td>
    <td WIDTH="131" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">&nbsp;$1,434.31</font></td>
  </tr>
</table>
  </center>
</div>
</font>
</b>

<font FACE="Times New Roman" style="font-size: 9pt">
<p ALIGN="JUSTIFY">(1) Estimated solely for the purpose of calculating the
registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as
amended, on the basis of the average of the bid and ask prices per share of our
common stock, as reported on the OTC Bulletin Board, on April 23, 2004. </p>
</font>

<b>

<font FACE="Times New Roman" size="2">
<p ALIGN="JUSTIFY">THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON
SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE. </p>
</font>

<font FACE="Times New Roman PS" SIZE="5"><hr><p Style='page-break-before:always'></font>

<font FACE="Times New Roman PS" SIZE="2">
</font>

</b>

<font FACE="Times New Roman PS" SIZE="2">
<p>April 26, 2004 </p>
</font>

<b>

<font FACE="Times New Roman PS" SIZE="5">
<p align="center">PROSPECTUS <br>
mPHASE TECHNOLOGIES, INC. </font>

<font FACE="Times New Roman PS" SIZE="2"> <br>
</font></b>

<font FACE="Times New Roman PS" SIZE="4">29,027,026 </font><b>

<font FACE="Times New Roman PS" SIZE="4">Shares of Common Stock </p>
</font>

</b>

<font FACE="Times New Roman PS" SIZE="2">
<p ALIGN="JUSTIFY">This prospectus relates to the resale of up to
29,027,026 shares of common stock, of which 10,825,975 shares are issued and
outstanding and up to 18,201,051 shares may be issued upon the exercise of warrants and/or options held by the selling
stockholders. The selling stockholders listed on pages 61-69 may sell the shares
from time to time. </p>
<p>Our common stock is listed on the Over-the-Counter Bulletin Board under the
symbol &quot;XDSL.OB&quot; The last reported sales price of our common stock on April 23,
2004 was $.39 per share. </p>
<p>THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK. PLEASE
REFER TO &quot;RISK FACTORS&quot; BEGINNING ON PAGE 8. </p>
<p>Our principal executive offices are located at 587 Connecticut Avenue,
Norwalk, Connecticut 06854-1711. Our phone number is (203) 838-2741. </p>
<p ALIGN="JUSTIFY">NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER
REGULATORY BODY HAS APPROVED OR DISAPPROVED ANY OF THESE SECURITIES OR PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE. </p>
<p>The date of this prospectus is April 26, 2004 </p>
</font>

<b>

<font FACE="Times New Roman PS" SIZE="5"><font FACE="Times New Roman">
<p align="center">TABLE OF CONTENTS </p>
</font>
<div align="center">
  <center>
<table CELLSPACING="0" BORDER="0" WIDTH="75%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="767">&nbsp;</td>
    <td WIDTH="160" align="right">
    <font FACE="Times New Roman" style="font-size: 11pt">Page</font></td>
  </tr>
  <tr>
    <td WIDTH="767">&nbsp;</td>
    <td WIDTH="160" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="767"><font FACE="Times New Roman" style="font-size: 11pt">
    Prospectus Summary</font></td>
    <td WIDTH="160" align="right">
    <font FACE="Times New Roman" style="font-size: 11pt">1</font></td>
  </tr>
  <tr>
    <td WIDTH="767"><font FACE="Times New Roman" style="font-size: 11pt">The
    Offering</font></td>
    <td WIDTH="160" align="right">
    <font FACE="Times New Roman" style="font-size: 11pt">4</font></td>
  </tr>
  <tr>
    <td WIDTH="767"><font FACE="Times New Roman" style="font-size: 11pt">
    Forward-Looking Statements</font></td>
    <td WIDTH="160" align="right">
    <font FACE="Times New Roman" style="font-size: 11pt">4</font></td>
  </tr>
  <tr>
    <td WIDTH="767"><font FACE="Times New Roman" style="font-size: 11pt">Summary
    Financial Data</font></td>
    <td WIDTH="160" align="right">
    <font FACE="Times New Roman" style="font-size: 11pt">6</font></td>
  </tr>
  <tr>
    <td WIDTH="767"><font FACE="Times New Roman" style="font-size: 11pt">Risk
    Factors</font></td>
    <td WIDTH="160" align="right">
    <font FACE="Times New Roman" style="font-size: 11pt">8</font></td>
  </tr>
  <tr>
    <td WIDTH="767"><font FACE="Times New Roman" style="font-size: 11pt">Use of
    Proceeds</font></td>
    <td WIDTH="160" align="right">
    <font FACE="Times New Roman" style="font-size: 11pt">11</font></td>
  </tr>
  <tr>
    <td WIDTH="767"><font FACE="Times New Roman" style="font-size: 11pt">Price
    Range of Common Stock</font></td>
    <td WIDTH="160" align="right">
    <font FACE="Times New Roman" style="font-size: 11pt">12</font></td>
  </tr>
  <tr>
    <td WIDTH="767"><font FACE="Times New Roman" style="font-size: 11pt">
    Selected Financial Data</font></td>
    <td WIDTH="160" align="right">
    <font FACE="Times New Roman" style="font-size: 11pt">13</font></td>
  </tr>
  <tr>
    <td WIDTH="767"><font FACE="Times New Roman" style="font-size: 11pt">
    Selected Quarterly Financial Data</font></td>
    <td WIDTH="160" align="right">
    <font FACE="Times New Roman" style="font-size: 11pt">14</font></td>
  </tr>
  <tr>
    <td WIDTH="767"><font FACE="Times New Roman" style="font-size: 11pt">Company
    Operations</font></td>
    <td WIDTH="160" align="right">
    <font FACE="Times New Roman" style="font-size: 11pt">17</font></td>
  </tr>
  <tr>
    <td WIDTH="767"><font FACE="Times New Roman" style="font-size: 11pt">
    Business</font></td>
    <td WIDTH="160" align="right">
    <font FACE="Times New Roman" style="font-size: 11pt">36</font></td>
  </tr>
  <tr>
    <td WIDTH="767"><font FACE="Times New Roman" style="font-size: 11pt">Legal
    Proceedings</font></td>
    <td WIDTH="160" align="right">
    <font FACE="Times New Roman" style="font-size: 11pt">52</font></td>
  </tr>
  <tr>
    <td WIDTH="767"><font FACE="Times New Roman" style="font-size: 11pt">Our
    Management</font></td>
    <td WIDTH="160" align="right">
    <font FACE="Times New Roman" style="font-size: 11pt">52</font></td>
  </tr>
  <tr>
    <td WIDTH="767"><font FACE="Times New Roman" style="font-size: 11pt">Stock
    Options</font></td>
    <td WIDTH="160" align="right">
    <font FACE="Times New Roman" style="font-size: 11pt">55</font></td>
  </tr>
  <tr>
    <td WIDTH="767"><font FACE="Times New Roman" style="font-size: 11pt">
    Security Ownership of Certain Beneficial Owners and Management</font></td>
    <td WIDTH="160" align="right">
    <font FACE="Times New Roman" style="font-size: 11pt">58</font></td>
  </tr>
  <tr>
    <td WIDTH="767"><font FACE="Times New Roman" style="font-size: 11pt">Certain
    Relationships and Related Transactions</font></td>
    <td WIDTH="160" align="right">
    <font FACE="Times New Roman" style="font-size: 11pt">60</font></td>
  </tr>
  <tr>
    <td WIDTH="767"><font FACE="Times New Roman" style="font-size: 11pt">Selling
    Stockholders</font></td>
    <td WIDTH="160" align="right">
    <font FACE="Times New Roman" style="font-size: 11pt">66</font></td>
  </tr>
  <tr>
    <td WIDTH="767"><font FACE="Times New Roman" style="font-size: 11pt">Plan of
    Distribution</font></td>
    <td WIDTH="160" align="right">
    <font FACE="Times New Roman" style="font-size: 11pt">72</font></td>
  </tr>
  <tr>
    <td WIDTH="767"><font FACE="Times New Roman" style="font-size: 11pt">
    Description of Securities</font></td>
    <td WIDTH="160" align="right">
    <font FACE="Times New Roman" style="font-size: 11pt">74</font></td>
  </tr>
  <tr>
    <td WIDTH="767"><font FACE="Times New Roman" style="font-size: 11pt">Legal
    Matters</font></td>
    <td WIDTH="160" align="right">
    <font FACE="Times New Roman" style="font-size: 11pt">75</font></td>
  </tr>
  <tr>
    <td WIDTH="767"><font FACE="Times New Roman" style="font-size: 11pt">Experts</font></td>
    <td WIDTH="160" align="right">
    <font FACE="Times New Roman" style="font-size: 11pt">76</font></td>
  </tr>
  <tr>
    <td WIDTH="767"><font FACE="Times New Roman" style="font-size: 11pt">Where
    You Can Find Additional Information</font></td>
    <td WIDTH="160" align="right">
    <font FACE="Times New Roman" style="font-size: 11pt">76</font></td>
  </tr>
</table>
  </center>
</div>
</font>
</b>
<font FACE="Times New Roman" size="2">
<p ALIGN="JUSTIFY">YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS
DOCUMENT OR THOSE DOCUMENTS TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS
DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. </p>
<p ALIGN="JUSTIFY">THE DELIVERY OF THIS PROSPECTUS OR ANY ACCOMPANYING SALE DOES
NOT IMPLY THAT: (1) THERE HAVE BEEN NO CHANGES IN OUR AFFAIRS AFTER THE DATE OF
THIS PROSPECTUS; OR (2) THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT
AFTER THE DATE OF THIS PROSPECTUS. </p>
</font>

<b>

<font FACE="Times New Roman PS" SIZE="5"><hr><p Style='page-break-before:always'></font></b>
<font FACE="Times New Roman" size="5">
<p align="center"><b><a name="prospectorsummary"></a>PROSPECTUS SUMMARY </b> </p>
</font><font FACE="Times New Roman" size="2">
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; You should read this Prospectus Summary together with the
more detailed information contained in this prospectus, including the risk
factors and financial statements and the notes to the financial statements. This
prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those discussed in
the forward-looking statements. Factors that might cause such a difference
include those discussed in the Risk Factors section and elsewhere in this
prospectus. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; From inception (October 2, 1996), through December 31, 2003
the Company had incurred (unaudited) development stage losses and has an
accumulated deficit of approximately $111 million and a stockholders' deficit of
approximately $4.7 million respectively. Cumulatively, through June 30, 2003 and
December 31, 2003, (unaudited) the Company had negative cash flows from
operations of approximately $43.6 million and $44.7 million respectively. The
auditors report for the fiscal year ended June 30, 2003 is qualified as to the
Company's ability to continue as a going concern. Management estimates the
Company needs to raise approximately $2,000,000 during the next 12 months to
sustain its current level of operations. </p>
</font><font FACE="Times New Roman" size="5">
<p align="center"><b>mPHASE TECHNOLOGIES, INC.</b></font><font FACE="Times New Roman" size="2"> </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; mPhase Technologies, Inc. (mPhase, the Company, we or us), a
New Jersey corporation, founded in 1996 is a publicly-held company with
approximately 11,000 shareholders and approximately 85 million shares of common
stock outstanding. mPhase is a developer of broadband communications products,
specifically, digital subscriber line (DSL) products for telecommunications
service providers around the world. Since our inception in 1996 we have been a
development-stage company. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The Company's common stock is traded on the NASDAQ Over the
Counter Bulletin Board under the ticker symbol XDSL. We are headquartered in
Norwalk, Connecticut with offices in Little Falls, New Jersey and Atlanta,
Georgia. mPhase shares common office space and common management with Microphase
Corporation, a privately-held company. Microphase sells radio frequency and
filtering technologies to the defense and telecommunications industry.
Microphase has been in operation for almost 50 years and supports mPhase with
engineering, administrative and financial resources, as needed. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Our primary activities have consisted of designing,
manufacturing and testing our flagship products designed to deliver broadcast
television over DSL. We have not, as yet, derived significant sales revenue from
such products. Our products facilitate telephone companies becoming full service
communications providers by enabling the simultaneous delivery of digital
broadcast television, high speed data and voice services over the existing
telephone line infrastructure. mPhase has developed its flagship line of
products primarily for telephone companies in parts of the world where access to
multi-channel television is limited. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Recently, the Company has entered into the field of
Nanotechnology research and development of micro power cell batteries of various
voltages. The initial goal is to develop batteries for military applications
capable of operating for significantly longer periods of time than are currently
available in the market. The Company believes that such development is
consistent with its strategy of being a pioneer in areas of high growth
technology and potentially diversifies its mix of products. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; mPhase introduced its first TV over DSL platform, the
Traverser&#153 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 plain
old telephone service (POTS) 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) that allows for the delivery of any television channel to all
users at any given time without a dilution in quality. The DVDDS consists of an
Access Shelf located at a telephone service provider's central office (CO) and
an Intelligent Network Interface (INI)&#153 set top box located in a customer's
home. Because it is a proprietary end-to-end system, the DVDDS does not
interoperate with other manufacturers' DSL Central Office (CO) equipment or
customer premises equipment (CPE) modems. The DVDDS utilizes Asymetric DSL
(ADSL) that allows for significantly more downstream than upstream bandwidth for
transmission and is well suited for delivery of broadcast television. The system
is the only system on the market that utilizes non-Internet Protocol (IP)
transmission over ADSL. The Company continues to market this product, and
believes it to be best-suited for customers specifically interested in
supporting television services with a minimal need to support high-speed data
customers. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The DVDDS is installed at Hart Telephone Company in Hartwell,
Georgia, where a limited user system is currently operational. A DVDDS system is
also installed at the BMW manufacturing plant in Spartanburg, South Carolina for
use as a telebroadcast system in a commercial setting. </p>
<p>&nbsp;&nbsp;&nbsp; The mPhase TV+ platform, recently developed in conjunction with the Bell Labs
division of Lucent Technologies, Inc. (Lucent), is a new product also designed
to allow for the simultaneous delivery of voice, high speed data, and broadcast TV over copper telephone lines
between a telephone service provider's CO and the customer premises. The TV+
formerly named 'Simple TV', is a modular solution for the delivery of several
hundred broadcast television channels over ADSL that utilizes an
industry-leading, standards-based Lucent Stinger&#153 DSL Access Concentrator for
transport of digital television plus high speed internet and voice. The mPhase
TV+ platform consists of a cost-reduced Traverser INI&#153 set top box located in a
customer's premises plus the Lucent Stinger located at the telephone company's
CO. A newly developed mPhase Broadcast Television Switch (&quot;BTS&quot;) interfaces with
the Stinger and a video headend built by a telephone service provider to
downlink broadcast television programming from satellites. The BTS formats the
video data prior to distribution to a customer by the Stinger and supports
administrative tasks associated with subscriber management. Using the Lucent
Stinger (digital subscriber line access mutiplexer commonly known as a DSLAM)
for transport in the TV+ platform results in a highly scalable architecture for
the delivery of video. This scalability is accomplished by internally
multicasting each television channel for delivery from the CO to a larger number
of end users than would be otherwise possible over ADSL. We believe that the TV+
platform is the most cost- effective, standards-based solution for delivery of
broadcast television using ADSL. The Stinger is one of a few DSLAM's currently
on the market with robust internal multicasting capabilities. For mPhase, the
alliance with Lucent marks a change in strategy from selling a complete
proprietary platform to providing an industry-standard modular solution. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Both the TV+ platform and the legacy DVDDS products are aimed
for use in markets primarily outside of the United States that do not have a
hybrid fiber coaxial cable (&quot;HFC&quot;) infrastructure necessary for cable TV or
fiber to the curb necessary for very fast DSL (VDSL). We believe there is a
significant cost advantage when our mPhase TV+ solution is compared against
other platforms utilizing existing telephone lines containing the <i>same</i>
features. The mPhase TV+ platform does not contain the features such as the
delivery of two or more TV channels to a single set top box over copper
telephone lines or video on demand and interactive TV features. As ADSL
technology migrates forward to ADSL2 or ADSL2+, mPhase will include additional
features to its TV+ platform in a modular scaleable cost- effective manner
depending upon <i>actual</i> market demand for such features in markets that
mPhase is targeting. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; We believe the legacy DVDDS developed by GTRC, when combined
with a version of the cost-reduced Traverser INI&#153 set top box redesigned by
Lucent, continues to be a cost effective TV platform. The DVDDS can be sold in
international markets where primary demand is for multi-channel digital
broadcast television plus voice only and where there is little demand for high
speed internet. We believe the mPhase TV+ platform is the optimal solution for
both a telecommunications service provider where the ultimate customer requires
all three services, i.e. high-speed internet, voice and digital broadcast
television over ADSL. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; For those television markets in the United States that are
not served by HFC, we believe the availability of programming content is
essential to facilitate potential sales of our TV platforms over ADSL. In March
of 2000, we established mPhase Television net., Inc. (mPhase TV), a joint
venture between mPhase and Alphastar International, Inc. mPhase TV can provide
contracts, licensing agreements, marketing and legal support to service
providers interested in deploying television over ADSL for U.S. markets. mPhase
TV has secured licenses to resell programming for approximately 80 channels of
U.S. broadcast television. mPhase TV enables telecommunications service
providers in the U.S. to provide customers a full complement of television
programming. This enables a U.S. telecommunications service provider to avoid
the necessity of securing such contracting rights individually with many
different providers of broadcast television content. It is important to note
that the role of mPhase TV has changed since its inception. Originally, mPhase
TV was to utilize a satellite uplink/downlink facility and serve as an
aggregator of television content. This would eliminate the need for a
telecommunications service provider, purchasing a TV delivery platform from
mPhase, from having to build a full scale television reception facility
(head-end) to downlink broadcast television channels from satellites orbiting
the earth. However, recent advances in technology have significantly reduced the
costs for a telephone company to build a full scale headend. Therefore, the role
of mPhaseTV is now limited to providing the appropriate licenses and
relationships as opposed to offering a content aggregation solution. As part of
its cost reduction efforts, mPhase terminated its lease of Alphastar's earth
station satellite uplink and downlink facility in Oxford, CT. mPhase owns
approximately 57% of mPhase TV. </p>
<p><b>NanoTechnology Products </b> </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Effective February 3, 2004, mPhase entered into a Research
and Development Agreement with the Bell Labs division of Lucent Technologies,
Inc. to develop micro power cell battery arrays employing nantextured
superhydrophobic materials for $1.2 million. Under the terms of the contract,
the Company will share in royalties from any licensing of the products developed
with Lucent. mPhase believes that the initial market for the product will be
military applications and that a prototype of the product will be completed by
the end of the second quarter in fiscal year 2005. </p>
<p><b>mPhase DSL Component Products </b> </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; mPhase also has designed and markets a line of DSL component
products ranging from items such as Plain Old Telephone Service (POTS) splitters
to innovative loop management products. From our inception in 1996 to date
virtually all of mPhase's revenue has been derived from sales of our component
DSL products such as POTS splitters and low pass filters. Our newest innovation
in our suite of DSL component products is our <i>i</i>POTS or Intelligent POTS
splitter product. This product enables telephone service providers comprehensive
remote and automated test access to all elements of a DSL network. The <i>i</i>POTS<i>1</i>,
and <i>i</i>POTS3 allow a telephone service provider to bypass POTS splitters on
a DSL network and avoid having to manually intervene and disrupt line usage so a
test signal can pass through a DSL network. This product marks an advancement in
automating DSL loop management. As DSL deployments increase, it is becoming more
important for telecommunications service providers to streamline the process for
rolling-out and troubleshooting DSL services. Additionally, as competition for
high speed Internet expands, the market is witnessing a reduction in the price
for such service. Therefore, it has become imperative that telecommunications
service providers lower the operational costs involved with supporting DSL
services. Currently our <i>i</i>POTS<i>1</i> is designed for use with the Lucent
Stinger, whereas, the <i>iPOTS3</i> is compatible with DSLAM's manufactured by
other vendors. mPhase currently has a nonexclusive worldwide distribution
agreement with Corning Cable Systems for the sale of the <i>i</i>POTS products.
Such arrangement potentially expands exposure for this product, as Corning is
one of the largest vendors of central office DSL filtering equipment. The
Company is also aggressively pursuing direct efforts with respect to sales of
the <i>i</i>POTS product. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; For the year ending June 30, 2003 sales from our POTS
Splitter Shelves were $1,581,639 with a Net Loss of $6,650,211 as compared to
POTS Splitter Shelf sales of $2,582,446 and a Net Loss of $11,245,361 for the
fiscal year ended June 30, 2002. For the six months ending December 31, 2003 (unaudited),
sales from POTS Splitter Shelves were $3,780,137 with a Net Loss of $2,565,877
compared to sales of $771,837 and a Net Loss of $3,421,396 for the same period
ending December 31, 2002. (See Financial Statements which commence on page F-1.)
</p>
</font><b>

<font FACE="Times New Roman PS" SIZE="5"><font FACE="Times New Roman"><hr><p Style='page-break-before:always'>
<p align="center"><a name="theoffering"></a>THE OFFERING </p>
</font></font></b><font FACE="Times New Roman" size="2">
<p ALIGN="JUSTIFY">Common stock offered:Up to 29,027,026 shares of common stock,
of which 10,825,975 shares are issued and outstanding and up to 18,201,051
shares may be issued pursuant to convertible notes and upon exercise of warrants
and options held by the selling stockholders. </p>
<p ALIGN="JUSTIFY">Common Stock to be outstanding after this offering:
Approximately 84,930,962 shares of common stock. This does not include an
aggregate of 64,940,621 shares that are reserved for issuance pursuant to
convertible notes, outstanding employee stock options, non-employee stock
options and warrants. </p>
<p ALIGN="JUSTIFY">Use of proceeds: We will not receive any proceeds from the
sale and issuance of the common stock included in this offering. However, we
will receive approximately  $4,546,741 upon the conversion of convertible notes
and the exercise of all of the warrants and options by the selling stockholders,
which would be used for general working capital. </p>
<p ALIGN="JUSTIFY">Risk Factors:An investment in our common stock is subject to
significant risks. You should carefully consider the information set forth in
the &quot;Risk Factors&quot; section of this prospectus as well as other information set
forth in this prospectus, including our financial statements and related notes.
</p>
<p>Dividend policy:We do not expect to pay dividends on our common stock in the
foreseeable future. We anticipate that all future earnings, if any, generated
from operations will be retained to develop and expand our business. </p>
<p ALIGN="JUSTIFY">Plan of Distribution:The shares of common stock (OTC Bulletin
Board symbol: XDSL.OB) offered for resale may be sold by the selling
stockholders pursuant to this prospectus in the manner described under &quot;Plan of
Distribution.&quot; </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; We have applied for trademarks on certain marks which relate
to the following products: Traverser&#153, INI, Intelligent Network Interface, DVDDS,
Digital Video and Data Delivery System. This prospectus also contains product
names, trade names and trademarks of ours as well as those of other
organizations. All other brand names and trademarks appearing in this prospectus
are the property of their respective holders. </p>
</font><font FACE="Times New Roman" size="5">
<p align="center"><b><a name="forwardlookingstmts"></a>FORWARD-LOOKING STATEMENTS </b> </p>
</font><font FACE="Times New Roman" size="2">
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In addition to the other information contained in this
prospectus, investors should carefully consider the risk factors disclosed in
this prospectus, including those beginning on page 7, in evaluating an
investment in our common stock. This prospectus includes &quot;forward-looking
statements&quot;. All statements other than statements of historical fact are
&quot;forward-looking statements&quot; for purposes of these provisions, including any
projections of earnings, revenues or other financial items, any statements of
the plans and objectives of management for future operations, any statements
concerning proposed new products or services, any statements regarding future
economic conditions or performance, and any statement of assumptions underlying
any of the foregoing. In some cases, forward-looking statements can be
identified by the use of terminology such as &quot;may&quot;, &quot;will&quot;, &quot;expects&quot;, &quot;plans&quot;,
&quot;anticipates&quot;, &quot;estimates&quot;, &quot;potential&quot;, or &quot;continue&quot; or the negative thereof
or other comparable terminology. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Although we believe that the expectations reflected in the
forward-looking statements contained herein and in such incorporated documents
are reasonable, there can be no assurance that such expectations or any of the
forward-looking statements will prove to be correct, and actual results could
differ materially from those projected or assumed in the forward-looking
statements. Our future financial condition and results of operations, as well as
any forward-looking statements, are subject to inherent risks and uncertainties,
including but not limited to the risk factors set forth above and for the
reasons described elsewhere in this prospectus. All forward-looking statements
and reasons why results may differ included in this prospectus are made as of
the date hereof, and we assume no obligation to update any such forward-looking
statement or reason why actual results might differ. </p>
</font><b>

<font FACE="Times New Roman PS" SIZE="5"><hr><p Style='page-break-before:always'><font FACE="Times New Roman">
<p align="center"><a name="sumfindata"></a>SUMMARY FINANCIAL DATA </p>
</font>
</font></b><font FACE="Times New Roman" size="2">
<p ALIGN="JUSTIFY">The summary financial data set forth below should be read in
conjunction with &quot;Management's Discussion and Analysis of Financial Condition
and Results of Operations&quot; and the historical consolidated financial statements
and notes included in this prospectus. The statements of operations data from
October 2, 1996 (date of inception) to June 30, 1998 are derived from financial
statements that have been audited by (i) Schuhalter, Coughlin &amp; Suozzo, PC,
independent auditors from inception to June 30, 1998, and (ii) by Arthur
Andersen for the years ended 1999, 2000 and 2001 included in this prospectus.
The statement of operations data for the year ended June 30, 2002 and June 30,
2003 are derived from the financial statements that have been audited by
Rosenberg, Rich, Baker, Berman &amp; Company in this prospectus. </p>
</font>

<font FACE="Times New Roman PS" SIZE="5"><b>
<table CELLSPACING="0" BORDER="0" WIDTH="85%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="266">&nbsp;</td>
    <td WIDTH="113" align="center">&nbsp;</td>
    <td WIDTH="137" align="center">&nbsp;</td>
    <td WIDTH="142" align="center">&nbsp;</td>
    <td WIDTH="138" align="center">&nbsp;</td>
    <td WIDTH="131" align="center">&nbsp;</td>
    <td WIDTH="123" align="center">
    <font FACE="Times New Roman" size="2">Cumulative</font></td>
  </tr>
  <tr>
    <td WIDTH="266">&nbsp;</td>
    <td WIDTH="113" align="center">&nbsp;</td>
    <td WIDTH="137" align="center">&nbsp;</td>
    <td WIDTH="142" align="center">&nbsp;</td>
    <td WIDTH="138" align="center">&nbsp;</td>
    <td WIDTH="131" align="center">&nbsp;</td>
    <td WIDTH="123" align="center">
    <font FACE="Times New Roman" size="2">Totals</font></td>
  </tr>
  <tr>
    <td WIDTH="266">&nbsp;</td>
    <td WIDTH="113" align="center">&nbsp;</td>
    <td WIDTH="137" align="center">&nbsp;</td>
    <td WIDTH="142" align="center">&nbsp;</td>
    <td WIDTH="138" align="center">&nbsp;</td>
    <td WIDTH="131" align="center">&nbsp;</td>
    <td WIDTH="123" align="center">
    <font FACE="Times New Roman" size="2">from</font></td>
  </tr>
  <tr>
    <td WIDTH="266">&nbsp;</td>
    <td WIDTH="113" align="center">&nbsp;</td>
    <td WIDTH="137" align="center">&nbsp;</td>
    <td WIDTH="142" align="center">&nbsp;</td>
    <td WIDTH="138" align="center">&nbsp;</td>
    <td WIDTH="131" align="center">&nbsp;</td>
    <td WIDTH="123" align="center">
    <font FACE="Times New Roman" size="2">Inception</font></td>
  </tr>
  <tr>
    <td WIDTH="266">&nbsp;</td>
    <td WIDTH="113" align="center">&nbsp;</td>
    <td WIDTH="417" COLSPAN="3" align="center">
    <font FACE="Times New Roman" style="text-decoration: underline" size="2">
    Year Ended June 30,</font></td>
    <td WIDTH="131" align="center">&nbsp;</td>
    <td WIDTH="123" align="center">
    <font FACE="Times New Roman" size="2">(October</font></td>
  </tr>
  <tr>
    <td WIDTH="266">&nbsp;</td>
    <td WIDTH="113" align="center">&nbsp;</td>
    <td WIDTH="137" align="center">&nbsp;</td>
    <td WIDTH="142" align="center">&nbsp;</td>
    <td WIDTH="138" align="center">&nbsp;</td>
    <td WIDTH="131" align="center">&nbsp;</td>
    <td WIDTH="123" align="center">
    <font FACE="Times New Roman" size="2">2, 1996)</font></td>
  </tr>
  <tr>
    <td WIDTH="266">&nbsp;</td>
    <td WIDTH="113" align="center">&nbsp;</td>
    <td WIDTH="137" align="center">&nbsp;</td>
    <td WIDTH="142" align="center">&nbsp;</td>
    <td WIDTH="138" align="center">&nbsp;</td>
    <td WIDTH="131" align="center">&nbsp;</td>
    <td WIDTH="123" align="center">
    <font FACE="Times New Roman" size="2">to June 30,</font></td>
  </tr>
  <tr>
    <td WIDTH="266">&nbsp;</td>
    <td WIDTH="113" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">1999</font></td>
    <td WIDTH="137" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">2000</font></td>
    <td WIDTH="142" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">2001</font></td>
    <td WIDTH="138" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">2002</font></td>
    <td WIDTH="131" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">2003</font></td>
    <td WIDTH="123" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">2003</font></td>
  </tr>
  <tr>
    <td WIDTH="266" bgcolor="#FFFFFF">&nbsp;</td>
    <td WIDTH="113" align="right" style="border-top-style: solid; border-top-width: 1" bgcolor="#FFFFFF">&nbsp;</td>
    <td WIDTH="137" align="right" style="border-top-style: solid; border-top-width: 1" bgcolor="#FFFFFF">&nbsp;</td>
    <td WIDTH="142" align="right" style="border-top-style: solid; border-top-width: 1" bgcolor="#FFFFFF">&nbsp;</td>
    <td WIDTH="138" align="right" style="border-top-style: solid; border-top-width: 1" bgcolor="#FFFFFF">&nbsp;</td>
    <td WIDTH="131" align="right" style="border-top-style: solid; border-top-width: 1" bgcolor="#FFFFFF">&nbsp;</td>
    <td WIDTH="123" align="right" style="border-top-style: solid; border-top-width: 1" bgcolor="#FFFFFF">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="266" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Total
    revenues</font></td>
    <td WIDTH="113" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$-</font></td>
    <td WIDTH="137" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$279,476</font></td>
    <td WIDTH="142" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$10,524,134</font></td>
    <td WIDTH="138" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$2,582,446</font></td>
    <td WIDTH="131" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$1,581,639</font></td>
    <td WIDTH="123" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$14,967,695</font></td>
  </tr>
  <tr>
    <td WIDTH="266">&nbsp;</td>
    <td WIDTH="113" align="right">&nbsp;</td>
    <td WIDTH="137" align="right">&nbsp;</td>
    <td WIDTH="142" align="right">&nbsp;</td>
    <td WIDTH="138" align="right">&nbsp;</td>
    <td WIDTH="131" align="right">&nbsp;</td>
    <td WIDTH="123" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="266" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    Expenses:</font></td>
    <td WIDTH="113" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="137" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="142" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="138" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="131" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="123" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="266"><font FACE="Times New Roman" size="2">&nbsp;&nbsp;
    Cost of sales</font></td>
    <td WIDTH="113" align="right">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="137" align="right">
    <font FACE="Times New Roman" size="2">131,756</font></td>
    <td WIDTH="142" align="right">
    <font FACE="Times New Roman" size="2">5,804,673</font></td>
    <td WIDTH="138" align="right">
    <font FACE="Times New Roman" size="2">2,415,129</font></td>
    <td WIDTH="131" align="right">
    <font FACE="Times New Roman" size="2">1,493,394</font></td>
    <td WIDTH="123" align="right">
    <font FACE="Times New Roman" size="2">9,844,952</font></td>
  </tr>
  <tr>
    <td WIDTH="266" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">&nbsp;&nbsp;
    Research and development</font></td>
    <td WIDTH="113" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">3,562,901</font></td>
    <td WIDTH="137" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">10,156,936</font></td>
    <td WIDTH="142" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">10,779,570</font></td>
    <td WIDTH="138" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">3,819,583</font></td>
    <td WIDTH="131" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">3,538,305</font></td>
    <td WIDTH="123" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">34,347,079</font></td>
  </tr>
  <tr>
    <td WIDTH="266"><font FACE="Times New Roman" size="2">&nbsp;&nbsp;
    General and administrative</font></td>
    <td WIDTH="113" align="right">
    <font FACE="Times New Roman" size="2">17,685,714</font></td>
    <td WIDTH="137" align="right">
    <font FACE="Times New Roman" size="2">27,859,330</font></td>
    <td WIDTH="142" align="right">
    <font FACE="Times New Roman" size="2">17,321,614</font></td>
    <td WIDTH="138" align="right">
    <font FACE="Times New Roman" size="2">7,038,923</font></td>
    <td WIDTH="131" align="right">
    <font FACE="Times New Roman" size="2">2,683,534</font></td>
    <td WIDTH="123" align="right">
    <font FACE="Times New Roman" size="2">74,877,136</font></td>
  </tr>
  <tr>
    <td WIDTH="266" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">&nbsp;&nbsp;
    Depreciation and</font></td>
    <td WIDTH="113" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="137" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="142" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="138" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="131" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="123" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="266" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">&nbsp;&nbsp;&nbsp;&nbsp;
    amortization</font></td>
    <td WIDTH="113" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">410,303</font></td>
    <td WIDTH="137" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">471,101</font></td>
    <td WIDTH="142" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">660,372</font></td>
    <td WIDTH="138" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">670,183</font></td>
    <td WIDTH="131" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">515,417</font></td>
    <td WIDTH="123" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">2,767,029</font></td>
  </tr>
  <tr>
    <td WIDTH="266">&nbsp;</td>
    <td WIDTH="113" align="right">&nbsp;</td>
    <td WIDTH="137" align="right">&nbsp;</td>
    <td WIDTH="142" align="right">&nbsp;</td>
    <td WIDTH="138" align="right">&nbsp;</td>
    <td WIDTH="131" align="right">&nbsp;</td>
    <td WIDTH="123" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="266" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    Operating loss</font></td>
    <td WIDTH="113" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(21,658,918)</font></td>
    <td WIDTH="137" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(38,339,647)</font></td>
    <td WIDTH="142" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(24,042,095)</font></td>
    <td WIDTH="138" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(11,361,372)</font></td>
    <td WIDTH="131" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(6,649,011)</font></td>
    <td WIDTH="123" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(106,868,501)</font></td>
  </tr>
  <tr>
    <td WIDTH="266">&nbsp;</td>
    <td WIDTH="113" align="right">&nbsp;</td>
    <td WIDTH="137" align="right">&nbsp;</td>
    <td WIDTH="142" align="right">&nbsp;</td>
    <td WIDTH="138" align="right">&nbsp;</td>
    <td WIDTH="131" align="right">&nbsp;</td>
    <td WIDTH="123" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="266" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Other
    income (expense), net</font></td>
    <td WIDTH="113" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(1,161,622)</font></td>
    <td WIDTH="137" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">20,000</font></td>
    <td WIDTH="142" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="138" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">142,236</font></td>
    <td WIDTH="131" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">49,968</font></td>
    <td WIDTH="123" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(1,254,263)</font></td>
  </tr>
  <tr>
    <td WIDTH="266"><font FACE="Times New Roman" size="2">
    Interest income (expense)</font></td>
    <td WIDTH="113" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">(17,804)</font></td>
    <td WIDTH="137" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">158,105</font></td>
    <td WIDTH="142" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">43,361</font></td>
    <td WIDTH="138" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">(26,225)</font></td>
    <td WIDTH="131" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">(51,168)</font></td>
    <td WIDTH="123" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">106,267</font></td>
  </tr>
  <tr>
    <td WIDTH="266">&nbsp;</td>
    <td WIDTH="113" align="right">&nbsp;</td>
    <td WIDTH="137" align="right">&nbsp;</td>
    <td WIDTH="142" align="right">&nbsp;</td>
    <td WIDTH="138" align="right">&nbsp;</td>
    <td WIDTH="131" align="right">&nbsp;</td>
    <td WIDTH="123" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="266" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Net
    loss</font></td>
    <td WIDTH="113" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(22,838,344)</font></td>
    <td WIDTH="137" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(38,161,542)</font></td>
    <td WIDTH="142" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(23,998,734)</font></td>
    <td WIDTH="138" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(11,245,361)</font></td>
    <td WIDTH="131" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(6,650,211)</font></td>
    <td WIDTH="123" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(108,016,497)</font></td>
  </tr>
  <tr>
    <td WIDTH="266">&nbsp;</td>
    <td WIDTH="113" align="right">&nbsp;</td>
    <td WIDTH="137" align="right">&nbsp;</td>
    <td WIDTH="142" align="right">&nbsp;</td>
    <td WIDTH="138" align="right">&nbsp;</td>
    <td WIDTH="131" align="right">&nbsp;</td>
    <td WIDTH="123" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="266">&nbsp;</td>
    <td WIDTH="113" align="right">&nbsp;</td>
    <td WIDTH="137" align="right">&nbsp;</td>
    <td WIDTH="142" align="right">&nbsp;</td>
    <td WIDTH="138" align="right">&nbsp;</td>
    <td WIDTH="131" align="right">&nbsp;</td>
    <td WIDTH="123" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="266" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Basic
    and diluted net loss per</font></td>
    <td WIDTH="113" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="137" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="142" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="138" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="131" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="123" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="266" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">share*</font></td>
    <td WIDTH="113" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(1.42)</font></td>
    <td WIDTH="137" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(1.41)</font></td>
    <td WIDTH="142" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(0.72)</font></td>
    <td WIDTH="138" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(0.23)</font></td>
    <td WIDTH="131" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(0.10)</font></td>
    <td WIDTH="123" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="266">&nbsp;</td>
    <td WIDTH="113" align="right">&nbsp;</td>
    <td WIDTH="137" align="right">&nbsp;</td>
    <td WIDTH="142" align="right">&nbsp;</td>
    <td WIDTH="138" align="right">&nbsp;</td>
    <td WIDTH="131" align="right">&nbsp;</td>
    <td WIDTH="123" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="266" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Shares
    used in basic and diluted</font></td>
    <td WIDTH="113" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="137" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="142" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="138" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="131" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="123" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="266" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">net
    loss per share*</font></td>
    <td WIDTH="113" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">16,038,009</font></td>
    <td WIDTH="137" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">26,974,997</font></td>
    <td WIDTH="142" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">33,436,641</font></td>
    <td WIDTH="138" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">49,617,280</font></td>
    <td WIDTH="131" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">65,217,088</font></td>
    <td WIDTH="123" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="266">&nbsp;</td>
    <td WIDTH="113" align="right">&nbsp;</td>
    <td WIDTH="137" align="right">&nbsp;</td>
    <td WIDTH="142" align="right">&nbsp;</td>
    <td WIDTH="138" align="right">&nbsp;</td>
    <td WIDTH="131" align="right">&nbsp;</td>
    <td WIDTH="123" align="right">&nbsp;</td>
  </tr>
</table>
</b></font>
<font FACE="Times New Roman" size="2">
<p>*</font><font FACE="Times New Roman PS" SIZE="5"><font size="2" FACE="Times New Roman PS"> Does not include any common
stock equivalents since their effect would be anti-dilutive. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The balance sheet data as of June 30, 2002 and 2003 is
derived from the financial statements that have been audited by Rosenberg, Rich,
Baker, Berman &amp; Company in this prospectus and the balance sheet data for
December 31, 2003, and include all adjustments (consisting of normal recurring
items) that management considers necessary for a fair presentation of the
financial statements have been derived from the unaudited financial statements
reviewed by Rosenberg, Rich Baker Berman &amp; Company included in this prospectus.
</p>
</font>
<b>
<table CELLSPACING="0" BORDER="0" WIDTH="80%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="433">&nbsp;</td>
    <td WIDTH="189" align="center">
    <font FACE="Times New Roman" size="2">As of</font></td>
    <td WIDTH="190" align="center">
    <font FACE="Times New Roman" size="2">As of</font></td>
    <td WIDTH="175" align="center">
    <font FACE="Times New Roman" size="2">As of</font></td>
  </tr>
  <tr>
    <td WIDTH="433">&nbsp;</td>
    <td WIDTH="189" align="center">
    <font FACE="Times New Roman" size="2">June 30,</font></td>
    <td WIDTH="190" align="center">
    <font FACE="Times New Roman" size="2">June 30,</font></td>
    <td WIDTH="175" align="center">
    <font FACE="Times New Roman" size="2">December</font></td>
  </tr>
  <tr>
    <td WIDTH="433">&nbsp;</td>
    <td WIDTH="189" align="center">
    <font FACE="Times New Roman" size="2">2002</font></td>
    <td WIDTH="190" align="center">
    <font FACE="Times New Roman" size="2">2003</font></td>
    <td WIDTH="175" align="center">
    <font FACE="Times New Roman" size="2">31, 2003</font></td>
  </tr>
  <tr>
    <td WIDTH="433">&nbsp;</td>
    <td WIDTH="189" align="center" style="border-bottom-style: solid; border-bottom-width: 1">&nbsp;</td>
    <td WIDTH="190" align="center" style="border-bottom-style: solid; border-bottom-width: 1">&nbsp;</td>
    <td WIDTH="175" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">(Unaudited)</font></td>
  </tr>
  <tr>
    <td WIDTH="433">&nbsp;</td>
    <td WIDTH="189" align="right">&nbsp;</td>
    <td WIDTH="190" align="right">&nbsp;</td>
    <td WIDTH="175" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="433" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2"><b>
    BALANCE SHEET DATA:</b></font></td>
    <td WIDTH="189" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="190" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="175" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="433"><font FACE="Times New Roman" size="2">Cash
    and cash equivalents</font></td>
    <td WIDTH="189" align="right">
    <font FACE="Times New Roman" size="2">$47,065</font></td>
    <td WIDTH="190" align="right">
    <font FACE="Times New Roman" size="2">$396,860</font></td>
    <td WIDTH="175" align="right">
    <font FACE="Times New Roman" size="2">$319,923</font></td>
  </tr>
  <tr>
    <td WIDTH="433" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Working
    capital (deficit)</font></td>
    <td WIDTH="189" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$399,321</font></td>
    <td WIDTH="190" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(1,405,331)</font></td>
    <td WIDTH="175" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(3,007,74</font></td>
  </tr>
  <tr>
    <td WIDTH="433">&nbsp;</td>
    <td WIDTH="189" align="right">&nbsp;</td>
    <td WIDTH="190" align="right">&nbsp;</td>
    <td WIDTH="175" align="right">
    <font FACE="Times New Roman" size="2">8)</font></td>
  </tr>
  <tr>
    <td WIDTH="433" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Total
    assets</font></td>
    <td WIDTH="189" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$6,942,515</font></td>
    <td WIDTH="190" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$3,781,649</font></td>
    <td WIDTH="175" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$2,622,661</font></td>
  </tr>
  <tr>
    <td WIDTH="433"><font FACE="Times New Roman" size="2">Total
    stockholders' equity (deficit)</font></td>
    <td WIDTH="189" align="right">
    <font FACE="Times New Roman" size="2">$(42,849)</font></td>
    <td WIDTH="190" align="right">
    <font FACE="Times New Roman" size="2">$(3,228,886)</font></td>
    <td WIDTH="175" align="right">
    <font FACE="Times New Roman" size="2">$(4,705,992)</font></td>
  </tr>
  </table>
</b></font><font FACE="Times New Roman" size="2">
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The statement of operations data for the six months ended
December 31, 2003 and December 31, 2002 have been derived from the unaudited
financial statements reviewed by Rosenberg, Rich Baker Berman &amp; Company included
in this prospectus and include all adjustments (consisting of normal recurring
items) that management considers necessary for a fair presentation of the
financial statements. The (unaudited) results for the six month period ended
December 31, 2003 are not necessarily indicative of the operating results to be
expected in the future. </p>
</font>

<font FACE="Times New Roman PS" SIZE="5"><b>
<table CELLSPACING="0" BORDER="0" WIDTH="80%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="445">&nbsp;</td>
    <td WIDTH="190" align="right">&nbsp;</td>
    <td WIDTH="204" align="right">&nbsp;</td>
    <td WIDTH="211" align="right">
    <font FACE="Times New Roman" size="2">Cumulative</font></td>
  </tr>
  <tr>
    <td WIDTH="445">&nbsp;</td>
    <td WIDTH="190" align="right">&nbsp;</td>
    <td WIDTH="204" align="right">&nbsp;</td>
    <td WIDTH="211" align="right">
    <font FACE="Times New Roman" size="2">Totals</font></td>
  </tr>
  <tr>
    <td WIDTH="445">&nbsp;</td>
    <td WIDTH="190" align="right">&nbsp;</td>
    <td WIDTH="204" align="right">&nbsp;</td>
    <td WIDTH="211" align="right">
    <font FACE="Times New Roman" size="2">&gt;From Inception</font></td>
  </tr>
  <tr>
    <td WIDTH="445">&nbsp;</td>
    <td WIDTH="394" COLSPAN="2" align="center">
    <font FACE="Times New Roman" size="2">Six Months Ended</font></td>
    <td WIDTH="211" align="right">
    <font FACE="Times New Roman" size="2">(October 2,</font></td>
  </tr>
  <tr>
    <td WIDTH="445">&nbsp;</td>
    <td WIDTH="394" COLSPAN="2" align="center">
    <font FACE="Times New Roman" size="2">December 31,</font></td>
    <td WIDTH="211" align="right">
    <font FACE="Times New Roman" size="2">1996)</font></td>
  </tr>
  <tr>
    <td WIDTH="445">&nbsp;</td>
    <td WIDTH="190" align="right">&nbsp;</td>
    <td WIDTH="204" align="right">&nbsp;</td>
    <td WIDTH="211" align="right">
    <font FACE="Times New Roman" size="2">to December 31,</font></td>
  </tr>
  <tr>
    <td WIDTH="445">&nbsp;</td>
    <td WIDTH="190" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">2002</font></td>
    <td WIDTH="204" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">2003</font></td>
    <td WIDTH="211" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">2003</font></td>
  </tr>
  <tr>
    <td WIDTH="445">&nbsp;</td>
    <td WIDTH="190" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="204" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="211" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="445">&nbsp;</td>
    <td WIDTH="190" align="right">
    <font FACE="Times New Roman" size="2">(Unaudited)</font></td>
    <td WIDTH="204" align="right">
    <font FACE="Times New Roman" size="2">(Unaudited)</font></td>
    <td WIDTH="211" align="right">
    <font FACE="Times New Roman" size="2">(Unaudited)</font></td>
  </tr>
  <tr>
    <td WIDTH="445" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Total
    revenues</font></td>
    <td WIDTH="190" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$771,837</font></td>
    <td WIDTH="204" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$3,780,187</font></td>
    <td WIDTH="211" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$18,747,831</font></td>
  </tr>
  <tr>
    <td WIDTH="445">&nbsp;</td>
    <td WIDTH="190" align="right">&nbsp;</td>
    <td WIDTH="204" align="right">&nbsp;</td>
    <td WIDTH="211" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="445" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    Expenses:</font></td>
    <td WIDTH="190" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="204" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="211" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="445"><font FACE="Times New Roman" size="2">&nbsp;&nbsp;&nbsp;
    Cost of sales</font></td>
    <td WIDTH="190" align="right">
    <font FACE="Times New Roman" size="2">744,030</font></td>
    <td WIDTH="204" align="right">
    <font FACE="Times New Roman" size="2">3,289,937</font></td>
    <td WIDTH="211" align="right">
    <font FACE="Times New Roman" size="2">13,134,889</font></td>
  </tr>
  <tr>
    <td WIDTH="445" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">&nbsp;&nbsp;&nbsp;
    Research and development</font></td>
    <td WIDTH="190" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">1,556,142</font></td>
    <td WIDTH="204" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">1,454,899</font></td>
    <td WIDTH="211" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">35,801,977</font></td>
  </tr>
  <tr>
    <td WIDTH="445"><font FACE="Times New Roman" size="2">&nbsp;&nbsp;&nbsp;
    General and administrative</font></td>
    <td WIDTH="190" align="right">
    <font FACE="Times New Roman" size="2">1,624,178</font></td>
    <td WIDTH="204" align="right">
    <font FACE="Times New Roman" size="2">1,518,411</font></td>
    <td WIDTH="211" align="right">
    <font FACE="Times New Roman" size="2">76,395,547</font></td>
  </tr>
  <tr>
    <td WIDTH="445" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">&nbsp;&nbsp;&nbsp;
    Depreciation and amortization</font></td>
    <td WIDTH="190" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">259,391</font></td>
    <td WIDTH="204" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">74,082</font></td>
    <td WIDTH="211" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">2,841,111</font></td>
  </tr>
  <tr>
    <td WIDTH="445">&nbsp;</td>
    <td WIDTH="190" align="right">&nbsp;</td>
    <td WIDTH="204" align="right">&nbsp;</td>
    <td WIDTH="211" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="445" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    Operating loss</font></td>
    <td WIDTH="190" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(3,411,899)</font></td>
    <td WIDTH="204" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(2,557,192)</font></td>
    <td WIDTH="211" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(109,425,693)</font></td>
  </tr>
  <tr>
    <td WIDTH="445"><font FACE="Times New Roman" size="2">Other
    income (expense), net</font></td>
    <td WIDTH="190" align="right">
    <font FACE="Times New Roman" size="2">24,641</font></td>
    <td WIDTH="204" align="right">
    <font FACE="Times New Roman" size="2">23,087</font></td>
    <td WIDTH="211" align="right">
    <font FACE="Times New Roman" size="2">(1,231,176)</font></td>
  </tr>
  <tr>
    <td WIDTH="445" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    Interest income (expense)</font></td>
    <td WIDTH="190" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(34,649)</font></td>
    <td WIDTH="204" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(31,272)</font></td>
    <td WIDTH="211" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">74,098</font></td>
  </tr>
  <tr>
    <td WIDTH="445" bgcolor="#FFFFFF"><font FACE="Times New Roman" size="2">Net
    loss</font></td>
    <td WIDTH="190" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">$(13,421,396)</font></td>
    <td WIDTH="204" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">$(2,565,377)</font></td>
    <td WIDTH="211" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">$(110,581,874)</font></td>
  </tr>
  <tr>
    <td WIDTH="445" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Basic
    and diluted net loss per share*</font></td>
    <td WIDTH="190" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(0.06)</font></td>
    <td WIDTH="204" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(0.04)</font></td>
    <td WIDTH="211" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="445" bgcolor="#FFFFFF"><font FACE="Times New Roman" size="2">Shares
    used in basic and diluted</font></td>
    <td WIDTH="190" align="right" bgcolor="#FFFFFF">&nbsp;</td>
    <td WIDTH="204" align="right" bgcolor="#FFFFFF">&nbsp;</td>
    <td WIDTH="211" align="right" bgcolor="#FFFFFF">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="445" bgcolor="#FFFFFF"><font FACE="Times New Roman" size="2">net
    loss per share*</font></td>
    <td WIDTH="190" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">63,397,799</font></td>
    <td WIDTH="204" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">72,251,251</font></td>
    <td WIDTH="211" align="right" bgcolor="#FFFFFF">&nbsp;</td>
  </tr>
  </table>
</b></font>
<font FACE="Times New Roman" size="2">
<p>*</font><font FACE="Times New Roman PS" SIZE="5"><font size="2" FACE="Times New Roman PS"> </font>
<font FACE="Times New Roman" size="2">Does not include any common
stock equivalents since their effect would be anti-dilutive. </p>
</font><b>
<hr><p Style='page-break-before:always'></b></font><font FACE="Times New Roman" size="5"><b>
<p align="center"><a name="riskfactors"></a>RISK FACTORS </p>
</b>
</font><font FACE="Times New Roman" size="2">
<i>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; An investment in the common stock offered by this prospectus
involves a high degree of risk. In addition to the other information in this
prospectus and any supplements to this prospectus, you should carefully consider
the following risks before making an investment decision.</i> </p>
<b>
<p>Risks Related to Financial Aspects of Our Business </p>
<p>The Company has recently entered into the new and emerging business of
Nanotechnology which entails significant development and commercial risk.
</p>
</b>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The Company is spending a total of $1.2 million pursuant to a
contract with Lucent Technologies, Inc. to initially develop longer life fuel
cells for military applications. Even if a prototype product be successfully
developed, pure research involves a high degree of risk with significant
uncertainty as to whether a commercially viable product will result. </p>
<b>
<p>mPhase's stock price has suffered significant declines during the past three
years and remains volatile. </p>
</b>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The market price of our common stock closed at $2.72 on
December 12, 2000 and closed at $.43 on December 12, 2003. Stocks in
telecommunications equipment providers of DSL products have been very volatile
during such period. 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 the NASDAQ
National or NASDAQ Small Cap exchanges, it is considered to be a &quot;penny stock&quot;
limiting the type of customers that broker/dealers can sell to. Such customers
consist only of &quot;established customers&quot; and &quot;Accredited Investors&quot; (within the
meaning of Rule 501 of Regulation D of the Securities Act of 1933, as
amended-generally individuals and entities of substantial net worth) thereby
limiting the liquidity of our common stock. </p>
<b>
<p>We have reported net losses for each of our fiscal years from our inception
in 1996 and for the first quarter (unaudited) ended September 30, 2003 and may
not be able to operate profitability in the future. </p>
</b>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; We have had substantial operating losses since our inception
in 1996 (including $6,649,011 and $11,361,372 for the fiscal year ended June 30,
2003 and fiscal year ended June 30, 2002, respectively and (unaudited) $ 864,511
and $1,801,425 for the quarters ending September 30, 2003 and September 30, 2002
respectively) and cannot be certain when or if we will ever be profitable. We
expect to continue to have net losses for the foreseeable future and have a need
to raise not less than $2 million in additional cash in the next 12 months
through further offerings to continue operations. We have never been profitable
from our inception in October, 1996 through September 30, 2003 (unaudited) and
we have incurred (a) accumulated losses of $108,881,008 and a stockholder's
deficit of $3,881,154 and (b) cumulative negative cash flow of $44,031,903. As
of September 30, 2003 (unaudited) we have a negative net worth of $3,881,154 and
a negative working capital of $2,385,525. </p>
<b>
<p>Our independent auditor's report express doubt about our ability to continue
as a going concern. </p>
</b>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The reports of the Company's outside auditors' Rosenberg,
Rich, Baker, Berman &amp; Company with respect to its latest audited 10K for the
fiscal years ended June 30, 2003, June 30, 2002 and June 30, 2001 stated that
&quot;there is substantial doubt of the Company's ability to continue as a going
concern.&quot; Such opinion from our outside auditors makes it significantly more
difficult and expensive for the Company to raise additional capital necessary to
continue our operations. </p>
<b>
<p>Our common stock is subject to significant dilution upon issuance of shares
we have reserved for future issuance. </p>
</b>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; As of April 23, 2004, we have warrants and options
outstanding convertible into approximately48,717,287 shares and 14,690,000
shares of mPhase common stock which, upon conversion, may adversely affect the
future price of our common stock. As of April 23, 2004 we have warrants and
options convertible into approximately 39,980,562 and 5,135,000 shares of our
common stock at $.35 per share or less that, upon exercise, will result in
significant dilution to many of our current shareholders and may adversely
affect the future price of our common stock. As of April 23, 2004, the Company
has approximately 1,533,334 shares of common stock reserved for the issuance
upon the conversion of certain 12% convertible notes to related parties at $.30
per share which may adversely affect the future price of our common stock. 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. Certain warranties with key vendors are subject to cashless
exercise and may be immediately exercised with no resulting proceeds to the
Company to satisfy overdue debt. (See note payable due December 31, 2003 in the
amount of $420,872 that is in default the details of which are set forth on page
34.) </p>
</font><b>

<font FACE="Times New Roman PS" SIZE="5"><font FACE="Times New Roman" size="2">
<p>Risk Factors Related to Our Operations </p>
<p>We have been a development-stage company since our inception in 1996 and have
not to date had a significant deployment of either of our main platforms for
delivery of televison over DSL. </p>
</font></b><font FACE="Times New Roman" size="2">
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; We have had to date no material revenues derived from sales
of our Traverser&#153 Digital Video Data Delivery System (DVDDS) or our mPhaseTV+
products or our new line of Intelligence POTS Splitters. There have been to date
no major deployments of Television over DSL by telephone service providers
globally and there currently is uncertainty as to the extent, if at all, that
deployments will occur in the future. </p>
<b>
<p>We depend upon outsourcing of our research and product development of our
television platforms to two outside entities. </p>
</b>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; We depend upon GTRC for continued technical assistance in
connection with deployment of the Traverser&#153 DVDDS platform and our business
would be materially adversely affected if GTRC were to terminate our
relationship since the Company does not have certain technical resources
available at GTRC for deployment of the Traverser&#153 DVDDS. We owe GTRC
approximately $1.8 million and are finalizing an agreement to convert all of
such payables into our common stock at $.35 per share. We depend upon Lucent for
the successful development of our TV+ product and our business would be
materially adversely affected if Lucent were to terminate our relationship. </p>
<b>
<p>The loss of key personnel could adversely effect our business. </p>
</b>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Management and employment contracts with all of our officers
have expired and no assurances can be given that such executives will remain
with the Company or that the Company will be able to successfully enter into
agreements with such key executives. All of our officers have been granted stock
options that are intended to represent a key component of their compensation.
Such options may not provided the intended incentives to such officers if our
stock price declines or experiences significant volatility. </p>
<b>
<p>Economic support from affiliated companies has been significant. </p>
</b>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; During the Downturn in The Telecommunications Industry, both
Microphase Corporation, and Janifast Ltd. had provided significant financial
support to mPhase during the past two years in the form of either cash infusions
or conversions of related party debt. Such companies, which share common
management with mPhase, are under no legal obligation to and may not be able to
sustain such economic support of mPhase in the future should such support be
necessary. </p>
<b>
<p>Sales and margins from our component DSL products has varied dramatically
during the past two years and remains volatile. </p>
</b>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Sales and gross margins from our POTS Splitter and other DSL
products have experienced a significant decline during the period from June 30,
2001 through June 30, 2003 as a result of the significant downturn in capital
spending by telecommunications service providers. Although there has been a
significant recovery in such sales during the quarter ended September 30, 2003
the outlook for continuing growth in sales remains uncertain. Failure to achieve
significant sales with adequate gross margins with respect to our component DSL
products will negatively effect the cash available to the Company prior to
commencement of sales of our flagship television platforms thereby having a
negative effect upon the overall financial condition of the Company and the
price of our common stock. </p>
<b>
<p>We rely on single sources for supply of a certain component for out POTS
splitter product that has been the source of all of our revenues to date.
</p>
</b>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; We purchase the core torroid which is a key component in our
POTS Splitter Product from VAC corporation. We purchase such component on a
purchase order basis and have no long term contract for the supply of such
component. The loss of this current source of supply could result in us having
to redesign our product at additional cost and result in lost revenues from our
main source of sales to date. </p>
<b>
<p>We may incur substantial expenditures in the future in order to protect our
intellectual property. </p>
</b>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Although our Traverser&#153 DVDDS television platform is
patent-protected and not the subject of any infringement allegations we do not
have currently patents or patents pending for our TV+ product. 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. </p>
<b>
<p>Risk Factors Related to Our Targeted Markets </p>
<p>Historically the sale of infrastructure products to telecommunication
providers in the international markets has a long lead time and a multiplicity
of risks. </p>
</b>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; We expect the majority of our future revenues to be derived
from international emerging markets and our success depends upon our ability to
sell our flagship television platforms outside of the United States where
political, currency and regulatory risks are significantly greater. As a result
of their distance from the United States, different time zones, culture,
management and language differences, these operations pose greater risk than
selling in the United States. Our sales cycle for our TV over DSL platforms is
lengthy (since it involves a major strategic decision by an international
telecommunications service provider) and we may incur significant marketing
expenses with no guarantee of future sales. A significant market for our Traverser&#153 DVDDS, mPhaseTV+ products may never develop if international
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 and other
deployment as a result of the current economic downturn in the industry. Future
market demand that will cause telephone service providers to continue to
aggressively roll out DSL, in general, and ADSL, ADSL2 and ADSL2+ in particular,
is highly unpredictable especially in markets outside of the United States.
Certain telephone companies (especially in developing international economies)
may have copper wire infrastructure that is not of sufficient quality to
accommodate the Traverser&#153 or mPhaseTV+ platform. Currency flucturations,
changes in foreign taxes and import duties and economic and political
instability in international markets pose a greater risk to our operations than
U.S. markets. </p>
<b>
<p>Our televison platforms may not achieve compliance with regulatory
requirements in foreign countries. </p>
</b>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Our Traverser&#153 DVDDS and mPhaseTV+ platforms may fail to meet
foreign regulatory standards. Since our targeted markets for our Television
platforms involve countries outside of the United States, such products are
subject to greater regulatory risks since they must comply with different
standards of different countries than can vary widely in the telecommunications
industry. The failure to meet such regulatory standards would result in
potential customers in countries outside of the United States not deploying of
our TV platforms. </p>
<b>
<p>The telecommunications industry is subject to intense competition
charazterized by swift changes in technology. </p>
</b>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The Telecommunications equipment industry is subject to swift
and continuing innovation and technological changes that could render our
Traverser&#153 DVDDS and TV+ products obsolete and intense competition in the
industry could prevent our ever becoming profitable. Our competitors that sell
DSL systems that compete with the Traverser&#153 and mPhaseTV+ system 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, Fujitsu, 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, Minerva Corporation and Myrio Corporation.Telephone service providers
that are our targeted customers face competition from cable-based technologies,
fixed wireless technologies and satellite technologies that may cause them not
to deploy our Traverser&#153 DVDDS or TV+ products. </p>
<b>
<p>Deployment of our television platforms requires certain additional
investments by telecommunications service providers. </p>
</b>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Our Customers may need to build a digital head-end to
download television content from satellites involving a significant additional
capital expenditure to utilize the digital Television capabilities of our
Traverser&#153 DVDDS and TV+ products. Such additional capital costs to build a
digital headend may cause a number of potential customers not to deploy our TV
platforms. </p>
<b>
<p>We may not be able to evolve our technology, products and services or develop
new technology, products and services that are acceptable to our customers.
</p>
  </b>
<blockquote>
  <p>The market for our broadcast digital television platforms over DSL is
  characterized by: </p>
  <p>Rapid technology change; </p>
  <p>New and improved product introductions; </p>
  <p>Changing customer Demands; and </p>
  <p>Evolving industry standards and product obsolescence. </p>
</blockquote>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Our future success will depend upon our ability to
continually enhance our existing broadcast digital television platforms as
Asymetric Digital Subscriber Line (ADSL) technology migrates forward to ADSL2
and ADSL2+ with enhanced features such as the ability to deliver multiple
television channels to one set top box and continually cost-reduce our platforms
consistent with the demands of telecommunications service providers. The development of enhanced and new technology, products and
services is a complex and uncertain process requiring high levels of innovation,
highly-skilled engineering and development personnel, and the accurate
anticipation of technological and market trends. We may not be able to identify,
develop, market or support new or enhanced technology, products, or services on
a timely basis, if at all owing to our size and limited financial resources. </p>
<b>
<p>Telecommunications service providers outside of the United States must be
able to access sources for broadcast television content in order to deploy our
either of our television platforms. </p>
</b>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In order to have an incentive to deploy either the TV+ or the
Traverser DVDDS platforms, an international telecommunications service provider
must have access, to multiple channels of Television programming from content
providers at prices that enable such provider to earn a profit from the
deployment of television programming. In certain of our key target markets, such
as Brazil, only cable companies are permitted under current law to provided such
content and therefore a local service provider must either establish a working
relationship with such a cable provider to have an incentive to utilize our
products. </p>
</font><font FACE="Times New Roman"><b>
<hr><p Style='page-break-before:always'>
<p align="center"><a name="useofproceeds"></a>USE OF PROCEEDS </p>
</b>
</font><font FACE="Times New Roman" size="2">
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The selling stockholders will receive the proceeds from the
resale of the shares of common stock. We will not receive any proceeds from the
resale of the shares of common stock by the selling stockholders. However, we
will receive approximately $4,546,741 if all of the warrants, options and
convertible notes are converted to purchase shares of common stock registered
under this prospectus are exercised, which would be used for general working
capital. </p>
</font><b>
<font FACE="Times New Roman"><p Style='page-break-before:always'>
<p align="center"><a name="pricerangestock"></a>PRICE RANGE OF COMMON STOCK </p>
</font>
</b><font FACE="Times New Roman" size="2">
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The primary market for our common stock is the OTC Bulletin
Board, where it trades under the symbol &quot;XDSL.OB&quot;. The following table sets
forth the high and low closing bid prices for the shares for the periods
indicated as provided by the National Quotation Bureau, Inc. The quotations
shown reflect inter-dealer prices, without retail mark-up, mark-down, or
commission and may not represent actual transactions. </p>
</font>
<b>
<table CELLSPACING="0" BORDER="0" WIDTH="80%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="47%"><font FACE="Times New Roman" size="2">
    Year/Quarter</font></td>
    <td WIDTH="26%" align="right">
    <font FACE="Times New Roman" size="2">High</font></td>
    <td WIDTH="27%" align="right">
    <font FACE="Times New Roman" size="2">Low</font></td>
  </tr>
  <tr>
    <td WIDTH="47%" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Fiscal
    year ended June 30, 1999</font></td>
    <td WIDTH="26%" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="27%" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="47%"><font FACE="Times New Roman" size="2">First
    Quarter</font></td>
    <td WIDTH="26%" align="right">
    <font FACE="Times New Roman" size="2">$4.25</font></td>
    <td WIDTH="27%" align="right">
    <font FACE="Times New Roman" size="2">$0.75</font></td>
  </tr>
  <tr>
    <td WIDTH="47%" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Second
    Quarter</font></td>
    <td WIDTH="26%" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">3.65625</font></td>
    <td WIDTH="27%" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">1.5625</font></td>
  </tr>
  <tr>
    <td WIDTH="47%"><font FACE="Times New Roman" size="2">Third
    Quarter</font></td>
    <td WIDTH="26%" align="right">
    <font FACE="Times New Roman" size="2">5.625</font></td>
    <td WIDTH="27%" align="right">
    <font FACE="Times New Roman" size="2">1.875</font></td>
  </tr>
  <tr>
    <td WIDTH="47%" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Fourth
    Quarter</font></td>
    <td WIDTH="26%" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">8.75</font></td>
    <td WIDTH="27%" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">2.90625</font></td>
  </tr>
  <tr>
    <td WIDTH="47%"><font FACE="Times New Roman" size="2">Fiscal
    year ended June 30, 2000</font></td>
    <td WIDTH="26%" align="right">&nbsp;</td>
    <td WIDTH="27%" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="47%" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">First
    Quarter</font></td>
    <td WIDTH="26%" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$9.25</font></td>
    <td WIDTH="27%" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$2.96875</font></td>
  </tr>
  <tr>
    <td WIDTH="47%"><font FACE="Times New Roman" size="2">Second
    Quarter</font></td>
    <td WIDTH="26%" align="right">
    <font FACE="Times New Roman" size="2">6.1875</font></td>
    <td WIDTH="27%" align="right">
    <font FACE="Times New Roman" size="2">2.50</font></td>
  </tr>
  <tr>
    <td WIDTH="47%" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Third
    Quarter</font></td>
    <td WIDTH="26%" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">19.125</font></td>
    <td WIDTH="27%" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">6.50</font></td>
  </tr>
  <tr>
    <td WIDTH="47%"><font FACE="Times New Roman" size="2">Fourth
    Quarter</font></td>
    <td WIDTH="26%" align="right">
    <font FACE="Times New Roman" size="2">14.125</font></td>
    <td WIDTH="27%" align="right">
    <font FACE="Times New Roman" size="2">6.00</font></td>
  </tr>
  <tr>
    <td WIDTH="47%" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Fiscal
    year ended June 30, 2001</font></td>
    <td WIDTH="26%" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="27%" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="47%"><font FACE="Times New Roman" size="2">First
    Quarter</font></td>
    <td WIDTH="26%" align="right">
    <font FACE="Times New Roman" size="2">$9.25</font></td>
    <td WIDTH="27%" align="right">
    <font FACE="Times New Roman" size="2">$3.00</font></td>
  </tr>
  <tr>
    <td WIDTH="47%" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Second
    Quarter</font></td>
    <td WIDTH="26%" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">5.9375</font></td>
    <td WIDTH="27%" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">1.4688</font></td>
  </tr>
  <tr>
    <td WIDTH="47%"><font FACE="Times New Roman" size="2">Third
    Quarter</font></td>
    <td WIDTH="26%" align="right">
    <font FACE="Times New Roman" size="2">3.38</font></td>
    <td WIDTH="27%" align="right">
    <font FACE="Times New Roman" size="2">1.22</font></td>
  </tr>
  <tr>
    <td WIDTH="47%" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Fourth
    Quarter</font></td>
    <td WIDTH="26%" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">2.61</font></td>
    <td WIDTH="27%" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">1.03</font></td>
  </tr>
  <tr>
    <td WIDTH="47%"><font FACE="Times New Roman" size="2">Fiscal
    year ended June 30, 2002</font></td>
    <td WIDTH="26%" align="right">&nbsp;</td>
    <td WIDTH="27%" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="47%" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">First
    Quarter</font></td>
    <td WIDTH="26%" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$1.67</font></td>
    <td WIDTH="27%" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$.31</font></td>
  </tr>
  <tr>
    <td WIDTH="47%"><font FACE="Times New Roman" size="2">Second
    Quarter</font></td>
    <td WIDTH="26%" align="right">
    <font FACE="Times New Roman" size="2">.86</font></td>
    <td WIDTH="27%" align="right">
    <font FACE="Times New Roman" size="2">.31</font></td>
  </tr>
  <tr>
    <td WIDTH="47%" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Third
    Quarter</font></td>
    <td WIDTH="26%" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">.62</font></td>
    <td WIDTH="27%" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">.27</font></td>
  </tr>
  <tr>
    <td WIDTH="47%"><font FACE="Times New Roman" size="2">Fourth
    Quarter</font></td>
    <td WIDTH="26%" align="right">
    <font FACE="Times New Roman" size="2">.50</font></td>
    <td WIDTH="27%" align="right">
    <font FACE="Times New Roman" size="2">.23</font></td>
  </tr>
  <tr>
    <td WIDTH="47%" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Fiscal
    year ended June 30, 2003</font></td>
    <td WIDTH="26%" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="27%" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="47%"><font FACE="Times New Roman" size="2">First
    Quarter</font></td>
    <td WIDTH="26%" align="right">
    <font FACE="Times New Roman" size="2">$.32</font></td>
    <td WIDTH="27%" align="right">
    <font FACE="Times New Roman" size="2">$.15</font></td>
  </tr>
  <tr>
    <td WIDTH="47%" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Second
    Quarter</font></td>
    <td WIDTH="26%" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">.31</font></td>
    <td WIDTH="27%" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">.15</font></td>
  </tr>
  <tr>
    <td WIDTH="47%"><font FACE="Times New Roman" size="2">Third
    Quarter</font></td>
    <td WIDTH="26%" align="right">
    <font FACE="Times New Roman" size="2">.36</font></td>
    <td WIDTH="27%" align="right">
    <font FACE="Times New Roman" size="2">.19</font></td>
  </tr>
  <tr>
    <td WIDTH="47%" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Fourth
    Quarter</font></td>
    <td WIDTH="26%" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">.42</font></td>
    <td WIDTH="27%" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">.28</font></td>
  </tr>
  <tr>
    <td WIDTH="47%"><font FACE="Times New Roman" size="2">Fiscal
    Year ended June 30, 2004</font></td>
    <td WIDTH="26%" align="right">&nbsp;</td>
    <td WIDTH="27%" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="47%" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">First
    Quarter</font></td>
    <td WIDTH="26%" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$.42</font></td>
    <td WIDTH="27%" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$.29</font></td>
  </tr>
  <tr>
    <td WIDTH="47%"><font FACE="Times New Roman" size="2">Second
    Quarter</font></td>
    <td WIDTH="26%" align="right">
    <font FACE="Times New Roman" size="2">$.61</font></td>
    <td WIDTH="27%" align="right">
    <font FACE="Times New Roman" size="2">$.26</font></td>
  </tr>
  <tr>
    <td WIDTH="47%" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Third
    Quarter</font></td>
    <td WIDTH="26%" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$.69</font></td>
    <td WIDTH="27%" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$.41</font></td>
  </tr>
</table>
</b>
<font FACE="Times New Roman" size="2">
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; As of April 23, 2004 (unaudited), we had 84,930,962 shares of
common stock outstanding and approximately 11,000 stockholders. The last
reported sales price of our common stock on April 23, 2004 was $.39 per share.
</p>
</font>
<font FACE="Times New Roman">
<b>
<hr><p Style='page-break-before:always'>
<p align="center"><a name="dividendpolicy"></a>DIVIDEND POLICY </p>
</b>
</font>
<font FACE="Times New Roman" size="2">
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; We have never declared or paid any cash dividends on our
common stock and do not anticipate paying any cash dividends in the foreseeable
future. We currently intend to retain future earnings, if any, to finance
operations and the expansion of our business. Any future determination to pay
cash dividends will be at the discretion of the board of directors and will be
based upon our 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 are relevant. </p>
</font><b>
<font FACE="Times New Roman">
<p align="center"><a name="selectfinancialdata"></a>SELECTED FINANCIAL DATA </p>
</font>
</b><font FACE="Times New Roman" size="2">
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The selected financial data set forth below should be read in
conjunction with &quot;Company Operations&quot; and the historical financial statements
and notes included in this prospectus The statement of operations data for the
years ended June 30, 1999, 2000 and 2001, are derived from financial statements
that have been audited by Arthur Andersen LLP, and the statement of operations
data for the years ended June 30, 2002 and June 30, 2003 are derived from
financial statements that have been audited by Rosenberg, Rich, Baker, Berman &amp;
Company, independent auditors, and are included in this prospectus. The
operations data for the quarterly periods ended September 30, 1999 and each
quarter thereafter to and including the quarter ended December 31, 2001 are
derived from unaudited financial statements reviewed by Arthur Andersen LLP and
the operations data for the quarterly periods from March 31, 2002 and each
quarter thereafter through and including the quarter ended December 31, 2003,
have been derived from unaudited financial statements reviewed by Rosenberg,
Rich, Baker, Berman &amp; Company, which include all adjustments (consisting of
normal recurring items) that management considers necessary for a fair
presentation. The results for the fiscal year ended June 30, 2003 and the are
results for the six months ended December 31, 2003 are not necessarily
indicative of the operating results to be expected in the future. </p>
</font>
<b>
<table CELLSPACING="0" BORDER="0" WIDTH="90%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="200">&nbsp;</td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="386" COLSPAN="3" align="right">
    <font FACE="Times New Roman" size="2">
    <p align="center">For The Year Ended</font></td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1">&nbsp;</td>
    <td WIDTH="295" COLSPAN="2" align="center" style="border-left-style: solid; border-left-width: 1">
    <font FACE="Times New Roman" size="2">For The Six Months</font></td>
  </tr>
  <tr>
    <td WIDTH="200">&nbsp;</td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
    <td WIDTH="129" align="right">
    <font FACE="Times New Roman" size="2">
    <p align="center">June 30,</font></td>
    <td WIDTH="132" align="right">&nbsp;</td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1">&nbsp;</td>
    <td WIDTH="295" COLSPAN="2" align="center" style="border-left-style: solid; border-left-width: 1">
    <font FACE="Times New Roman" size="2">Ended December 30,</font></td>
  </tr>
  <tr>
    <td WIDTH="200">&nbsp;</td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
    <td WIDTH="129" align="right">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1">&nbsp;</td>
    <td WIDTH="295" COLSPAN="2" align="center" style="border-left-style: solid; border-left-width: 1">
    <font FACE="Times New Roman" size="2">(Unaudited)</font></td>
  </tr>
  <tr>
    <td WIDTH="200">&nbsp;</td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
    <td WIDTH="129" align="right">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1">&nbsp;</td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1">&nbsp;</td>
    <td WIDTH="134" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="200">&nbsp;</td>
    <td WIDTH="110" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">1999</font></td>
    <td WIDTH="125" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">2000</font></td>
    <td WIDTH="129" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">2001</font></td>
    <td WIDTH="132" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">2002</font></td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1; border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">2003</font></td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1; border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">2002</font></td>
    <td WIDTH="134" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">2003</font></td>
  </tr>
  <tr>
    <td WIDTH="200">&nbsp;</td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
    <td WIDTH="129" align="right">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1">&nbsp;</td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1">&nbsp;</td>
    <td WIDTH="134" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="200"><font FACE="Times New Roman" size="2">
    STATEMENT OF</font></td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
    <td WIDTH="129" align="right">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1">&nbsp;</td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1">&nbsp;</td>
    <td WIDTH="134" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="200"><font FACE="Times New Roman" size="2">
    OPERATIONS</font></td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
    <td WIDTH="129" align="right">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1">&nbsp;</td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1">&nbsp;</td>
    <td WIDTH="134" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="200"><font FACE="Times New Roman" size="2">DATA:</font></td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
    <td WIDTH="129" align="right">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1">&nbsp;</td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1">&nbsp;</td>
    <td WIDTH="134" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="200" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Total
    revenues</font></td>
    <td WIDTH="110" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$-</font></td>
    <td WIDTH="125" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$279,476</font></td>
    <td WIDTH="129" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$10,524,134</font></td>
    <td WIDTH="132" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$2,582,446</font></td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1; border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$1,581,639</font></td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1; border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$771,837</font></td>
    <td WIDTH="134" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$3,780,137</font></td>
  </tr>
  <tr>
    <td WIDTH="200">&nbsp;</td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
    <td WIDTH="129" align="right">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1">&nbsp;</td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1">&nbsp;</td>
    <td WIDTH="134" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="200">&nbsp;</td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
    <td WIDTH="129" align="right">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1">&nbsp;</td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1">&nbsp;</td>
    <td WIDTH="134" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="200"><font FACE="Times New Roman" size="2">Costs
    and</font></td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
    <td WIDTH="129" align="right">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1">&nbsp;</td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1">&nbsp;</td>
    <td WIDTH="134" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="200"><font FACE="Times New Roman" size="2">
    Expenses:</font></td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
    <td WIDTH="129" align="right">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1">&nbsp;</td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1">&nbsp;</td>
    <td WIDTH="134" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="200" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Cost of
    sales</font></td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">131,756</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">5,804,673</font></td>
    <td WIDTH="132" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">2,415,129</font></td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">1,493,394</font></td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">744,030</font></td>
    <td WIDTH="134" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">3,288,937</font></td>
  </tr>
  <tr>
    <td WIDTH="200"><font FACE="Times New Roman" size="2">
    Research and</font></td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
    <td WIDTH="129" align="right">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1">&nbsp;</td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1">&nbsp;</td>
    <td WIDTH="134" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="200"><font FACE="Times New Roman" size="2">
    development</font></td>
    <td WIDTH="110" align="right">
    <font FACE="Times New Roman" size="2">3,562,901</font></td>
    <td WIDTH="125" align="right">
    <font FACE="Times New Roman" size="2">10,156,936</font></td>
    <td WIDTH="129" align="right">
    <font FACE="Times New Roman" size="2">10,779,570</font></td>
    <td WIDTH="132" align="right">
    <font FACE="Times New Roman" size="2">3,819,583</font></td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">3,538,305</font></td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1">
    <font FACE="Times New Roman" size="2">1,556,142</font></td>
    <td WIDTH="134" align="right">
    <font FACE="Times New Roman" size="2">1,454,899</font></td>
  </tr>
  <tr>
    <td WIDTH="200" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">General
    &amp;</font></td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="132" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="134" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="200" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    administrative</font></td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">17,685,714</font></td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">27,859,330</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">17,321,614</font></td>
    <td WIDTH="132" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">7,038,923</font></td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">2,683,534</font></td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">1,624,178</font></td>
    <td WIDTH="134" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">1,518,481</font></td>
  </tr>
  <tr>
    <td WIDTH="200"><font FACE="Times New Roman" size="2">
    Depreciation &amp;</font></td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
    <td WIDTH="129" align="right">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1">&nbsp;</td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1">&nbsp;</td>
    <td WIDTH="134" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="200"><font FACE="Times New Roman" size="2">
    amortization</font></td>
    <td WIDTH="110" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">410,303</font></td>
    <td WIDTH="125" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">471,101</font></td>
    <td WIDTH="129" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">660,372</font></td>
    <td WIDTH="132" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">670,183</font></td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1; border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">515,417</font></td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1; border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">259,391</font></td>
    <td WIDTH="134" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">74,082</font></td>
  </tr>
  <tr>
    <td WIDTH="200" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="132" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="134" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="200" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    Operating loss</font></td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(21,658,918)</font></td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(38,339,647)</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(24,042,095)</font></td>
    <td WIDTH="132" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(11,361,372)</font></td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(6,649,011)</font></td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(3,411,899)</font></td>
    <td WIDTH="134" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(2,557,192)</font></td>
  </tr>
  <tr>
    <td WIDTH="200">&nbsp;</td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
    <td WIDTH="129" align="right">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1">&nbsp;</td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1">&nbsp;</td>
    <td WIDTH="134" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="200" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Other
    income</font></td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="132" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="134" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="200" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    (expense), net</font></td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(1,161,622)</font></td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">20,000</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="132" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">142,236</font></td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">49,968</font></td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">24,647</font></td>
    <td WIDTH="134" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">23,087</font></td>
  </tr>
  <tr>
    <td WIDTH="200"><font FACE="Times New Roman" size="2">
    Interest income</font></td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
    <td WIDTH="129" align="right">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1">&nbsp;</td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1">&nbsp;</td>
    <td WIDTH="134" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="200"><font FACE="Times New Roman" size="2">
    (expense)</font></td>
    <td WIDTH="110" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">(17,804)</font></td>
    <td WIDTH="125" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">158,105</font></td>
    <td WIDTH="129" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">43,361</font></td>
    <td WIDTH="132" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">(26,225)</font></td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1; border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">(51,168)</font></td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1; border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">(34,149)</font></td>
    <td WIDTH="134" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">(31,232)</font></td>
  </tr>
  <tr>
    <td WIDTH="200" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="132" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="134" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="200" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Net
    Loss</font></td>
    <td WIDTH="110" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(22,838,344)</font></td>
    <td WIDTH="125" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(38,161,542)</font></td>
    <td WIDTH="129" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(23,998,734)</font></td>
    <td WIDTH="132" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(11,245,361)</font></td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1; border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(6,650,211)</font></td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1; border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(3,421,396)</font></td>
    <td WIDTH="134" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(2,565,377)</font></td>
  </tr>
  <tr>
    <td WIDTH="200">&nbsp;</td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
    <td WIDTH="129" align="right">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1">&nbsp;</td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1">&nbsp;</td>
    <td WIDTH="134" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="200">&nbsp;</td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
    <td WIDTH="129" align="right">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1">&nbsp;</td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1">&nbsp;</td>
    <td WIDTH="134" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="200" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Basic
    and diluted</font></td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="132" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="134" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="200" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">net
    loss per share</font></td>
    <td WIDTH="110" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(1.42)</font></td>
    <td WIDTH="125" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(1.41)</font></td>
    <td WIDTH="129" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(0.72)</font></td>
    <td WIDTH="132" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(0.23)</font></td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1; border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(0.10)</font></td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1; border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(.06)</font></td>
    <td WIDTH="134" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(.04)</font></td>
  </tr>
  <tr>
    <td WIDTH="200">&nbsp;</td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
    <td WIDTH="129" align="right">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1">&nbsp;</td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1">&nbsp;</td>
    <td WIDTH="134" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="200" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Shares
    used in</font></td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="132" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="134" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="200" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">basic
    and diluted</font></td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="132" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="134" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="200" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">net
    loss per</font></td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="132" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="134" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="200" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    share(1)</font></td>
    <td WIDTH="110" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">16,038,809</font></td>
    <td WIDTH="125" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">26,974,997</font></td>
    <td WIDTH="129" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">33,436,641</font></td>
    <td WIDTH="132" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">49,617,280</font></td>
    <td WIDTH="122" align="right" style="border-right-style: solid; border-right-width: 1; border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">65,217,088</font></td>
    <td WIDTH="161" align="right" style="border-left-style: solid; border-left-width: 1; border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">63,397,799</font></td>
    <td WIDTH="134" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">72,251,251</font></td>
  </tr>
</table>
</b>
<font FACE="Times New Roman" size="2">
<p ALIGN="JUSTIFY">(1) Does not include shares on a pro forma basis for all
periods presented for shares which may be issued pursuant to warrants issued in
private placements, options or conversion rights for certain notes; of which the
underlying shares of the Company's common stock for such common equivalent
shares are subject to registration by this prospectus, since their effect is
anti-dilutive. Common equivalent shares for such shares other than the options, warrants and convertible rights subject to registration
herein, have also been excluded from the computation of diluted earnings per
share since their effect is anti-dilutive. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; The balance sheet data as of June 30, 1999, 2000, 2001 are
derived from financial statements that have been audited by Arthur Andersen LLP
and June 30, 2002 and 2003 are derived from financial statements that have been
audited by Rosenberg, Rich, Baker, Berman &amp; Company and the balance sheet data
as of December 31, 2003, have been derived from unaudited financial statements
reviewed by Rosenberg, Rich, Baker, Berman &amp; Company, and include all
adjustments (consisting of normal recurring items) that management considers
necessary for a fair presentation. </p>
<b>
<p align="left">Balance Sheet Data as of: </p>
</b>
</font><b>
<table CELLSPACING="0" BORDER="0" WIDTH="90%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="299">&nbsp;</td>
    <td WIDTH="124" align="right">&nbsp;</td>
    <td WIDTH="136" align="right">&nbsp;</td>
    <td WIDTH="135" align="right">
    <font FACE="Times New Roman" style="text-decoration: underline" size="2">
    June 30,</font></td>
    <td WIDTH="139" align="right">&nbsp;</td>
    <td WIDTH="142" align="right" style="border-right-style: solid; border-right-width: 1">&nbsp;</td>
    <td WIDTH="138" align="right" style="border-left-style: solid; border-left-width: 1">
    <font FACE="Times New Roman" style="text-decoration: underline" size="2">
    December 31,</font></td>
  </tr>
  <tr>
    <td WIDTH="299">&nbsp;</td>
    <td WIDTH="124" align="right">&nbsp;</td>
    <td WIDTH="136" align="right">&nbsp;</td>
    <td WIDTH="135" align="right">&nbsp;</td>
    <td WIDTH="139" align="right">&nbsp;</td>
    <td WIDTH="142" align="right" style="border-right-style: solid; border-right-width: 1">&nbsp;</td>
    <td WIDTH="138" align="right" style="border-left-style: solid; border-left-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="299">&nbsp;</td>
    <td WIDTH="124" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">1999</font></td>
    <td WIDTH="136" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">2000</font></td>
    <td WIDTH="135" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">2001</font></td>
    <td WIDTH="139" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">2002</font></td>
    <td WIDTH="142" align="right" style="border-right-style: solid; border-right-width: 1; border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">2003</font></td>
    <td WIDTH="138" align="right" style="border-left-style: solid; border-left-width: 1; border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">2003</font></td>
  </tr>
  <tr>
    <td WIDTH="299">&nbsp;</td>
    <td WIDTH="124" align="right">&nbsp;</td>
    <td WIDTH="136" align="right">&nbsp;</td>
    <td WIDTH="135" align="right">&nbsp;</td>
    <td WIDTH="139" align="right">&nbsp;</td>
    <td WIDTH="142" align="right" style="border-right-style: solid; border-right-width: 1">&nbsp;</td>
    <td WIDTH="138" align="right" style="border-left-style: solid; border-left-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="299">&nbsp;</td>
    <td WIDTH="124" align="right">&nbsp;</td>
    <td WIDTH="136" align="right">&nbsp;</td>
    <td WIDTH="135" align="right">&nbsp;</td>
    <td WIDTH="139" align="right">&nbsp;</td>
    <td WIDTH="142" align="right" style="border-right-style: solid; border-right-width: 1">&nbsp;</td>
    <td WIDTH="138" align="right" style="border-left-style: solid; border-left-width: 1">
    <font FACE="Times New Roman" size="2">(unaudited)</font></td>
  </tr>
  <tr>
    <td WIDTH="299" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Cash
    and cash</font></td>
    <td WIDTH="124" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="136" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="135" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="139" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="142" align="right" style="border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="138" align="right" style="border-left-style: solid; border-left-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="299" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    equivalents</font></td>
    <td WIDTH="124" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$7,977,860</font></td>
    <td WIDTH="136" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$6,432,417</font></td>
    <td WIDTH="135" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$31,005</font></td>
    <td WIDTH="139" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$47,065</font></td>
    <td WIDTH="142" align="right" style="border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$396,860</font></td>
    <td WIDTH="138" align="right" style="border-left-style: solid; border-left-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$319,923</font></td>
  </tr>
  <tr>
    <td WIDTH="299"><font FACE="Times New Roman" size="2">Working
    capital</font></td>
    <td WIDTH="124" align="right">&nbsp;</td>
    <td WIDTH="136" align="right">&nbsp;</td>
    <td WIDTH="135" align="right">&nbsp;</td>
    <td WIDTH="139" align="right">&nbsp;</td>
    <td WIDTH="142" align="right" style="border-right-style: solid; border-right-width: 1">&nbsp;</td>
    <td WIDTH="138" align="right" style="border-left-style: solid; border-left-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="299"><font FACE="Times New Roman" size="2">
    (deficit)</font></td>
    <td WIDTH="124" align="right">
    <font FACE="Times New Roman" size="2">4,936,361</font></td>
    <td WIDTH="136" align="right">
    <font FACE="Times New Roman" size="2">3,556,587</font></td>
    <td WIDTH="135" align="right">
    <font FACE="Times New Roman" size="2">(1,458,227)</font></td>
    <td WIDTH="139" align="right">
    <font FACE="Times New Roman" size="2">399,321</font></td>
    <td WIDTH="142" align="right" style="border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">(1,405,331)</font></td>
    <td WIDTH="138" align="right" style="border-left-style: solid; border-left-width: 1">
    <font FACE="Times New Roman" size="2">(3,077,748)</font></td>
  </tr>
  <tr>
    <td WIDTH="299" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Total
    assets</font></td>
    <td WIDTH="124" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">10,624,105</font></td>
    <td WIDTH="136" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">11,184,246</font></td>
    <td WIDTH="135" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">8,997,182</font></td>
    <td WIDTH="139" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">6,942,515</font></td>
    <td WIDTH="142" align="right" style="border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">3,781,649</font></td>
    <td WIDTH="138" align="right" style="border-left-style: solid; border-left-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">2,622,661</font></td>
  </tr>
  <tr>
    <td WIDTH="299"><font FACE="Times New Roman" size="2">Total
    Long-term</font></td>
    <td WIDTH="124" align="right">&nbsp;</td>
    <td WIDTH="136" align="right">&nbsp;</td>
    <td WIDTH="135" align="right">&nbsp;</td>
    <td WIDTH="139" align="right">&nbsp;</td>
    <td WIDTH="142" align="right" style="border-right-style: solid; border-right-width: 1">&nbsp;</td>
    <td WIDTH="138" align="right" style="border-left-style: solid; border-left-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="299"><font FACE="Times New Roman" size="2">
    obligations, net of</font></td>
    <td WIDTH="124" align="right">&nbsp;</td>
    <td WIDTH="136" align="right">&nbsp;</td>
    <td WIDTH="135" align="right">&nbsp;</td>
    <td WIDTH="139" align="right">&nbsp;</td>
    <td WIDTH="142" align="right" style="border-right-style: solid; border-right-width: 1">&nbsp;</td>
    <td WIDTH="138" align="right" style="border-left-style: solid; border-left-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="299"><font FACE="Times New Roman" size="2">current
    portion</font></td>
    <td WIDTH="124" align="right">
    <font FACE="Times New Roman" size="2">0</font></td>
    <td WIDTH="136" align="right">
    <font FACE="Times New Roman" size="2">0</font></td>
    <td WIDTH="135" align="right">
    <font FACE="Times New Roman" size="2">90,000</font></td>
    <td WIDTH="139" align="right">
    <font FACE="Times New Roman" size="2">2,890,535</font></td>
    <td WIDTH="142" align="right" style="border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">2,607,552</font></td>
    <td WIDTH="138" align="right" style="border-left-style: solid; border-left-width: 1">
    <font FACE="Times New Roman" size="2">2,085,484</font></td>
  </tr>
  <tr>
    <td WIDTH="299" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    Total stockholders'</font></td>
    <td WIDTH="124" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="136" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="135" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="139" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="142" align="right" style="border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="138" align="right" style="border-left-style: solid; border-left-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="299" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">equity
    (deficit)</font></td>
    <td WIDTH="124" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$6,974,006</font></td>
    <td WIDTH="136" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$7,328,504</font></td>
    <td WIDTH="135" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$1,864,642</font></td>
    <td WIDTH="139" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(42,849)</font></td>
    <td WIDTH="142" align="right" style="border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(3,228,886)</font></td>
    <td WIDTH="138" align="right" style="border-left-style: solid; border-left-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(4,705,992)</font></td>
  </tr>
</table>
<hr><p Style='page-break-before:always'><font FACE="Times New Roman">
<p align="center"><a name="selectquarterlydata"></a>SELECTED QUARTERLY FINANCIAL DATA </p>
</font>
</b><font FACE="Times New Roman" size="2">
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The statement of operations data as of the periods indicated
below are derived from unaudited financial statements, of which the quarterly
periods ended September 30, 1999 and each quarter thereafter to and including
the quarter ended December 31, 2001 are derived from unaudited financial
statements reviewed by Arthur Andersen LLP. The operations data for the
quarterly periods ended March 31, 2002 and each quarter thereafter through and
including the quarter ended December 31, 2003, have been derived from unaudited
financial statements reviewed by Rosenberg, Rich, Baker, Berman &amp; Company. The
foregoing include all adjustments (consisting of normal recurring items) that
management considers necessary for a fair presentation of the financial
statements. </p>
</font>
<b>
<table CELLSPACING="0" BORDER="0" WIDTH="80%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="638">&nbsp;</td>
    <td WIDTH="350" COLSPAN="2" align="right">
    <font FACE="Times New Roman" style="text-decoration: underline" size="2">
    <p align="center">Three Months Ended</font></td>
  </tr>
  <tr>
    <td WIDTH="638">&nbsp;</td>
    <td WIDTH="162" align="right">&nbsp;</td>
    <td WIDTH="188" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="638">&nbsp;</td>
    <td WIDTH="162" align="right">
    <font FACE="Times New Roman" size="2">September 30,</font></td>
    <td WIDTH="188" align="right">
    <font FACE="Times New Roman" size="2">December 31,</font></td>
  </tr>
  <tr>
    <td WIDTH="638">&nbsp;</td>
    <td WIDTH="350" COLSPAN="2" align="right">
    <font FACE="Times New Roman" size="2">
    <p align="center">(in thousands, except share amounts)</font></td>
  </tr>
  <tr>
    <td WIDTH="638"><font FACE="Times New Roman" size="2">FISCAL
    2004 QUARTERLY</font></td>
    <td WIDTH="162" align="right">&nbsp;</td>
    <td WIDTH="188" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="638"><font FACE="Times New Roman" size="2">
    STATEMENT OF OPERATIONS DATA:</font></td>
    <td WIDTH="162" align="right">&nbsp;</td>
    <td WIDTH="188" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="638" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Total
    revenues</font></td>
    <td WIDTH="162" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$2,489</font></td>
    <td WIDTH="188" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$1,291</font></td>
  </tr>
  <tr>
    <td WIDTH="638">&nbsp;</td>
    <td WIDTH="162" align="right">&nbsp;</td>
    <td WIDTH="188" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="638" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Costs
    and Expenses:</font></td>
    <td WIDTH="162" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="188" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="638"><font FACE="Times New Roman" size="2">&nbsp;&nbsp;&nbsp;
    Cost of sales</font></td>
    <td WIDTH="162" align="right">
    <font FACE="Times New Roman" size="2">2,099</font></td>
    <td WIDTH="188" align="right">
    <font FACE="Times New Roman" size="2">1,191</font></td>
  </tr>
  <tr>
    <td WIDTH="638" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">&nbsp;&nbsp;&nbsp;
    Research and development</font></td>
    <td WIDTH="162" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">612</font></td>
    <td WIDTH="188" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">843</font></td>
  </tr>
  <tr>
    <td WIDTH="638"><font FACE="Times New Roman" size="2">&nbsp;&nbsp;&nbsp;
    General and administrative</font></td>
    <td WIDTH="162" align="right">
    <font FACE="Times New Roman" size="2">605</font></td>
    <td WIDTH="188" align="right">
    <font FACE="Times New Roman" size="2">914</font></td>
  </tr>
  <tr>
    <td WIDTH="638" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">&nbsp;&nbsp;&nbsp;
    Depreciation and amortization</font></td>
    <td WIDTH="162" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">46</font></td>
    <td WIDTH="188" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">28</font></td>
  </tr>
  <tr>
    <td WIDTH="638">&nbsp;</td>
    <td WIDTH="162" align="right">&nbsp;</td>
    <td WIDTH="188" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="638" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    Operating loss</font></td>
    <td WIDTH="162" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(872)</font></td>
    <td WIDTH="188" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(1,685)</font></td>
  </tr>
  <tr>
    <td WIDTH="638"><font FACE="Times New Roman" size="2">
    Interest expense, Net</font></td>
    <td WIDTH="162" align="right">
    <font FACE="Times New Roman" size="2">(15)</font></td>
    <td WIDTH="188" align="right">
    <font FACE="Times New Roman" size="2">(16)</font></td>
  </tr>
  <tr>
    <td WIDTH="638" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Gain on
    extinguishment</font></td>
    <td WIDTH="162" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">2</font></td>
    <td WIDTH="188" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    -</td>
  </tr>
  <tr>
    <td WIDTH="638">&nbsp;</td>
    <td WIDTH="162" align="right">&nbsp;</td>
    <td WIDTH="188" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="638" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Net
    Loss</font></td>
    <td WIDTH="162" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$865</font></td>
    <td WIDTH="188" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(1,701)</font></td>
  </tr>
  <tr>
    <td WIDTH="638">&nbsp;</td>
    <td WIDTH="162" align="right">&nbsp;</td>
    <td WIDTH="188" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="638" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Basic
    and diluted net loss per share</font></td>
    <td WIDTH="162" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(.01)</font></td>
    <td WIDTH="188" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(.02)</font></td>
  </tr>
  <tr>
    <td WIDTH="638">&nbsp;</td>
    <td WIDTH="162" align="right">&nbsp;</td>
    <td WIDTH="188" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="638" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Shares
    used in basic and diluted net loss per share(1)</font></td>
    <td WIDTH="162" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">71,725,318</font></td>
    <td WIDTH="188" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">72,814,272</font></td>
  </tr>
  <tr>
    <td WIDTH="638">&nbsp;</td>
    <td WIDTH="162" align="right">&nbsp;</td>
    <td WIDTH="188" align="right">&nbsp;</td>
  </tr>
</table>
</b>
<font FACE="Times New Roman" size="2">
<p ALIGN="JUSTIFY">(1) The quarterly earnings per share data above are computed
independently for each of the quarters presented. As such, the sum of the
quarterly per common share information may not equal the full year amounts due
to rounding differences resulting from changes in the weighted-average number of
common shares outstanding. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The statement of operations data as of the periods indicated
below are derived from unaudited financial statements. The operations data for
the quarterly periods ended September 30, 1999 and each quarter thereafter to
and including the quarter ended December 31, 2001 are derived from unaudited
financial statements reviewed by Arthur Andersen LLP and the operations data for
the quarterly periods from March 31, 2002 and each quarter thereafter through
and including the quarter ended June 30, 2003, have been derived from unaudited
financial statements reviewed by Rosenberg, Rich, Baker, Berman &amp; Company, and
include all adjustments (consisting of normal recurring items) that management
considers necessary for a fair presentation of the financial statements. </p>
</font><b>
<table CELLSPACING="0" BORDER="0" WIDTH="80%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="414">&nbsp;</td>
    <td WIDTH="142" align="right">&nbsp;</td>
    <td WIDTH="296" COLSPAN="2" align="right">
    <font FACE="Times New Roman" style="text-decoration: underline" size="2">
    <p align="center">Three Months Ended</font></td>
    <td WIDTH="139" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="414">&nbsp;</td>
    <td WIDTH="142" align="right">&nbsp;</td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="139" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="414">&nbsp;</td>
    <td WIDTH="142" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">September 30</font></td>
    <td WIDTH="148" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">December 31</font></td>
    <td WIDTH="148" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">March 31</font></td>
    <td WIDTH="139" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">June 30</font></td>
  </tr>
  <tr>
    <td WIDTH="414">&nbsp;</td>
    <td WIDTH="142" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="148" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="148" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="139" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="414">&nbsp;</td>
    <td WIDTH="577" COLSPAN="4" align="right">
    <font FACE="Times New Roman" size="2">
    <p align="center">(in thousands, except share amounts)</font></td>
  </tr>
  <tr>
    <td WIDTH="414"><font FACE="Times New Roman" size="2">FISCAL
    2003 QUARTERLY</font></td>
    <td WIDTH="142" align="right">&nbsp;</td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="139" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="414"><font FACE="Times New Roman" size="2">
    STATEMENT OF</font></td>
    <td WIDTH="142" align="right">&nbsp;</td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="139" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="414"><font FACE="Times New Roman" size="2">
    OPERATIONS DATA:</font></td>
    <td WIDTH="142" align="right">&nbsp;</td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="139" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="414" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Total
    revenues</font></td>
    <td WIDTH="142" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$210</font></td>
    <td WIDTH="148" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$562</font></td>
    <td WIDTH="148" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$210</font></td>
    <td WIDTH="139" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$600</font></td>
  </tr>
  <tr>
    <td WIDTH="414">&nbsp;</td>
    <td WIDTH="142" align="right">&nbsp;</td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="139" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="414" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Costs
    and Expenses:</font></td>
    <td WIDTH="142" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="148" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="148" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="139" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="414" bgcolor="#FFFFFF"><font FACE="Times New Roman" size="2">Cost of
    sales</font></td>
    <td WIDTH="142" align="right" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">197</font></td>
    <td WIDTH="148" align="right" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">547</font></td>
    <td WIDTH="148" align="right" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">205</font></td>
    <td WIDTH="139" align="right" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">544</font></td>
  </tr>
  <tr>
    <td WIDTH="414" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    Research and development</font></td>
    <td WIDTH="142" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">803</font></td>
    <td WIDTH="148" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">753</font></td>
    <td WIDTH="148" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">906</font></td>
    <td WIDTH="139" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">1,077</font></td>
  </tr>
  <tr>
    <td WIDTH="414" bgcolor="#FFFFFF"><font FACE="Times New Roman" size="2">General
    and administrative</font></td>
    <td WIDTH="142" align="right" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">893</font></td>
    <td WIDTH="148" align="right" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">731</font></td>
    <td WIDTH="148" align="right" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">544</font></td>
    <td WIDTH="139" align="right" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">516</font></td>
  </tr>
  <tr>
    <td WIDTH="414" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    Depreciation and amortization</font></td>
    <td WIDTH="142" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">131</font></td>
    <td WIDTH="148" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">129</font></td>
    <td WIDTH="148" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">129</font></td>
    <td WIDTH="139" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">127</font></td>
  </tr>
  <tr>
    <td WIDTH="414" bgcolor="#FFFFFF">&nbsp;</td>
    <td WIDTH="142" align="right" bgcolor="#FFFFFF">&nbsp;</td>
    <td WIDTH="148" align="right" bgcolor="#FFFFFF">&nbsp;</td>
    <td WIDTH="148" align="right" bgcolor="#FFFFFF">&nbsp;</td>
    <td WIDTH="139" align="right" bgcolor="#FFFFFF">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="414" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    Operating loss</font></td>
    <td WIDTH="142" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(1,814)</font></td>
    <td WIDTH="148" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(1,598)</font></td>
    <td WIDTH="148" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(1,574)</font></td>
    <td WIDTH="139" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(1,664)</font></td>
  </tr>
  <tr>
    <td WIDTH="414" bgcolor="#FFFFFF"><font FACE="Times New Roman" size="2">
    Interest expense, Net</font></td>
    <td WIDTH="142" align="right" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">(18)</font></td>
    <td WIDTH="148" align="right" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">(15)</font></td>
    <td WIDTH="148" align="right" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">(11)</font></td>
    <td WIDTH="139" align="right" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">(6)</font></td>
  </tr>
  <tr>
    <td WIDTH="414" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Gain on
    debt extinguishment</font></td>
    <td WIDTH="142" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">41</font></td>
    <td WIDTH="148" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="148" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">9</font></td>
    <td WIDTH="139" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">11</font></td>
  </tr>
  <tr>
    <td WIDTH="414" bgcolor="#FFFFFF"><font FACE="Times New Roman" size="2">Gain
    (Loss) on investments</font></td>
    <td WIDTH="142" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="148" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">(16)</font></td>
    <td WIDTH="148" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">(12)</font></td>
    <td WIDTH="139" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">17</font></td>
  </tr>
  <tr>
    <td WIDTH="414" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="142" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="148" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="148" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="139" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="414" bgcolor="#FFFFFF"><font FACE="Times New Roman" size="2">Net
    Loss</font></td>
    <td WIDTH="142" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">$(1,791)</font></td>
    <td WIDTH="148" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">$(1,629)</font></td>
    <td WIDTH="148" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">$(1,588)</font></td>
    <td WIDTH="139" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">$(1,642)</font></td>
  </tr>
  <tr>
    <td WIDTH="414" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="142" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="148" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="148" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="139" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="414" bgcolor="#FFFFFF"><font FACE="Times New Roman" size="2">Basic
    and diluted net loss per share</font></td>
    <td WIDTH="142" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">$(.03)</font></td>
    <td WIDTH="148" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">$(.07)</font></td>
    <td WIDTH="148" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">$(.02)</font></td>
    <td WIDTH="139" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">$(.02)</font></td>
  </tr>
  <tr>
    <td WIDTH="414" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="142" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="148" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="148" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="139" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="414" bgcolor="#FFFFFF"><font FACE="Times New Roman" size="2">Shares
    used in basic and diluted net loss per share(1)</font></td>
    <td WIDTH="142" align="right" style="border-bottom: 3px double #000000" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">60,881,131</font></td>
    <td WIDTH="148" align="right" style="border-bottom: 3px double #000000" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">65,914,466</font></td>
    <td WIDTH="148" align="right" style="border-bottom: 3px double #000000" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">65,956,810</font></td>
    <td WIDTH="139" align="right" style="border-bottom: 3px double #000000" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">68,164,160</font></td>
  </tr>
  </table>
<p>&nbsp;</p>
<table CELLSPACING="0" BORDER="0" WIDTH="80%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="408">&nbsp;</td>
    <td WIDTH="144" align="right">&nbsp;</td>
    <td WIDTH="149" align="right">&nbsp;</td>
    <td WIDTH="151" align="right">&nbsp;</td>
    <td WIDTH="136" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="408">&nbsp;</td>
    <td WIDTH="144" align="right">&nbsp;</td>
    <td WIDTH="300" COLSPAN="2" align="right">
    <font FACE="Times New Roman" style="text-decoration: underline" size="2">
    <p align="center">Three Months Ended</font></td>
    <td WIDTH="136" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="408">&nbsp;</td>
    <td WIDTH="144" align="right">&nbsp;</td>
    <td WIDTH="149" align="right">&nbsp;</td>
    <td WIDTH="151" align="right">&nbsp;</td>
    <td WIDTH="136" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="408">&nbsp;</td>
    <td WIDTH="144" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">September 30</font></td>
    <td WIDTH="149" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">December 31</font></td>
    <td WIDTH="151" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">March 31</font></td>
    <td WIDTH="136" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">June 30</font></td>
  </tr>
  <tr>
    <td WIDTH="408">&nbsp;</td>
    <td WIDTH="144" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="149" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="151" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="136" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="408">&nbsp;</td>
    <td WIDTH="580" COLSPAN="4" align="right">
    <font FACE="Times New Roman" size="2">
    <p align="center">(in thousands, except share amounts)</font></td>
  </tr>
  <tr>
    <td WIDTH="408"><font FACE="Times New Roman" size="2">FISCAL
    2002 QUARTERLY</font></td>
    <td WIDTH="144" align="right">&nbsp;</td>
    <td WIDTH="149" align="right">&nbsp;</td>
    <td WIDTH="151" align="right">&nbsp;</td>
    <td WIDTH="136" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="408"><font FACE="Times New Roman" size="2">
    STATEMENT OF</font></td>
    <td WIDTH="144" align="right">&nbsp;</td>
    <td WIDTH="149" align="right">&nbsp;</td>
    <td WIDTH="151" align="right">&nbsp;</td>
    <td WIDTH="136" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="408"><font FACE="Times New Roman" size="2">
    OPERATIONS DATA:</font></td>
    <td WIDTH="144" align="right">&nbsp;</td>
    <td WIDTH="149" align="right">&nbsp;</td>
    <td WIDTH="151" align="right">&nbsp;</td>
    <td WIDTH="136" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="408" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Total
    revenues</font></td>
    <td WIDTH="144" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$537</font></td>
    <td WIDTH="149" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$545</font></td>
    <td WIDTH="151" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$866</font></td>
    <td WIDTH="136" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$634</font></td>
  </tr>
  <tr>
    <td WIDTH="408">&nbsp;</td>
    <td WIDTH="144" align="right">&nbsp;</td>
    <td WIDTH="149" align="right">&nbsp;</td>
    <td WIDTH="151" align="right">&nbsp;</td>
    <td WIDTH="136" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="408" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Costs
    and Expenses:</font></td>
    <td WIDTH="144" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="149" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="151" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="136" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="408" bgcolor="#FFFFFF"><font FACE="Times New Roman" size="2">&nbsp;&nbsp;&nbsp;
    Cost of Sales</font></td>
    <td WIDTH="144" align="right" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">457</font></td>
    <td WIDTH="149" align="right" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">530</font></td>
    <td WIDTH="151" align="right" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">724</font></td>
    <td WIDTH="136" align="right" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">704</font></td>
  </tr>
  <tr>
    <td WIDTH="408" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">&nbsp;&nbsp;&nbsp;
    Research and development</font></td>
    <td WIDTH="144" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">1,111</font></td>
    <td WIDTH="149" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">1,257</font></td>
    <td WIDTH="151" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">539</font></td>
    <td WIDTH="136" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">912</font></td>
  </tr>
  <tr>
    <td WIDTH="408" bgcolor="#FFFFFF"><font FACE="Times New Roman" size="2">&nbsp;&nbsp;&nbsp;
    General and administrative</font></td>
    <td WIDTH="144" align="right" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">2,862</font></td>
    <td WIDTH="149" align="right" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">1,641</font></td>
    <td WIDTH="151" align="right" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">1,355</font></td>
    <td WIDTH="136" align="right" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">1,182</font></td>
  </tr>
  <tr>
    <td WIDTH="408" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">&nbsp;&nbsp;&nbsp;
    Depreciation and amortization</font></td>
    <td WIDTH="144" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">193</font></td>
    <td WIDTH="149" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">209</font></td>
    <td WIDTH="151" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">136</font></td>
    <td WIDTH="136" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">132</font></td>
  </tr>
  <tr>
    <td WIDTH="408" bgcolor="#FFFFFF">&nbsp;</td>
    <td WIDTH="144" align="right" bgcolor="#FFFFFF">&nbsp;</td>
    <td WIDTH="149" align="right" bgcolor="#FFFFFF">&nbsp;</td>
    <td WIDTH="151" align="right" bgcolor="#FFFFFF">&nbsp;</td>
    <td WIDTH="136" align="right" bgcolor="#FFFFFF">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="408" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    Operating loss</font></td>
    <td WIDTH="144" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(4,086)</font></td>
    <td WIDTH="149" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(3,092)</font></td>
    <td WIDTH="151" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(1,888)</font></td>
    <td WIDTH="136" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(2,296)</font></td>
  </tr>
  <tr>
    <td WIDTH="408" bgcolor="#FFFFFF"><font FACE="Times New Roman" size="2">
    Interest expense, Net</font></td>
    <td WIDTH="144" align="right" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">(10)</font></td>
    <td WIDTH="149" align="right" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">(1)</font></td>
    <td WIDTH="151" align="right" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">(5)</font></td>
    <td WIDTH="136" align="right" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">(10)</font></td>
  </tr>
  <tr>
    <td WIDTH="408" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Gain
    (Loss) on debt extinguishment</font></td>
    <td WIDTH="144" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">33</font></td>
    <td WIDTH="149" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">5</font></td>
    <td WIDTH="151" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">85</font></td>
    <td WIDTH="136" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">19</font></td>
  </tr>
  <tr>
    <td WIDTH="408" bgcolor="#FFFFFF">&nbsp;</td>
    <td WIDTH="144" align="right" bgcolor="#FFFFFF">&nbsp;</td>
    <td WIDTH="149" align="right" bgcolor="#FFFFFF">&nbsp;</td>
    <td WIDTH="151" align="right" bgcolor="#FFFFFF">&nbsp;</td>
    <td WIDTH="136" align="right" bgcolor="#FFFFFF">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="408" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Net
    Loss</font></td>
    <td WIDTH="144" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(4,063)</font></td>
    <td WIDTH="149" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(3,088)</font></td>
    <td WIDTH="151" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(1,808)</font></td>
    <td WIDTH="136" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(2,287)</font></td>
  </tr>
  <tr>
    <td WIDTH="408" bgcolor="#FFFFFF">&nbsp;</td>
    <td WIDTH="144" align="right" bgcolor="#FFFFFF">&nbsp;</td>
    <td WIDTH="149" align="right" bgcolor="#FFFFFF">&nbsp;</td>
    <td WIDTH="151" align="right" bgcolor="#FFFFFF">&nbsp;</td>
    <td WIDTH="136" align="right" bgcolor="#FFFFFF">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="408" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Basic
    and diluted net loss per share</font></td>
    <td WIDTH="144" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(.10)</font></td>
    <td WIDTH="149" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(.07)</font></td>
    <td WIDTH="151" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(.03)</font></td>
    <td WIDTH="136" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(.04)</font></td>
  </tr>
  <tr>
    <td WIDTH="408" bgcolor="#FFFFFF"><font FACE="Times New Roman" size="2">Shares
    used in basic and diluted net loss per share(1)</font></td>
    <td WIDTH="144" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">42,037,506</font></td>
    <td WIDTH="149" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">44,645,458</font></td>
    <td WIDTH="151" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">55,606,168</font></td>
    <td WIDTH="136" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#FFFFFF">
    <font FACE="Times New Roman" size="2">56,459,167</font></td>
  </tr>
  </table>
</b>
<font FACE="Times New Roman" size="2">
<p ALIGN="JUSTIFY">(1) The quarterly earnings per share data above are computed
independently for each of the quarters presented. As such, the sum of the
quarterly per common share information may not equal the full year amounts due
to rounding differences resulting from changes in the weighted-average number of
common shares outstanding. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The statement of operations data as of the periods indicated
below are derived from unaudited financial statements. The operations data for
the quarterly periods ended September 30, 1999 and each quarter thereafter to
and including the quarter ended December 31, 2001 are derived from unaudited
financial statements reviewed by Arthur Andersen LLP and the operations data for
the quarterly periods from March 31, 2002 and each quarter thereafter through
and including the quarter ended September 30, 2003, have been derived from
unaudited financial statements reviewed by Rosenberg, Rich, Baker, Berman &amp;
Company, and include all adjustments (consisting of normal recurring items) that
management considers necessary for a fair presentation of the financial
statements. </p>
</font><b>
<table CELLSPACING="0" BORDER="0" WIDTH="80%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="453">&nbsp;</td>
    <td WIDTH="147" align="right">&nbsp;</td>
    <td WIDTH="352" COLSPAN="2" align="right">
    <font FACE="Times New Roman" style="text-decoration: underline" size="2">
    <p align="center">Three Months Ended</font></td>
    <td WIDTH="153" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="453">&nbsp;</td>
    <td WIDTH="147" align="right">&nbsp;</td>
    <td WIDTH="174" align="right">&nbsp;</td>
    <td WIDTH="178" align="right">&nbsp;</td>
    <td WIDTH="153" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="453">&nbsp;</td>
    <td WIDTH="147" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">September 30</font></td>
    <td WIDTH="174" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">December 31</font></td>
    <td WIDTH="178" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">March 31</font></td>
    <td WIDTH="153" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">June 30</font></td>
  </tr>
  <tr>
    <td WIDTH="453">&nbsp;</td>
    <td WIDTH="147" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="174" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="178" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="153" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="453">&nbsp;</td>
    <td WIDTH="652" COLSPAN="4" align="right">
    <font FACE="Times New Roman" size="2">
    <p align="center">(in thousands, except share amounts)</font></td>
  </tr>
  <tr>
    <td WIDTH="453"><font FACE="Times New Roman" size="2">FISCAL
    2001 QUARTERLY</font></td>
    <td WIDTH="147" align="right">&nbsp;</td>
    <td WIDTH="174" align="right">&nbsp;</td>
    <td WIDTH="178" align="right">&nbsp;</td>
    <td WIDTH="153" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="453"><font FACE="Times New Roman" size="2">
    STATEMENT OF</font></td>
    <td WIDTH="147" align="right">&nbsp;</td>
    <td WIDTH="174" align="right">&nbsp;</td>
    <td WIDTH="178" align="right">&nbsp;</td>
    <td WIDTH="153" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="453"><font FACE="Times New Roman" size="2">
    OPERATIONS DATA:</font></td>
    <td WIDTH="147" align="right">&nbsp;</td>
    <td WIDTH="174" align="right">&nbsp;</td>
    <td WIDTH="178" align="right">&nbsp;</td>
    <td WIDTH="153" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="453" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Total
    revenues</font></td>
    <td WIDTH="147" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$1,865</font></td>
    <td WIDTH="174" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$5,231</font></td>
    <td WIDTH="178" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$2,959</font></td>
    <td WIDTH="153" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$469</font></td>
  </tr>
  <tr>
    <td WIDTH="453">&nbsp;</td>
    <td WIDTH="147" align="right">&nbsp;</td>
    <td WIDTH="174" align="right">&nbsp;</td>
    <td WIDTH="178" align="right">&nbsp;</td>
    <td WIDTH="153" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="453" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Costs
    and Expenses:</font></td>
    <td WIDTH="147" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="174" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="178" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="153" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="453"><font FACE="Times New Roman" size="2">Cost of
    Sales</font></td>
    <td WIDTH="147" align="right">
    <font FACE="Times New Roman" size="2">872</font></td>
    <td WIDTH="174" align="right">
    <font FACE="Times New Roman" size="2">2,779</font></td>
    <td WIDTH="178" align="right">
    <font FACE="Times New Roman" size="2">1,689</font></td>
    <td WIDTH="153" align="right">
    <font FACE="Times New Roman" size="2">465</font></td>
  </tr>
  <tr>
    <td WIDTH="453" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">&nbsp;&nbsp;&nbsp;
    Research and development</font></td>
    <td WIDTH="147" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">3,162</font></td>
    <td WIDTH="174" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">3,318</font></td>
    <td WIDTH="178" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">2,220</font></td>
    <td WIDTH="153" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">2,080</font></td>
  </tr>
  <tr>
    <td WIDTH="453"><font FACE="Times New Roman" size="2">&nbsp;&nbsp;&nbsp;
    General and administrative</font></td>
    <td WIDTH="147" align="right">
    <font FACE="Times New Roman" size="2">3,485</font></td>
    <td WIDTH="174" align="right">
    <font FACE="Times New Roman" size="2">3,314</font></td>
    <td WIDTH="178" align="right">
    <font FACE="Times New Roman" size="2">3,105</font></td>
    <td WIDTH="153" align="right">
    <font FACE="Times New Roman" size="2">7,406</font></td>
  </tr>
  <tr>
    <td WIDTH="453" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">&nbsp;&nbsp;&nbsp;
    Depreciation and amortization</font></td>
    <td WIDTH="147" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">123</font></td>
    <td WIDTH="174" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">136</font></td>
    <td WIDTH="178" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">200</font></td>
    <td WIDTH="153" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">201</font></td>
  </tr>
  <tr>
    <td WIDTH="453">&nbsp;</td>
    <td WIDTH="147" align="right">&nbsp;</td>
    <td WIDTH="174" align="right">&nbsp;</td>
    <td WIDTH="178" align="right">&nbsp;</td>
    <td WIDTH="153" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="453" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    Operating loss</font></td>
    <td WIDTH="147" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(5,779)</font></td>
    <td WIDTH="174" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(4,316)</font></td>
    <td WIDTH="178" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(4,255)</font></td>
    <td WIDTH="153" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(9,683)</font></td>
  </tr>
  <tr>
    <td WIDTH="453"><font FACE="Times New Roman" size="2">
    Interest income, Net</font></td>
    <td WIDTH="147" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">28</font></td>
    <td WIDTH="174" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">8</font></td>
    <td WIDTH="178" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">4</font></td>
    <td WIDTH="153" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">3</font></td>
  </tr>
  <tr>
    <td WIDTH="453" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="147" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="174" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="178" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="153" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="453"><font FACE="Times New Roman" size="2">Net
    loss</font></td>
    <td WIDTH="147" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$(5,751)</font></td>
    <td WIDTH="174" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$(4,308)</font></td>
    <td WIDTH="178" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$(4,251)</font></td>
    <td WIDTH="153" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$(9,680)</font></td>
  </tr>
  <tr>
    <td WIDTH="453" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="147" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="174" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="178" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="153" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="453"><font FACE="Times New Roman" size="2">Basic
    and diluted net loss per share</font></td>
    <td WIDTH="147" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$(.18)</font></td>
    <td WIDTH="174" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$(.13)</font></td>
    <td WIDTH="178" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$(.12)</font></td>
    <td WIDTH="153" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$(.27)</font></td>
  </tr>
  <tr>
    <td WIDTH="453" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="147" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="174" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="178" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="153" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="453"><font FACE="Times New Roman" size="2">Shares
    used in basic and diluted net loss per share(1)</font></td>
    <td WIDTH="147" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">31,562,727</font></td>
    <td WIDTH="174" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">32,324,964</font></td>
    <td WIDTH="178" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">34,205,000</font></td>
    <td WIDTH="153" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">35,702,797</font></td>
  </tr>
  </table>
<p>&nbsp;</p>
<table CELLSPACING="0" BORDER="0" WIDTH="80%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="451">&nbsp;</td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="355" COLSPAN="2" align="right">
    <font FACE="Times New Roman" style="text-decoration: underline" size="2">
    <p align="center">Three Months Ended</font></td>
    <td WIDTH="153" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="451">&nbsp;</td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="176" align="right">&nbsp;</td>
    <td WIDTH="179" align="right">&nbsp;</td>
    <td WIDTH="153" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="451">&nbsp;</td>
    <td WIDTH="148" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">September 30</font></td>
    <td WIDTH="176" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">December 31</font></td>
    <td WIDTH="179" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">March 31</font></td>
    <td WIDTH="153" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">June 30</font></td>
  </tr>
  <tr>
    <td WIDTH="451">&nbsp;</td>
    <td WIDTH="148" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="176" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="179" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="153" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="451">&nbsp;</td>
    <td WIDTH="656" COLSPAN="4" align="right">
    <font FACE="Times New Roman" size="2">
    <p align="center">(in thousands, except share amounts)</font></td>
  </tr>
  <tr>
    <td WIDTH="451"><font FACE="Times New Roman" size="2">FISCAL
    2000 QUARTERLY</font></td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="176" align="right">&nbsp;</td>
    <td WIDTH="179" align="right">&nbsp;</td>
    <td WIDTH="153" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="451"><font FACE="Times New Roman" size="2">
    STATEMENT OF</font></td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="176" align="right">&nbsp;</td>
    <td WIDTH="179" align="right">&nbsp;</td>
    <td WIDTH="153" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="451"><font FACE="Times New Roman" size="2">
    OPERATIONS DATA:</font></td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="176" align="right">&nbsp;</td>
    <td WIDTH="179" align="right">&nbsp;</td>
    <td WIDTH="153" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="451" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Total
    revenues</font></td>
    <td WIDTH="148" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$-</font></td>
    <td WIDTH="176" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$-</font></td>
    <td WIDTH="179" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$40</font></td>
    <td WIDTH="153" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$240</font></td>
  </tr>
  <tr>
    <td WIDTH="451">&nbsp;</td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="176" align="right">&nbsp;</td>
    <td WIDTH="179" align="right">&nbsp;</td>
    <td WIDTH="153" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="451" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Costs
    and Expenses:</font></td>
    <td WIDTH="148" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="176" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="179" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="153" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="451"><font FACE="Times New Roman" size="2">&nbsp;&nbsp;&nbsp;
    Cost of sales</font></td>
    <td WIDTH="148" align="right">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="176" align="right">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="179" align="right">
    <font FACE="Times New Roman" size="2">19</font></td>
    <td WIDTH="153" align="right">
    <font FACE="Times New Roman" size="2">113</font></td>
  </tr>
  <tr>
    <td WIDTH="451" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">&nbsp;&nbsp;&nbsp;
    Research and development</font></td>
    <td WIDTH="148" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">1,491</font></td>
    <td WIDTH="176" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">1,904</font></td>
    <td WIDTH="179" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">2,858</font></td>
    <td WIDTH="153" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">3,904</font></td>
  </tr>
  <tr>
    <td WIDTH="451"><font FACE="Times New Roman" size="2">&nbsp;&nbsp;&nbsp;
    General and administrative</font></td>
    <td WIDTH="148" align="right">
    <font FACE="Times New Roman" size="2">1,210</font></td>
    <td WIDTH="176" align="right">
    <font FACE="Times New Roman" size="2">1,226</font></td>
    <td WIDTH="179" align="right">
    <font FACE="Times New Roman" size="2">12,776</font></td>
    <td WIDTH="153" align="right">
    <font FACE="Times New Roman" size="2">12,648</font></td>
  </tr>
  <tr>
    <td WIDTH="451" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">&nbsp;&nbsp;&nbsp;
    Depreciation and amortization</font></td>
    <td WIDTH="148" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">114</font></td>
    <td WIDTH="176" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">116</font></td>
    <td WIDTH="179" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">118</font></td>
    <td WIDTH="153" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">123</font></td>
  </tr>
  <tr>
    <td WIDTH="451">&nbsp;</td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="176" align="right">&nbsp;</td>
    <td WIDTH="179" align="right">&nbsp;</td>
    <td WIDTH="153" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="451" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    Operating loss</font></td>
    <td WIDTH="148" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(2,815)</font></td>
    <td WIDTH="176" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(3,246)</font></td>
    <td WIDTH="179" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(15,731)</font></td>
    <td WIDTH="153" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">(16,548)</font></td>
  </tr>
  <tr>
    <td WIDTH="451"><font FACE="Times New Roman" size="2">Other
    income, net</font></td>
    <td WIDTH="148" align="right">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="176" align="right">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="179" align="right">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="153" align="right">
    <font FACE="Times New Roman" size="2">20</font></td>
  </tr>
  <tr>
    <td WIDTH="451" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    Interest income, Net</font></td>
    <td WIDTH="148" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">18</font></td>
    <td WIDTH="176" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">41</font></td>
    <td WIDTH="179" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">57</font></td>
    <td WIDTH="153" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">42</font></td>
  </tr>
  <tr>
    <td WIDTH="451">&nbsp;</td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="176" align="right">&nbsp;</td>
    <td WIDTH="179" align="right">&nbsp;</td>
    <td WIDTH="153" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="451" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Net
    Loss</font></td>
    <td WIDTH="148" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(2,797)</font></td>
    <td WIDTH="176" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(3,205)</font></td>
    <td WIDTH="179" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(15,674)</font></td>
    <td WIDTH="153" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(16,486)</font></td>
  </tr>
  <tr>
    <td WIDTH="451">&nbsp;</td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="176" align="right">&nbsp;</td>
    <td WIDTH="179" align="right">&nbsp;</td>
    <td WIDTH="153" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="451" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Basic
    and diluted net loss per share</font></td>
    <td WIDTH="148" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(.11)</font></td>
    <td WIDTH="176" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(.12)</font></td>
    <td WIDTH="179" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(.56)</font></td>
    <td WIDTH="153" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(.55)</font></td>
  </tr>
  <tr>
    <td WIDTH="451">&nbsp;</td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="176" align="right">&nbsp;</td>
    <td WIDTH="179" align="right">&nbsp;</td>
    <td WIDTH="153" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="451" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Shares
    used in basic and diluted net loss per share(1)</font></td>
    <td WIDTH="148" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">24,942,965</font></td>
    <td WIDTH="176" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">25,907,602</font></td>
    <td WIDTH="179" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">27,743,996</font></td>
    <td WIDTH="153" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">29,729,060</font></td>
  </tr>
</table>
</b>
<font FACE="Times New Roman" size="2">
<p ALIGN="JUSTIFY">(1) The quarterly earnings per share data above are computed
independently for each of the quarters presented. As such, the sum of the
quarterly per common share information may not equal the full year amounts due
to rounding differences resulting from changes in the weighted-average number of
common shares outstanding. </p>
</font><b>
<hr><p Style='page-break-before:always'><font FACE="Times New Roman">
<p align="center">SELECTED BALANCE SHEET DATA </p>
</font>
</b><font FACE="Times New Roman" size="2">
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The summary financial data set forth below should be read in
conjunction with &quot;Company's Operations&quot; and the historical consolidated
financial statements and notes included in this prospectus. The balance sheet
data including the effects of Changes in the Statement of Stockholders from
October 2, 1996 (date of inception) to June 30, 1998 are derived from financial
statements that have been audited by (i) Schuhalter, Coughlin &amp; Suozzo, PC,
independent auditors from inception to June 30, 1998 (ii) from financial
statements that have been audited by Arthur Andersen for the years ended 1999,
2000 and 2001 and the balance sheet data as of June 30, 2002 and 2003, which are
included in this prospectus, are derived from financial statements that have
been audited by Rosenberg, Rich, Baker, Berman &amp; Company. </p>
</font>
<b>
<table CELLSPACING="0" BORDER="0" WIDTH="95%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="281">&nbsp;</td>
    <td WIDTH="76" align="right">&nbsp;</td>
    <td WIDTH="93" align="right">&nbsp;</td>
    <td WIDTH="168" align="right" colspan="2">
    <font FACE="Times New Roman" style="text-decoration: underline" size="2">
    Year Ended June 30,</font></td>
    <td WIDTH="80" align="right">&nbsp;</td>
    <td WIDTH="75" align="right">&nbsp;</td>
    <td WIDTH="76" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="281">&nbsp;</td>
    <td WIDTH="76" align="right">&nbsp;</td>
    <td WIDTH="93" align="right">&nbsp;</td>
    <td WIDTH="84" align="right">&nbsp;</td>
    <td WIDTH="82" align="right">&nbsp;</td>
    <td WIDTH="80" align="right">&nbsp;</td>
    <td WIDTH="75" align="right">&nbsp;</td>
    <td WIDTH="76" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="281">&nbsp;</td>
    <td WIDTH="76" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">1997</font></td>
    <td WIDTH="93" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">1998</font></td>
    <td WIDTH="84" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">1999</font></td>
    <td WIDTH="82" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">2000</font></td>
    <td WIDTH="80" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">2001</font></td>
    <td WIDTH="75" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">2002</font></td>
    <td WIDTH="76" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">2003</font></td>
  </tr>
  <tr>
    <td WIDTH="281">&nbsp;</td>
    <td WIDTH="76" align="right">&nbsp;</td>
    <td WIDTH="93" align="right">&nbsp;</td>
    <td WIDTH="166" align="right" colspan="2">
    <font FACE="Times New Roman" size="2">(in thousands)</font></td>
    <td WIDTH="80" align="right">&nbsp;</td>
    <td WIDTH="75" align="right">&nbsp;</td>
    <td WIDTH="76" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="281"><font FACE="Times New Roman" size="2">BALANCE
    SHEET </font><font FACE="Times New Roman" size="2">DATA:</font></td>
    <td WIDTH="76" align="right">&nbsp;</td>
    <td WIDTH="93" align="right">&nbsp;</td>
    <td WIDTH="84" align="right">&nbsp;</td>
    <td WIDTH="82" align="right">&nbsp;</td>
    <td WIDTH="80" align="right">&nbsp;</td>
    <td WIDTH="75" align="right">&nbsp;</td>
    <td WIDTH="76" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="281" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Cash
    and cash equivalents</font></td>
    <td WIDTH="76" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$162</font></td>
    <td WIDTH="93" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$-</font></td>
    <td WIDTH="86" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$7,978</font></td>
    <td WIDTH="82" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$6,432</font></td>
    <td WIDTH="80" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$31</font></td>
    <td WIDTH="75" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$47</font></td>
    <td WIDTH="76" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$397</font></td>
  </tr>
  <tr>
    <td WIDTH="281"><font FACE="Times New Roman" size="2">Working
    capital (deficit)</font></td>
    <td WIDTH="76" align="right">
    <font FACE="Times New Roman" size="2">(212)</font></td>
    <td WIDTH="93" align="right">
    <font FACE="Times New Roman" size="2">(3,073)</font></td>
    <td WIDTH="86" align="right">
    <font FACE="Times New Roman" size="2">4,936</font></td>
    <td WIDTH="82" align="right">
    <font FACE="Times New Roman" size="2">3,557</font></td>
    <td WIDTH="80" align="right">
    <font FACE="Times New Roman" size="2">(1,458)</font></td>
    <td WIDTH="77" align="right">
    <font FACE="Times New Roman" size="2">(399)</font></td>
    <td WIDTH="76" align="right">
    <font FACE="Times New Roman" size="2">(1,405)</font></td>
  </tr>
  <tr>
    <td WIDTH="281" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Total
    assets</font></td>
    <td WIDTH="76" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">369</font></td>
    <td WIDTH="93" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">2,175</font></td>
    <td WIDTH="86" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">10,624</font></td>
    <td WIDTH="82" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">11,184</font></td>
    <td WIDTH="80" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">8,997</font></td>
    <td WIDTH="77" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">6,943</font></td>
    <td WIDTH="76" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">3,781</font></td>
  </tr>
  <tr>
    <td WIDTH="281"><font FACE="Times New Roman" size="2">
    Long-term obligations, net</font></td>
    <td WIDTH="76" align="right">&nbsp;</td>
    <td WIDTH="93" align="right">&nbsp;</td>
    <td WIDTH="84" align="right">&nbsp;</td>
    <td WIDTH="82" align="right">&nbsp;</td>
    <td WIDTH="80" align="right">&nbsp;</td>
    <td WIDTH="77" align="right">&nbsp;</td>
    <td WIDTH="76" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="281"><font FACE="Times New Roman" size="2">&nbsp;
    of current portion</font></td>
    <td WIDTH="76" align="right">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="93" align="right">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="84" align="right">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="82" align="right">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="80" align="right">
    <font FACE="Times New Roman" size="2">90</font></td>
    <td WIDTH="77" align="right">
    <font FACE="Times New Roman" size="2">2,890</font></td>
    <td WIDTH="76" align="right">
    <font FACE="Times New Roman" size="2">2,608</font></td>
  </tr>
  <tr>
    <td WIDTH="281" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Total
    stockholders' equity</font></td>
    <td WIDTH="76" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="93" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="86" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="82" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="80" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="77" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="76" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="281" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">&nbsp;
    (deficit)</font></td>
    <td WIDTH="76" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(23)</font></td>
    <td WIDTH="93" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(915)</font></td>
    <td WIDTH="86" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$6,974</font></td>
    <td WIDTH="82" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$7,329</font></td>
    <td WIDTH="80" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$1,865</font></td>
    <td WIDTH="77" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(43)</font></td>
    <td WIDTH="76" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$(3,229)</font></td>
  </tr>
</table>
</b>
<font FACE="Times New Roman">
<p align="center"><b><a name="companyoperations"></a>COMPANY OPERATIONS </b> </p>
</font>
<font FACE="Times New Roman" size="2">
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. </p>
<p align="left"><b>CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE
PRIVATE LITIGATION REFORM ACT OF 1995: </b> </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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 &quot;anticipate,&quot;
&quot;believe,&quot; &quot;estimate,&quot; &quot;expect,&quot; &quot;plan,&quot; &quot;intend,&quot; &quot;should,&quot; &quot;seek,&quot; &quot;will,&quot; 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.
</p>
</font>
<font FACE="Times New Roman">
<p align="center"><b>OVERVIEW </b> </p>
</font>
<font FACE="Times New Roman" size="2">
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; mPhase Technologies, Inc. (mPhase, the Company, we or us), a
New Jersey corporation, founded in 1996 is a publicly-held company with
approximately 11,000 shareholders and approximately 85 million shares of common
stock outstanding. The Company's common stock is traded on the NASDAQ Over the
Counter Bulletin Board under the ticker symbol XDSL. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; mPhase is a developer of broadband communications products,
specifically, digital subscriber line (DSL) products for telecommunications
service providers around the world. Recently, mPhase has entered into the new
and emerging area of NanoTechnology. Since our inception in 1996 we have been a
development-stage company and operating activities have related primarily to
research and development, establishing third-party manufacturing relationships
and developing product brand recognition among telecommunications service
providers. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; We are headquartered in Norwalk, Connecticut with offices in
Little Falls, New Jersey and Atlanta, Georgia. mPhase shares common office space
and common management with Microphase Corporation, a privately-held company.
Microphase is a seller of radio frequency and filtering technologies to the
defense industry. Microphase has been in operation for almost 50 years and
supports mPhase with engineering, administrative and financial resources, as
needed. </p>
<p><b>Description of Operations </b> </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; mPhase develops, markets and sells an innovative line of
broadband communications equipment for transmission of broadcast television,
high speed data and voice over copper telephone lines utilizing DSL technology.
We have developed two different platforms (the Traverser DVDDS&#153 (DVDDS) and the
TV+ respectively) that enable telecommunications service providers to deliver,
simultaneously, digital broadcast television, high-speed internet and voice
between a service provider's central office and its customers' premises. In
particular, our products are designed to enable telecommunications service
providers to enter into the business of providing several hundred channels of
digital broadcast television over the existing copper wire infrastructure. To
date, our primary activities have consisted of designing, manufacturing, testing
and marketing our flagship products that enable deliver broadcast television
over DSL by telephone service providers. We have not, to date, derived material
revenues from such products. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Both our DVDDS and the TV+ platforms require a
telecommunications service provider to build a digital video head-end to
downlink channels of broadcast television programming from satellites. The cost
of building a digital head end has been substantially reduced in the past few
years as off the shelf technology has become less expensive. Such equipment
includes a satellite receiving dish, video grooming equipment and mPhase's
system management software necessary for managing the video content. mPhase does
not manufacture such digital head-end equipment. </p>
<p>&nbsp;&nbsp;&nbsp; Both the DVDDS and TV+ products utilize aysmetric DSL (more bandwidth
downstream than upstream) which is well-suited for the delivery of broadcast
television and high-speed internet. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; mPhase has developed its flagship line of products for
telephone companies in parts of the world where access to multi-channel
television is limited. Our products are currently designed primarily for service
providers located outside of the United States where fiber optic infrastructure
does not exist. Our products enable service providers to support proven,
revenue-generating services (i.e., broadcast TV) on the most cost effective
basis possible. This is achieved by utilizing the existing copper wire
infrastructure of a telephone service provider to transport broadcast television
from a central office without fiber for the &quot;last mile&quot; to a customer's
premises. Our solution avoids the tremendous cost of upgrading such
infrastructure to fiber to provide sufficient bandwidth in order to deliver
broadcast television. Our products utilize &quot;compression technology&quot; in order to
transport broadcast television along with voice and high-speed data to a
customer. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; We believe there is a significant cost advantage when our
products are compared with other platforms utilizing ADSL for the delivery of
broadcast television with the <i>same features</i>. Neither of our platforms
currently contain such features as the ability to deliver two or more TV
channels to a single set top box, video on demand and interactive TV. Our
belief, is that such features cannot currently be delivered at a cost
commensurate with a price people are capable and willing to pay in markets
lacking fiber optic infrastructure necessary for cable TV. As ADSL technology
migrates forward to ADS2 and ADSL2+, mPhase plans to include additional features
in its new TV+ platform in a modular scalable cost-effective manner depending
upon <i>actual</i> market demand. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; mPhase introduced its first TV over DSL product, the DVDDS in
1998. The DVDDS, is a patented end-to-end system based upon proprietary
technology developed in conjunction with Georgia Tech Research Corporation.
Because it is an end-to-end video-over-ADSL system, the DVDDS does not
interoperate with other manufacturer's digital subscriber line access
multiplexing equipment (DSLAM) located in a telephone service provider's central
office or modems or set top boxes residing in a customer's premises. This system
delivers native MPEG2 digital television from a satellite downlink or digital headend to the customer without reformatting such content into internet packets.
The system is the only non-Internet Protocol system for delivery of broadcast
television over ADSL on the market today. Telephone service providers using the
mPhase legacy DVDDS need to build a digital video headend or programming and
control center (&quot;PCC&quot;) to downlink broadcast television programming content 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
actual office or remotely located and connected to each Central Office (&quot;CO&quot;)
via fiber. The DVDDS CO equipment, known as the mPhase Universal Access Shelf,
integrate video signals from the PCC with Internet and voice signals. The output
of the Universal Access Shelf consists of DSL &quot;lines&quot; capable of carrying a
single digital broadcast channel, high-speed data and POTS (&quot;Plain Old Telephone
Service&quot;) to subscribers over existing telephone lines. Upon reaching the home
or office, the DSL line is fed into the mPhase intelligent network interface INI,
or digital set top box. The INI separates the three signals and routes them to
the television, PC and telephone. The Company continues to market this product,
and believes it is best suited for customers specifically interested in
supporting television services with a minimal need to support high-speed data
customers. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The DVDDS consists of three key elements: a digital head-end
called the Programming and Control Center (PCC), Central Office (CO) equipment
called the Universal Access Shelf or DSLAM, and the Customer Premises Equipment
(CPE called the Intelligent Network Interface (INI&#153). At the PCC, local off-air
channels are received, digitized and combined with broadcast television signals
down-linked from satellites. The PCC can be co-located with a single central office (CO) of a service provider or
remotely located and connected to each CO of a telephone service provider by
fiber not currently in use. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The DVDDS CO equipment, known as the mPhase Universal Access
Shelf, integrates video signals from the PCC with the internet and voice
signals. The output of the Universal Access Shelf consists of DSL &quot;lines&quot;
capable of carrying a single stream of native MPEG- 2 digital quality broadcast
television, high-speed data and voice. Upon reaching a residence or business,
the DSL line is fed into the Traverser&#153 intelligent network interface (INI)
digital set top box which separates and routes the television, high-speed data
and voice signals to the television, home computer and telephone, respectively.
</p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The digital compression technology used by the DVDDS
transports digital television signals in native motion pictures experts group 2
(MPEG2) format over the DSL spectrum. At no point does the DVDDS packetize the
video content or deliver it over an internet protocol (IP) or asynchronous
transfer mode (ATM) network. Up until recent developments by Lucent
Technologies, Inc. for its Stinger DSLAM, which is used as the method for
transport in our TV+ platform, the DVDDS technology had certain quality of
service advantages over IP based Video transmission methods over ADSL. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The DVDDS is installed at Hart Telephone Company in Hartwell,
Georgia, where a limited user system is currently operational. Hart Telephone
competed the construction of its digital head end toward the end of 2001,
marking the DVDDS's transition to commercial deployment. A DVDDS system is also
installed at the BMW manufacturing plant in Spartanburg, South Carolina for use
as a telebroadcast system in a commercial setting. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; mPhase has recently introduced its second product for deliver
of broadcast television, high speed data and voice over ADSL originally named
Simple TV and now called the TV+ platform. This product has been developed in
conjunction with the Bell Labs division of Lucent Technologies, Inc. TV+ is a
modular solution that is also designed to simultaneously deliver digital
broadcast television, high speed data plus voice over copper telephone wires.
The TV+ utilizes the industry-leading, standards-based Lucent Stinger Digital
Access Concentrator (the Stinger&#153) for transport. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The TV+ platform requires a telephone service provider to
built a digital head-end to down-link channels to television programming from
satellites. Unlike the headend utilized with the Traverser&#153 DVDDS, the signals
are converted at the head-end from native MPEG- 2 into IP format. The
architecture developed by Bell Labs for the mPhase TV+ product encompasses: </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The mPhase Traverser&#153 BTS (Broadcast Television Switch) layer
interfacing the video headend and the DSLAM. The BTS supports administrative
tasks associated with subscriber management by communicating with each Traverser&#153
INI set top box to enable access by users to programming selected by such user
as well as compiling customer billing information for a service provider. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Lucent's Stinger Digital Access Concentrator, a field-tested
central office (CO) piece of equipment containing the new Lucent IP 2000 card
that provides DSL connections to individual customers and the greater bandwidth
necessary to support internal multicasting of hundreds of channels of video
traffic. This capability results in a highly scaleable and cost effective video
delivery architecture based upon a leading standards based IP delivery
technology. </p>
<p>&nbsp;&nbsp;&nbsp; mPhases Traverser&#153 INI Set Top Box, a highly integrated piece of customer
premises equipment (CPE) to deliver digital television in the home environment
from the DSL link. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; During the first half of fiscal year 2003, mPhase began
discussions with the Bell Labs division of Lucent to redesign, feature enhance
and cost reduce its Traverser&#153 INI (intelligent network interface) set top box
CPE portion of the DVDDS. In December of 2002 Bell Labs approached mPhase about
creating the hybrid, mPhaseTV+ solution over DSL that would add broadcast
television capabilities to the Lucent Stinger DSLAM and capitalize upon the fact
that such DSLAM is deployed to over 4 million customers worldwide for voice and
data delivery over copper telephone lines. The goal is to create the most
reliable scaleable and cost-effective method for delivery of broadcast quality
television and high-speed data over copper telephone lines. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The initial design of the mPhaseTV+ solution does not contain
features that would currently require expensive upgrades to a telephone service
provider's infrastructure such as the delivery of more than one different
television channel through one set-top box to a customer, video on demand and
interactive television which is currently available on many cable systems
throughout the United States. Our goal is to achieve wide acceptance of our
television platforms indeveloping markets outside of the United States for
multi-channel broadcast television at significant gross margins by creating an
extremely cost-effective product. We believe such markets do not demand, or can
afford, feature-rich and expensive solutions available with alternate
technologies such as cable, VDSL and much more expensive platforms for ADSL. As
ADSL technology migrates forward to ASDL2 or ASDL2+, mPhase will include some or
all of these features in its TV+ platform in a modular scalable cost-effective
manner depending upon <i>actual</i> market demand for such features in markets
that mPhase is targeting. </p>
</font><font FACE="Times New Roman" size="2">
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; As noted above, Bell Labs had been working in a contract
engineering capacity helping mPhase to cost-reduce its digital set top box, the
Traverser&#153 INI Set Top Box (INI). mPhase's original set top box designed by GTRC
to be used as the CPE portion of the Traverser&#153 has recently been reduced in
size and costs by Lucent. This product is a low-cost set-top box developed
specifically for delivering Motion Picture Experts Group two (MPEG2) standard
video bitstreams over DSL links. The integrated DSL modem makes the connection
between the set-top box and the DSLAM. The INI's video output sends television
signals directly to the end-user's TV. Such integration of the set-top-box with
the DSL modem provides greater video content security by having the video
content decoded directly by the set top box into the television signal. Thus
digital television cannot be downloaded and saved directly from a DSL modem.
While no system is completely impenetrable to video theft, the INI solution
thwarts and discourages such activity. mPhase's cost reduced INI designed by
Lucent utilizes standard Asynchronous Transfer Mode over ADSL transport. </p>
<i>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; mPhase DSL Component Products</i>. mPhase also has designed
and markets a line of DSL component products ranging from commodity items such
as POTS splitters to innovative loop management products. Most notable in the
suite of DSL component products is the recently introduced <i>i</i>POTS or
Intelligent POTS Splitter product. The <i>i</i>POTS<i>1</i> product is designed
to work in conjunction the Lucent Stinger DSLAM. A newly developed version of
the product called the <i>i</i>POTS<i>3</i> ids compatible with the Lucent
Stinger as well as DSLAM's manufactured by other vendors. This product marks a
significant advancement in automating loop management. As DSL deployments scale,
it is becoming increasingly more important for telecommunications service
providers to streamline the process for provisioning and troubleshooting DSL
services. Additionally, as competition for high speed Internet expands, the
market is witnessing a reduction in price. Therefore, it has become imperative
that telecommunications service providers lower the operational costs involved
with supporting DSL services. The <i>i</i>POTS is a device that allows service
providers to perform full loop testing without having to deploy manual assets by
allowing service providers to temporarily bypass the POTS Splitter and have a
comprehensive view of their DSL networks. Prior to the introduction of this
product in order to perform full testing, service providers would have to
manually intervene so that so that test signals could be passed through the
network. mPhase has established a worldwide non-exclusive distribution agreement
with Corning Cable Systems for the sale of <i>i</i>POTS product. Utilizing
Corning as a distribution channel expands exposure for this product, as Corning
is one of the largest vendors of central office DSL filtering equipment. mPhase
also continues to market the product directly to major telephone service
providers. </p>
<p><b>Nanotechnology </b> </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Effective February 3, 2004, mPhase has entered into a
Development Agreement with Lucent Technologies, Inc. to commercialize the use of
nano power cell technology. We believe that this arrangement with the Bell Labs
division of Lucent will give mPhase the opportunity to develop and offer
breakthrough battery technology 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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 believes that a prototype of its first nano
power cell product could be completed as early as 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. </p>
<i>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Revenues</i>. 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 &quot;the length and variability
of the commercial roll-out of the Traverser&#153 and mPhase TV+ products to various
telecommunications service providers and (ii) the Company's recent entry into
the NanoTechnology business. Since the Company believes that there may be a
significant international market for the Traverser&#153 and the mPhaseTV+ products
involving many different countries, with different regulations, certifications
and commercial practices than the United States, future revenues are highly
subject to the changing variables and uncertainties. Additionally, the recent
instability of the telecommunications market evidenced by reduction in capital
spending across the whole in the telecom sector contributes to our difficulty in
accurately predicting future revenues. </p>
<i>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Cost of revenues</i>. 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 Traverser&#153 and Simple TV Platform products will
consist primarily of payments to manufacturers to acquire the necessary
components and assemble the products and, in the case of the Traverser&#153, future
patent royalties payable to Georgia Tech Research Corporation (GTRC). </p>
<i>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Research and development</i>. Research and development
expenses consist principally of the payments made to GTRC, Microphase and
Lucent, respectively, for development of the Traverser&#153 DVDDS, the <i>i</i>POTS
and the TV+ products respectively. The TV+ solution consists of the newly
developed mPhase Broadcast Television Switch together with the Lucent Stinger
voice and data delivery system product. All research and development costs are
expensed as incurred. </p>
<i>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; General and administrative</i>. Selling, general and
administrative expenses consist primarily of salaries and related expenses for
personnel engaged in direct marketing of the Traverser&#153 the Simple TV Platform,
the POTS Splitter Shelves, the <i>i</i>POTS and other DSL component products, as
well as support functions including executive, legal and accounting personnel.
Certain administrative activities are outsourced on a monthly fee basis to
Microphase and mPhase leases its principal office in Norwalk, Connecticut from
Microphase. </p>
<i>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Non-Cash compensation charges</i>. The Company makes
extensive use of stock options and warrants as a form of compensation to
employees, directors and outside consultants. We incurred non-cash compensation
charges totaling $48,114,097 from inception (October 2, 1996) through June 30,
2003, of which $2,045,669 was included in research and development expenses;
$46,090,349 was included in general and administrative expenses of which
$20,996,614 pertains to advisors and consultants for services and $25,093,735
pertains to stock- based compensation of employees. </p>
<p><b>Twelve Months Ended June 30, 2003 vs. June 30, 2002 </b> </p>
<p> <i>&nbsp;&nbsp;&nbsp; Revenue</i> </p>
<p ALIGN="justify">&nbsp;&nbsp;&nbsp; Total revenues were $1,581,639 for the year ended June 30,
2003 compared to $2,582,446 for the year ended June 30, 2002. The decrease was
attributable to the continued slowing sales during fiscal year 2003 of the
Company's POTS Splitter product line, caused by the general downturn in the
telecommunications market, including 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 a significant part of DSL
deployment worldwide. The Company cannot say when the demand for
telecommunication equipment will resume. </p>
<p ALIGN="justify"> <i>&nbsp;&nbsp;&nbsp; Cost of Revenues</i> </p>
<p ALIGN="justify">&nbsp;&nbsp;&nbsp; Cost of sales
was $1,493,394 for the fiscal year ended June, 2003 as compared to $2,415,219 in
the prior period, representing 94% of gross revenues, for each of the fiscal
years ended June 30, 2003 and 2002, respectively. The margins have contracted
dramatically in the past two fiscal years as spending among the
telecommunications providers has contracted, coupled with downward pressures
related to the supply and demand of telecommunications products. </p>
<p ALIGN="justify"> <i>&nbsp;&nbsp;&nbsp; Research and
Development</i> </p>
<p ALIGN="justify">&nbsp;&nbsp;&nbsp; Research and development expenses were $3,538,305 for the fiscal
year ended June 30, 2003 as compared to $3,819,583 during the comparable period
in 2002; or a decrease of $281,278. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Such expenditures include $100,000 incurred with GTRC for the
fiscal year ended June 30, 2003 as compared to $450,000 during the comparable
period in 2002. In addition, the Company incurred research and development
expenses for depreciation of test equipment located at Hart Telephone Company
and at mPhase of $839,735 and $845,783 for the fiscal years ended June 30, 2003
and 2002, respectively. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Other portions of research and development expenses include
(a) a decrease of research and development expenses incurred with Microphase by
$322,640 to $428,434 for the fiscal year ended June 30, 2003 from $751,074 for
the comparable period ended June 30,2002, (b) non cash compensation of $385,495
for the twelve month period ended June 30, 2003 compared to $267,338 for the
same period ending June 30, 2002 and (c) miscellaneous expenses of $143,024 and
$298,227 for the periods ended June 30, 2003 and June 30, 2002, respectively.
</p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The Company incurred increased charges with Lucent
Technologies, Inc. in the current year, totaling $1,112,500 incurred on
development of the Broadcast Television Switch for use with Lucent's Stinger DSL
product, $437,500 incurred for the cost reduction effort for mPhase's set top
box. In addition, $75,000 was incurred for software development associated with
mPhase's <i>i</i>POTS3 product, as compared with $156,250 incurred in the year
ended June 30, 2002. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The elements contributing to the decrease in other research
and development expenses included a decrease in the operations of the Company's
joint venture, mPhase Television.net. The major costs incurred by the joint
venture were payroll expenses attributable to research and development of the
Company's transmission capabilities and acquisition of television content. Costs
incurred by the joint venture during the fiscal year ended June 30, 2002 were
$232,334 as compared to $62,352 for the period ended June 30, 2003.
Additionally, this decrease can be attributed to the Company abandoning certain
research projects on DSL components the Company believed were no longer
commercially viable, this approximated $12,960 in fiscal 2003 compared to
$440,295 in fiscal 2002. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The decrease in research expenditures incurred with GTRC is
due to the Company's shift of capital expenditures from the Traverser&#153 DVDDS to
the TV+ product. The Company's project with Lucent provides for cost reduction
of the INI set top box and other product enhancements as well as development of
a Broadcast Television Switch for use with Lucent's Stinger product. To date
expenses incurred with respect to the TV+ platform and development of the new
cost reduced InI are $593,750, and $437,500 respectively for the fiscal year
ended June 30, 2003. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; 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 <i>i</i>POTS&#153 and the mPhase Stretch. We believe the mPhase <i>i</i>POTS&#153
offers a much needed solution for the DSL industry; the <i>i</i>POTS&#153 enables
telecommunications service providers to remotely and cost-effectively perform
loop management and maintenance including line testing, qualification and
troubleshooting. Prior to the introduction of the <i>i</i>POTS&#153, loop management
could not be remotely performed through a conventional POTS Splitter without the
use of expensive cross connects or relay banks because of the mandatory DC
blocking capacitors in traditional POTS splitters, as required by various
telephone protocol and regulatory standards. The unique (patent pending) <i>i</i>POTS&#153
circuit allows most test heads to perform both narrow and wideband testing of
the local loop through the central office POTS Splitter without having to
physically disconnect the POTS Splitter, thereby eliminating the need to
dispatch personnel and a truckroll. The Company anticipates future demand for
this product, as it significantly reduces the cost of deploying and maintaining
DSL services. Also recently developed is the DSL loop extender product called
mPhaseStretch. This product extends the service distance for the mPhase
Traverser&#153 and can be used in conjunction with other DSL services. The Company
believes there will be future demand for the Stretch loop extender product as it
addresses a primary issue in DSL services.<b>
</p>
</b>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; General and Administrative Expenses</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; General and administrative expenses were $2,654,971 for the
twelve-month period ended on June 30, 2003 as compared to $6,490,373 for the
same period ended June 30, 2002. This represents a decrease of these expenses of
$3,836,402, or approximately 59% in fiscal 2003 as a percentage of these
expenses in fiscal 2002. The decrease in administrative costs included a
decrease of $1,696,771 in non-cash changes for the issuance of options to
consultants which totaled $748,840 for the year ended June 30, 2003 as compared
to $2,445,561 during the comparable period in 2002. The decrease also occurred
as a result of the reduction in workforce and the reduction in marketing
expenses which the Company began 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 included decreases in
(a) executive compensation and administrative payroll and related costs of
approximately $775,000, (b) marketing expenses such as trade shows of
approximately $250,000, (c) reductions in occupancy costs by approximately
$290,000, (d) decreases in shareholder services and related expenses by
approximately $190,000, (e) insurance and risk management costs by approximately
$145,000 and (f) various decreases in other administrative categories
aggregating approximating $490,000. The foregoing approximated reductions of
general and administraive expenses other than non-cash charges of $2,125,000 in
the twelve months ended June 30, 2003 compared to the same period ended June 30,
2002. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; We do not expect this downward trend to continue, yet
administrative expenses are expected to remain at the current levels until the
Company begins its marketing effort to roll out its TV+ products in the second
quarter, and at such time we expect that selling and travel expenses will grow.
Further when the Company begins to implement and support its Television over DSL
platforms then administrative payroll and related costs will again rise as the
Company will need to add employees to its administrative workforce. </p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; Depreciation and Amortization</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; Depreciation and amortization expense was $515,417 in fiscal
2003 as compared to $670,183 for 2002. These expenses decreased $154,766, or
approximately 23% of the prior years expense as a result of the Company's
reduced need for and outlays on capital expenditures in its two preceding fiscal
years. We do not expect such downward trend to continue but such depreciation
and amortization expense should remain at the current reduced levels until the
Company commences deployment of its Television over DSL platforms. We expect to
increase capital expenditures in connecting with the deployment of equipment at
test sites with various telecommunications service providers globally as
deployment of our TV+ product progresses and such equipment will need to be
depreciated or amortized, as the case may be, that will result in increased
depreciation at that time. </p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; Net Loss</i> </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The Company recorded a net loss of $6,650,211 for the period
ended June 30, 2003 as compared to a loss of $11,245,361 for the period ended
June 30, 2002. This represents a loss per common share of $.10 for the fiscal
year ended June 30, 2003 as compared to a loss per common share of $.23 for the
fiscal year ended June 30, 2002 based upon weighted average common shares
outstanding of 65,217,008 and 49,617,780 during the fiscal years ended June 30,
2003 and 2002, respectively. </p>
<p><b>Twelve Months Ended June 30, 2002 vs. June 30, 2001 </b> </p>
<p><i>&nbsp;&nbsp;&nbsp; Revenue</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; 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. 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. </p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; Cost of Revenues</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; 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 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 2% of the amount invoiced if paid within 29
days of the invoice date, amounted to $14,389 for the period ended June 30,
2002. Such discounts were offered to two major customers that are leading
telecommunications service providers. In each case, the discount was offered to
an existing customer to accelerate collections in connection with a reorder of
our POTS Splitter product and was treated as a purchase discount to our
customer, and the resultant reduction to net sales lowered the gross margins in
the period. </p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; Research and Development</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The decrease in research expenditures incurred with GTRC is
due to the Company's nearing completion of the design and manufacture of
prototypes of the set top box and the central office equipment associated with
its Traverser&#153 product in 2002. Generally, as the Company anticipates the
completion of its Traverser&#153 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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&#153 and mPhase Stretch. We believe the mPhase iPOTS&#153 offers a
much needed solution for the DSL industry; the iPOTS&#153 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&#153, loop management could not be remotely performed through a conventional
POTS Splitter without manual deployment of personnel. The unique (patent
pending) iPOTS&#153 circuit allows most test heads to perform both narrow and
wideband testing of the local telephone loop from a network operations center
central office POTS Splitter without having to physically disconnect the POTS
Splitter, thereby eliminating the need to dispatch personnel and a truckroll to
either a central office in the field or a customer premises. The Company
believes there will be a 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&#153 and can be used in conjunction with
other DSL services. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; The Company believes there will be demand for the Stretch loop
extender product as it extends the reach of delivery of television and data over
DSL. </p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; General And Administrative Expenses</i> </p>
<p ALIGN="left">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. </p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; Net Loss</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; 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. </p>
<p><b>Six Months Ended December 31, 2003 vs. December 31, 2002 </b> </p>
<p><i>&nbsp;&nbsp;&nbsp; Revenue</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; Total revenues were $3,780,137 for the six months ended December
31, 2003 compared to $771,837 for the six months ended December 31, 2002,
representing an increase of $3,008,300. The increase was primarily attributable
to an increased demand of the Company's Pots Splitter product line. The Company
continues to believe that its line of Pots Splitter products is positioned to be
competitively priced with high reliability and connectivity, and as such has the
potential to be a significant part of DSL deployment worldwide. The Company
still cannot say if the upturn in sales of its Pots Splitter line will be
sustained at this level. The revenue increase was primarily from two customers Covad Communications and Bell South. </p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; Cost of Revenues</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; Cost of sales were $3,289,937 for the six months ended December
31, 2003 as compared to $744,030 in the prior period, representing 87.0% of
gross revenues for the first half of fiscal 2004 which ended December 31, 2003
and 96.4% for the first half of fiscal 2003 which ended December 31, 2002,
respectively. Our gross margins have contracted dramatically over the past three
years as spending among the telecommunications providers has contracted, coupled
with downward pressures related to the supply and demand of telecommunications
products. Margins for the first half of fiscal 2004, which ended December 31,
2003, increased by 7.4% over the margins for the same period ended December 31,
2002 due to better cost of materials used in the Pots Splitter product line. Due
to pricing pressure in the current quarter, the improvement of our gross margins
year to date is down 2.2% from the 9.6% improvement we noted in the last
quarter. We are unable to determine whether such increase in margins will
continue for the remainder of fiscal year 2004. </p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; Research and Development</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; Research and development expenses were $1,454,889 for the six
months ended December 31, 2003 as compared $1,556,142 during the comparable
period in 2002, or a decrease of $101,243. This decrease is comprised primarily
of a reduction in expenses to GTRC of $100,000, compared to the six months ended
December 31, 2002, decreases in expenses to Microphase of approximately $116,000
and $262,500 in the non-cash option expense component of research and
development and expenditures; offset by costs incurred for the increased
research efforts on the TV+ product with Lucent of over $420,000 for the first
half of fiscal 2004 when compared to the first half of fiscal 2003 which ended
December 31, 2002. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Such decreases are the result primarily of elimination of
further development of the TRAVERSER DVDDS product by GTRC as the Company
focuses its efforts on research and development and expenditures associated
therewith on the TV+ product with Lucent, which has been comparatively, to date,
less expensive to develop. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The Company does, however, expect an increase in research and
development costs beginning in March, 2004. In order to broaden and diversify
its current line of business into additional high growth technology areas, the
Company has entered into a Development Agreement, effective February 3, 2004,
with the Bell Labs division of Lucent Technologies, Inc. to commercialize the
use of nano power cell technology. Under the terms of the $1.2 million contract, Lucent/Bell Labs will develop for
mPhase micro-power source arrays fabricated using nanotextured, superhydrophobic
materials. This new business arrangement with Lucent Bell Labs will give mPhase
the opportunity to develop and offer breakthrough battery technology
applications, initially to government market segments including defense and
homeland security, and ultimately to the commercial market. The initial
applications for the nano power cell technology will address the need to supply
emergency and reserved power to a wide range of electronic devices for the
defense department. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; 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 <i>ipots&#153</i> and the mPhase stretch. We believe the mPhase <i>
ipots&#153</i> offers a much-needed solution for the DSL industry; the <i>ipots&#153</i>
enables telcos to remotely and cost-effectively perform loop management and
maintenance including line testing, qualification and troubleshooting. Prior to
the introduction of the <i>ipots&#153</i>, loop management could not be remotely
performed through a conventional Pots splitter without the use of expensive
cross connects or relay banks because of the mandatory dc blocking capacitors in
traditional Pots splitters, as required by the ITU, ANSI and ETSI. The unique
(patent pending) <i>ipots&#153</i> circuit allows most test heads to perform both
narrow and wideband testing of the local loop through the central office Pots
splitter without having to physically disconnect the Pots splitter, thereby
eliminating the need to dispatch personnel and a truckroll. The Company
anticipates future demand for this product, as it significantly reduces the cost
of deploying and maintaining DSL services. Also recently developed is the DSL
loop extender product called mPhase stretch. This product extends the service
distance for the mPhase Traverser&#153 and can be used in conjunction with other DSL
services. The Company anticipates future demand for the stretch loop extender
product as it addresses a primary issue in DSL services. </p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; General and Administrative Expenses</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; Selling, general and administrative expenses were $1,518,411 for
the six months ending December 31, 2003 down from $1,624,178 or a decrease of
$105,767 from the comparable period in 2002. The decrease in the selling,
general and administrative costs is comprised primarily of a reduction in
expenses of non-cash charges relating to the issuance of common stock and
options to consultants, which totaled $307,245 for the six months ended December
31, 2003 as compared to $484,358 for the comparable period ended December 31,
2002 resulting in a savings of $177,113. This decrease, coupled with other
reductions in selling, general and administrative costs including travel were
offset by increases in marketing costs, including payroll and related expenses
for two new technical sales managers having the composite effect of increasing
aggregate administrative expenses other than non-cash charges relating to the
issuance of equity investments by approximately $75,000. We expect sales and
travel expenses to grow as the Company's approaches the deployment of its TV+
products in the future. </p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; Depreciation and Amortization</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; Depreciation and amortization expense was $74,082 for the six
months ending December 31, 2003, down from $259,381, or a decrease of $185,299
from the comparable period in 2002. The decrease is a result of the Company's
reduced outlays for capital expenditures in its two most recent fiscal years. We
do not expect such downward trend to continue but such depreciation and
amortization expense should remain at the current reduced levels until the
Company commences deployment of its Television over DSL platforms. We expect to
increase capital expenditures in connecting with the deployment of equipment at
test sites with various telecommunications service providers globally as
deployment of our TV+ product progresses. </p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; Net Loss</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; The Company recorded a net loss of $2,565,377 for the six months
ended December 31, 2003 as compared to a loss of $3,421,396 for the six months
ended December 31, 2002. This represents a loss per common share of $.04 for the
six month period ended December 31, 2003 as compared to a loss per common share
of $.06 for the six months ending December 31, 2002; based upon weighted average
common shares outstanding of 63,397,799 and 72,251,251 during the periods ending
December 31, 2003 and 2002, respectively. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; Although it is difficult to predict the exact timing of our fist
sales, the Company believes the initial major deployments and the resultant
revenues of its flagship products, the <i>traverser&#153</i> and the <i>TV+</i>
respectively, are not expected until the second quarter of fiscal year 2005,
which along with any upturn of spending in the telephone industry will also
increase sales and improve the Company's margins and provide the Company with
the opportunities to attain profitability. </p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; The Outlook for the Company's Flagship Products</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; The Company believes the initial deployments and resultant
revenues of its Flagship products, The Traverser&#153 DVDDS amd the TV+
respectively, are not expected until the second quarter of fiscal year 2005,
which, if accompanied by a material upturn in spending in the telephone industry
could lead to increased sales and improve the Company's margins and provide the
Company with the opportunity to become profitable. </p>
</font><font FACE="Times New Roman" SIZE="3">
<p ALIGN="left"></font>

<font FACE="Times New Roman PS"><font FACE="Times New Roman" size="2"><i>
&nbsp;&nbsp;&nbsp;
Research and Development Activities</i> </font></p>
</font>

<font FACE="Times New Roman PS" SIZE="2">
<p ALIGN="left"><font FACE="Times New Roman">&nbsp;&nbsp;&nbsp; mPhase
throughout its history has outsourced its research and development activity with
respect to both of its TV platforms as well as its POTS splitter products. 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 DVDDS legacy product.
Microphase has performed research and development for mPhase with respect to
certain component DSL products such as the iPOTS products, low pass filters and
POTS Splitters and the legacy DVDDS product. Most recently, mPhase has engaged
Lucent to cost-reduce its INI set top box and develop its new TV+ product. </p>
</font>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; For the years ended June 30, 2003, 2002 and 2001 and for the
period since inception (October 2, 1996) to June 30, 2003, approximately
$100,000, $450,000, $3,813,683 and $13,524,300, respectively, has been billed to
mPhase for research and development conducted by GTARC. With the completion of
the DVDDS legacy product, the Company has shifted its research and development
from GATRC to Lucent Technologies Inc. Such new research and development was (a)
initially for cost reduction of its INI set top box (b) development by Lucent of
the new TV+ product (consisting of a newly designed television broadcast switch
compatible with the Lucent Stinger data delivery system as well as equipment of
other major vendors). The Company has recently expanded its research and
development efforts with Lucent Technologies to the NanoTechnology business
segment. The Company incurred research and development expenses with Lucent for
fiscal years ended June 30, 2003 and 2002 of $1,112,500 and $156,250,
respectively. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; In February of 2004, the Company and GTRC entered into a final
agreement to convert approximately $1.8 million in payables outstanding to GTRC
and exchange mutual releases in consideration for the issuance to GTRC of a
Warrant (which may be exercised on a cashless basis) to purchase 5,069,242
shares of the Company's common stock valued at $.35 per share. In addition the
Company is obligated to pay GTRC a total of $100,000 in quarterly installments
payments commencing at the end of March of 2004. Under the terms of its license
from GTRC mPhase is the sole, worldwide licensee of the technology developed by
GTARC in conjunction with the legacy DVDDS product. Upon completion of the
legacy DVDDS product, GTRC may receive a royalty of up to 5% of product sales.
</p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; The amount of research and development costs the Company has
expended from October 2, 1996, its inception date, through June 30, 2003 is
$34,347,079. During the year ended June 30, 2003, the Company incurred research
and development expenses of $3,538,305 related to the continued development of
its current TV platforms and other DSL products and services as compared to
$3,819,583 for the same period ended June 30, 2002. </p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; Strategic Alliances Implemented</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; 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 &quot;intelligent&quot; DSL component products including the recently
released iPOTS3, as well as its other &quot;intelligent&quot; 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. mPhase continues to aggressively directly
market these product since the current agreement with Corning is non-exclusive
in scope. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; In addition, the Company has entered into a Co-Branding
Agreement with Lucent for its redesigned cost reduced Traverser INI set top box.
In addition, pursuant to a Systems Integration Agreement with Lucent, the
Company has been designated as the exclusive worldwide reseller of the Lucent
Stinger when bundled as part of the mPhase TV+ product. </p>
<p align="left"><b>Critical Accounting Policies </b> </p>
<p align="left"><i>&nbsp;&nbsp;&nbsp; Revenue Recognition</i> </p>
<p align="left">&nbsp;&nbsp;&nbsp; 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. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; As required, mPhase has adopted the Securities and Exchange
Commission (&quot;SEC&quot;) Staff Accounting Bulletin (&quot;SAB&quot;) No. 101, &quot;Revenue
Recognition in Financial Statements&quot;, 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. </p>
</font><font FACE="Times New Roman" size="2">
<p ALIGN="left">&nbsp;&nbsp;&nbsp; The deferred revenues balance recorded on the Balance Sheet for
the fiscal year ended June 30, 2003 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&#153 product which will occur upon
commercial production of such product. </p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; Research and Development</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; Research and development costs are charged to operations as
incurred in accordance with Statement of Financial Accounting Standards (&quot;SFAS&quot;),
No.2, &quot;Accounting for Research and Development Cost.&quot; </p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; Income Taxes</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; mPhase accounts for income taxes using the asset and liability
method in accordance with SFAS No.109 &quot;Accounting for Income Taxes.&quot; 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. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; Utilization of net operating losses generated through June 30,
2003 may be limited due to &quot;changes in control&quot; of our common stock that
occurred. </p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; Stock-based Compensation</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; Financial Accounting Statement No. 123, Accounting for Stock
Based Compensation, encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation for
grants to employees using the intrinsic method prescribed in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock. The Company has adopted the &quot;disclosure only&quot; 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.
</p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; 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. </p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; Inventory Reserve and Valuation Allowance</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; The Company carries its inventory at the lower of cost,
determined on a first-in, first-out basis, or market. Inventory consists mainly
of the Company's POTS Splitter Shelf and Filters. In determining the lower of
cost or market, the Company periodically reviews and estimates a valuation
allowance to reserve for technical obsolescence and marketability. The allowance
represents management's assessment and reserve for the technical obsolescence
based upon the inter-operability of its component products, primarily filters
and splitters, with presently deployed and next generation DSL infrastructures
as well as a reserve for marketability based upon current prices and the overall
demand for the individual inventory items. Material changes in either the
technical standards of future DSL deployments or further erosion in the demand
for deployments of DSL infrastructures could affect the estimates and
assumptions resulting in the amounts reported. The allowance represents
management's assessment and reserve for the technical obsolescence based upon
the inter-operability of its component products, primarily filters and
splitters, with presently deployed and next generation DSL infrastructures as
well as a reserve for marketability based upon current prices and the overall
demand for the individual inventory items. Material changes in either the
technical standards of future DSL deployments or further erosion in the demand
for deployments of DSL infrastructures could affect the estimates and
assumptions resulting in the amounts reported. The allowance is estimated as the
difference between inventory at historical cost, on a first in first out basis,
and market based upon assumptions about future demand, current prices and
product liability, and charged to the provision for inventory, which is a
component of cost of sales. At the point the historical cost is adjusted, a
lower cost-basis for that inventory is established, and subsequent changes in
facts and circumstances do not result in the restoration or increase in that
newly established cost basis. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; During the fiscal years ended June 30, 2003, 2002 and 2001, the
Company reserved approximately $302,000, approximately $928,000, and
approximately $315,000, respectively, for technical obsolescence and
marketability based upon current prices and overall demand and charged a like
amount to expense, representing 8.4% of average inventory, at cost, of
approximately $3,588,000 on hand during the period in fiscal 2003; 20.2% of
average inventory, at cost, of approximately $4,602,000 on hand during the
period in fiscal 2002; and 13.6% of average inventory, at cost, of approximately
$2,309,000 on hand during fiscal 2001. The reserve and corresponding charges in fiscal 2002 were increased as the
Company experienced a dramatic decrease, along with the entire telephonic
industry, in demand for our component products in addition to the decision to
table the production of certain product line items built on certain European
standards and which the Company does not expect to pursue in the near future. As
of June 30, 2003, the Company recorded a cost adjustment of approximately
$1,059,000, recognizing permanent cost reductions due to price adjustments
approximating $318,000 and reductions due to obsolescence resulting from a lack
of inter-operability of certain components in inventory with the Company's
present product line approximating $741,000. As a result on June 30, 2003 the
Company had a total inventory valuation reserve of $486,500 against its
inventory with a total balance, at cost, of $2,589,678, or 18.8%. If there was
to be a sudden and significant decrease in demand for our products, or if there
were a higher incidence of inventory obsolescence because of rapidly changing
technology and customer requirements, we could be required to increase our
inventory allowances and our gross margins could be adversely affected. </p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; Material Related Party Transactions</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; 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 retransmission accreditation to
proprietary television content that the Company plans to provide with its
flagship product, the Traverser&#153 within its incorporated joint venture mPhase
Television.Net, in which the Company owns a 56.5% interest. </p>
<p>&nbsp;&nbsp;&nbsp; Directors that are significant shareholders of Janifast Limited include
Messrs Ronald A. Durando, Gustave T. Dotoli, and Necdet F. Ergul. </p>
<p>&nbsp;&nbsp;&nbsp; Mr. Michael McInerney, an outside Director, is employed by Lintel Inc. and
Mr. Abraham Biderman was employed until September 30, 2003 by our former
investment banking firm Lipper &amp; Company. </p>
<p>&nbsp;&nbsp;&nbsp; Messrs, Biderman, McInerney and Mr. Anthony Guerino own a relatively small
amount of stock, warrants and options in mPhase Technologies, Inc. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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&#153. In addition the Company has tested its TV+ platform in July of
2003 with 3 customers of Hart Telephone. A member of mPhase's Board of Directors
is employed by Lintel, Inc., the parent corporation of Hart Telephone. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Mr. Durando, the President and CEO of mPhase, owns a
controlling interest and is a director and COB of Janifast Limited. Mr. Durando
and Mr. Dotoli are officers of Microphase Corporation. Mr. Dotoli is also a
shareholder of Janifast Limited. Mr. Ergul, the chairman of the board of mPhase,
owns a controlling interest and is a director of Microphase Corporation and is a
director and shareholder of Janifast Limited. 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.<b>
</p>
</b>
</font><font FACE="Times New Roman" size="2">
<p align="center">Significant charges from related parties are summarized for the periods
enumerated as follows: </p>
<b>
<p>Charges and Expenses with Related Parties </p>
</b>
</font>
<b>
<table CELLSPACING="0" BORDER="0" WIDTH="90%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="405">&nbsp;</td>
    <td WIDTH="135" align="right">&nbsp;</td>
    <td WIDTH="143" align="right">&nbsp;</td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="282" COLSPAN="2" align="center">
    <font FACE="Times New Roman" size="2">For the Three Months</font></td>
  </tr>
  <tr>
    <td WIDTH="405">&nbsp;</td>
    <td WIDTH="135" align="right">&nbsp;</td>
    <td WIDTH="143" align="right">&nbsp;</td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="282" COLSPAN="2" align="center">
    <font FACE="Times New Roman" size="2">Ended December 31,</font></td>
  </tr>
  <tr>
    <td WIDTH="405">&nbsp;</td>
    <td WIDTH="426" COLSPAN="3" align="right">
    <font FACE="Times New Roman" size="2">
    <p align="center"><u>For the Years Ended June 30,</u></font></td>
    <td WIDTH="282" COLSPAN="2" align="center">
    <font FACE="Times New Roman" style="text-decoration: underline" size="2">
    (Unaudited)</font></td>
  </tr>
  <tr>
    <td WIDTH="405">&nbsp;</td>
    <td WIDTH="135" align="right">&nbsp;</td>
    <td WIDTH="143" align="right">&nbsp;</td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="157" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="405">&nbsp;</td>
    <td WIDTH="135" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">2001</font></td>
    <td WIDTH="143" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">2002</font></td>
    <td WIDTH="148" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">2003</font></td>
    <td WIDTH="157" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">2002</font></td>
    <td WIDTH="125" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">2003</font></td>
  </tr>
  <tr>
    <td WIDTH="405">&nbsp;</td>
    <td WIDTH="135" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="143" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="148" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="157" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="125" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="405"><font FACE="Times New Roman" size="2">Charges
    incurred with Janifast</font></td>
    <td WIDTH="135" align="right">&nbsp;</td>
    <td WIDTH="143" align="right">&nbsp;</td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="157" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="405"><font FACE="Times New Roman" size="2">
    included in:</font></td>
    <td WIDTH="135" align="right">&nbsp;</td>
    <td WIDTH="143" align="right">&nbsp;</td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="157" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="405" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Cost of
    sales and ending inventory</font></td>
    <td WIDTH="135" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$8,932,378</font></td>
    <td WIDTH="143" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$1,759,308</font></td>
    <td WIDTH="148" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$178,959</font></td>
    <td WIDTH="157" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$132,465</font></td>
    <td WIDTH="125" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$1,816,019</font></td>
  </tr>
  <tr>
    <td WIDTH="405">&nbsp;</td>
    <td WIDTH="135" align="right">&nbsp;</td>
    <td WIDTH="143" align="right">&nbsp;</td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="157" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="405" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Total
    Janifast</font></td>
    <td WIDTH="135" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$8,932,378</font></td>
    <td WIDTH="143" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$1,759,308</font></td>
    <td WIDTH="148" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$178,959</font></td>
    <td WIDTH="157" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$132,465</font></td>
    <td WIDTH="125" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">1,816,019</font></td>
  </tr>
  <tr>
    <td WIDTH="405">&nbsp;</td>
    <td WIDTH="135" align="right">&nbsp;</td>
    <td WIDTH="143" align="right">&nbsp;</td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="157" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="405" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Charges
    incurred with Microphase Corp.</font></td>
    <td WIDTH="135" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="143" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="148" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="157" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="405" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    included in:</font></td>
    <td WIDTH="135" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="143" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="148" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="157" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="405"><font FACE="Times New Roman" size="2">Cost of
    sales and ending inventory</font></td>
    <td WIDTH="135" align="right">&nbsp;</td>
    <td WIDTH="143" align="right">&nbsp;</td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="157" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="405"><font FACE="Times New Roman" size="2">
    (Including Royalties)</font></td>
    <td WIDTH="135" align="right">
    <font FACE="Times New Roman" size="2">$335,777</font></td>
    <td WIDTH="143" align="right">
    <font FACE="Times New Roman" size="2">$200,440</font></td>
    <td WIDTH="148" align="right">
    <font FACE="Times New Roman" size="2">$86,468</font></td>
    <td WIDTH="157" align="right">
    <font FACE="Times New Roman" size="2">$62,319</font></td>
    <td WIDTH="125" align="right">
    <font FACE="Times New Roman" size="2">$22,948</font></td>
  </tr>
  <tr>
    <td WIDTH="405" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    Research and development</font></td>
    <td WIDTH="135" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">1,660,606</font></td>
    <td WIDTH="143" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">876,074</font></td>
    <td WIDTH="148" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">428,434</font></td>
    <td WIDTH="157" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">240,000</font></td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">54,000</font></td>
  </tr>
  <tr>
    <td WIDTH="405"><font FACE="Times New Roman" size="2">General
    and administrative</font></td>
    <td WIDTH="135" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">132,600</font></td>
    <td WIDTH="143" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">136,080</font></td>
    <td WIDTH="148" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">133,200</font></td>
    <td WIDTH="157" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">73,200</font></td>
    <td WIDTH="125" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">15,000</font></td>
  </tr>
  <tr>
    <td WIDTH="405" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="135" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="143" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="148" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="157" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="405"><font FACE="Times New Roman" size="2">Total
    Microphase Corp.</font></td>
    <td WIDTH="135" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$2,128,983</font></td>
    <td WIDTH="143" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$1,212,594</font></td>
    <td WIDTH="148" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$648,102</font></td>
    <td WIDTH="157" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$375,519</font></td>
    <td WIDTH="125" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$91,948</font></td>
  </tr>
  <tr>
    <td WIDTH="405" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="135" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="143" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="148" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="157" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="405"><font FACE="Times New Roman" size="2">Charges
    incurred with Lintel &amp; Affiliates</font></td>
    <td WIDTH="135" align="right">&nbsp;</td>
    <td WIDTH="143" align="right">&nbsp;</td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="157" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="405"><font FACE="Times New Roman" size="2">
    included in:</font></td>
    <td WIDTH="135" align="right">&nbsp;</td>
    <td WIDTH="143" align="right">&nbsp;</td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="157" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="405" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    Research and development</font></td>
    <td WIDTH="135" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$192,000</font></td>
    <td WIDTH="143" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$0</font></td>
    <td WIDTH="148" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$0</font></td>
    <td WIDTH="157" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$0</font></td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$0</font></td>
  </tr>
  <tr>
    <td WIDTH="405"><font FACE="Times New Roman" size="2">General
    and administrative</font></td>
    <td WIDTH="135" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">285,000</font></td>
    <td WIDTH="143" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">0</font></td>
    <td WIDTH="148" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">0</font></td>
    <td WIDTH="157" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">0</font></td>
    <td WIDTH="125" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="405" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="135" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="143" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="148" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="157" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="405"><font FACE="Times New Roman" size="2">Total
    Lintel &amp; Affiliates</font></td>
    <td WIDTH="135" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$477,000</font></td>
    <td WIDTH="143" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$0</font></td>
    <td WIDTH="148" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$0</font></td>
    <td WIDTH="157" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$0</font></td>
    <td WIDTH="125" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$0</font></td>
  </tr>
  <tr>
    <td WIDTH="405" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="135" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="143" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="148" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="157" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="405"><font FACE="Times New Roman" size="2">Charges
    incurred with Joint Venture</font></td>
    <td WIDTH="135" align="right">&nbsp;</td>
    <td WIDTH="143" align="right">&nbsp;</td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="157" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="405"><font FACE="Times New Roman" size="2">
    Partners &amp; Affiliates</font></td>
    <td WIDTH="135" align="right">&nbsp;</td>
    <td WIDTH="143" align="right">&nbsp;</td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="157" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="405"><font FACE="Times New Roman" size="2">
    included in:</font></td>
    <td WIDTH="135" align="right">&nbsp;</td>
    <td WIDTH="143" align="right">&nbsp;</td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="157" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="405" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    Research and development</font></td>
    <td WIDTH="135" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$949,420</font></td>
    <td WIDTH="143" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$64,039</font></td>
    <td WIDTH="148" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$0</font></td>
    <td WIDTH="157" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$0</font></td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$0</font></td>
  </tr>
  <tr>
    <td WIDTH="405"><font FACE="Times New Roman" size="2">General
    and administrative</font></td>
    <td WIDTH="135" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">60,000</font></td>
    <td WIDTH="143" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">0</font></td>
    <td WIDTH="148" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">0</font></td>
    <td WIDTH="157" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">0</font></td>
    <td WIDTH="125" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="405" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="135" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="143" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="148" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="157" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="405"><font FACE="Times New Roman" size="2">Total
    Joint Venture Partner &amp; Affiliates</font></td>
    <td WIDTH="135" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$1,009,420</font></td>
    <td WIDTH="143" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$64,039</font></td>
    <td WIDTH="148" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$0</font></td>
    <td WIDTH="157" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$0</font></td>
    <td WIDTH="125" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$0</font></td>
  </tr>
  <tr>
    <td WIDTH="405" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="135" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="143" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="148" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="157" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="405"><font FACE="Times New Roman" size="2">Total
    Charges with Related Parties</font></td>
    <td WIDTH="135" align="right">&nbsp;</td>
    <td WIDTH="143" align="right">&nbsp;</td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="157" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="405"><font FACE="Times New Roman" size="2">
    included in:</font></td>
    <td WIDTH="135" align="right">&nbsp;</td>
    <td WIDTH="143" align="right">&nbsp;</td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="157" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="405" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Cost of
    sales and ending inventory</font></td>
    <td WIDTH="135" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$9,268,155</font></td>
    <td WIDTH="143" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$1,959,748</font></td>
    <td WIDTH="148" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$265,427</font></td>
    <td WIDTH="157" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$194,784</font></td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$1,838</font></td>
  </tr>
  <tr>
    <td WIDTH="405"><font FACE="Times New Roman" size="2">
    Research and development</font></td>
    <td WIDTH="135" align="right">
    <font FACE="Times New Roman" size="2">2,802,026</font></td>
    <td WIDTH="143" align="right">
    <font FACE="Times New Roman" size="2">940,113</font></td>
    <td WIDTH="148" align="right">
    <font FACE="Times New Roman" size="2">428,434</font></td>
    <td WIDTH="157" align="right">
    <font FACE="Times New Roman" size="2">240,000</font></td>
    <td WIDTH="125" align="right">
    <font FACE="Times New Roman" size="2">54,000</font></td>
  </tr>
  <tr>
    <td WIDTH="405" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">General
    and administrative</font></td>
    <td WIDTH="135" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">477,600</font></td>
    <td WIDTH="143" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">136,080</font></td>
    <td WIDTH="148" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">133,200</font></td>
    <td WIDTH="157" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">73,200</font></td>
    <td WIDTH="125" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">15,000</font></td>
  </tr>
  <tr>
    <td WIDTH="405">&nbsp;</td>
    <td WIDTH="135" align="right">&nbsp;</td>
    <td WIDTH="143" align="right">&nbsp;</td>
    <td WIDTH="148" align="right">&nbsp;</td>
    <td WIDTH="157" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="405" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Total
    Charges with Related Parties</font></td>
    <td WIDTH="135" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$12,547,781</font></td>
    <td WIDTH="143" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$3,035,941</font></td>
    <td WIDTH="148" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$827,061</font></td>
    <td WIDTH="157" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$507,784</font></td>
    <td WIDTH="125" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$1,907,967</font></td>
  </tr>
  </table>
<font FACE="Times New Roman" SIZE="3">
<p>&nbsp;&nbsp;&nbsp; </font></b>

<font FACE="Times New Roman PS" SIZE="2"><i>Liquidity and
Capital Resources</i> </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; From inception (October 2, 1996) through December 30, 2003
and June 30, 2003 the Company has incurred cumulative (a) development stage
losses and has an accumulated deficit of $110,581,874 and $108,016,497
respectively and (b) negative cash flow from operations of $44,364,545 and
$43,615,413 respectively. The auditors report for the fiscal year ended June 30,
2003 includes the statement that &quot;there is substantial doubt of the Company's
ability to continue as a going concern&quot;. Management estimates that the Company
needs to raise approximately $2,000,000 during the next 12 months to continue
operations. As of June 30, 2003, the Company had a negative net worth of
$3,228,886 up from a negative net worth of $42,849 as a result of continuing net
losses incurred after June 30, 2002. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; At June 30, 2003 mPhase had working capital deficit of
$1,405,331 as compared to working capital of $399,321 at June 30, 2002. Through
June 30, 2003, the Company had incurred development stage losses totaling
$108,016,497. At June 30, 2003, the Company had $396,860 of cash and cash
equivalents and $287,135 of net accounts receivables to fund short-term working
capital requirements. At December 31, 2003 mPhase had working capital deficit of
$3,007,748 as compared to working capital deficit of $1,405,331 at June 30,
2003. Through December 31, 2003, the Company had incurred development stage
losses totaling approximately $110,581,874. At December 31, 2003, the Company
had approximately $319,923 of cash, cash equivalents and approximately $182,136
of trade receivables to fund short- term working capital requirements. The
Company's ability to continue as a going concern and its future success is
dependent upon its ability to raise capital in the near term to: (1) satisfy its
current obligations, (2) continue its research and development efforts, and (3)
the successful wide scale development, deployment and marketing of its products.
</p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Historically, mPhase has funded its operations and capital
expenditures primarily through private placements of common stock. Management
expects that its ongoing financial needs will be provided by financing
activities and believes that the sales of its line of POTS Splitter products and
other related DSL component products will provide some offset to cash flow used
in operations, although there can be no assurance as to the level and growth
rate of such sales in future periods as seen with quarter to quarter
fluctuations in component sales. At June 30, 2003, the Company had cash and cash
equivalents of $396,860 compared to $47,065 at June 30, 2002, net accounts
receivable of $287,135 and net inventory of $2,103,328. This compared to
$273,780 of net accounts receivable and $3,342,716 of net inventory at June 30,
2002. At December 31, 2003, the Company had cash and cash equivalents of
$319,923 compared to $396,860 at June 30, 2003, accounts receivable of $182,186
and inventory of $1,088,875. This compared to $287,135 of accounts receivable
and $2,103,328 of inventory at June 30, 2003. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Cash used in operating activities was $749,303 during the six
months ending December 31, 2003. The cash used by operating activities
principally consists of the net loss, and significant changes in assets and
liabilities, including additional cash used for decreasing accrued expenses by
$420,000 offset by depreciation and amortization of $402,257, and by non-cash
charges of $307,425 for common stock options and warrants issued for services
and cash flow provided from a decrease in inventory of approximately $615,000.
The Company does not expect decreases of inventory to be as significant in
upcoming quarters, yet we will not need to increase inventory until the roll out
of our TV+ platform and the increase in accounts receivable is temporary as a
significant sale and shipment occurred late in the September quarter. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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 $100,000
and $450,000, for the twelve month periods ended June 30, 2003 and 2002,
respectively, and $13,524,300 from the period from inception through December
31, 2003. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In February of 2004, the Company and GTRC entered into a
final agreement to convert approximately $1.8 million in payables outstanding to
GTRC and exchange mutual releases in consideration for the issuance to GTRC of a
Warrant (which may be exercised on a cashless basis) to purchase 5,069,242
shares of the Company's common stock valued at $.35 per share. In addition the
Company is obligated to pay GTRC a total of $100,000 in quarterly installments
payments commencing at the end of March of 2004. mPhase is the sole, worldwide
licensee of the technology developed by GTARC in conjunction with the Traverser&#153
DVDDS product line. Upon completion of the commercial product, GTRC may receive
a royalty of up to 5% of product sales. </p>
<p>&nbsp;&nbsp;&nbsp; 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; During the fiscal year ended June 30, 2002 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. </p>
</font><font FACE="Times New Roman" size="2">
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; During the twelve months ending June 30, 2003, certain
strategic vendors and related parties converted approximately $1.9 million of
accounts payable and accrued expenses into 5,923,333 shares of the Company's
common stock and warrants to purchase 3,706,800 shares of common stock of mPhase.
</p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; As of December 30, 2003, mPhase is obligated to pay Lucent
Technologies, Inc., the sum of $140,000 per month through May of 2004 under a
new Development Agreement with Lucent for further development of the TV+ product
representing charges the Company has yet to incur of approximately $560,000 in
addition to $420,000 included in accounts payable at December 31, 2003, for a
total sum of $980,000 pertaining to DSL Delivery Systems. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The Company does, however, expect an increase in research and
development costs beginning in February, 2004. In order to broaden and diversify
its current line of business into additional high growth technology areas, the
Company has entered into a Development Agreement, effective February 3, 2004,
with the Bell labs division of Lucent Technologies, Inc. to commercialize the
use of nano power cell technology. Under the terms of the $1.2 million contract,
Lucent/ Bell Labs will develop for mPhase micro-power source arrays fabricated
using nanotextured, superhydrophobic materials. This new business arrangement
with Lucent Bell Labs will give mPhase the opportunity to develop and offer
breakthrough battery technology applications, initially to government market
segments including defense and homeland security, and ultimately to the
commercial market. The initial applications for the nano power cell technology
will address the need to supply emergency and reserved power t o a wide range of
electronic devices for the defense department. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The Company has no commitments from affiliates or related
parties to provide additional financing. The Company has, from time to time,
been able to obtain financing 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. </p>
<p>&nbsp;&nbsp;&nbsp; As a result, conversions of Debt with related parties and strategic vendors
during the periods enumerated is a follows: </p>
</font>
<b>
<table CELLSPACING="0" BORDER="0" WIDTH="90%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="409">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
    <td WIDTH="144" align="right">&nbsp;</td>
    <td WIDTH="144" align="right">&nbsp;</td>
    <td WIDTH="286" COLSPAN="2" align="center">
    <font FACE="Times New Roman" size="2">For the Six Months</font></td>
  </tr>
  <tr>
    <td WIDTH="409">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
    <td WIDTH="144" align="right">&nbsp;</td>
    <td WIDTH="144" align="right">&nbsp;</td>
    <td WIDTH="286" COLSPAN="2" align="center">
    <font FACE="Times New Roman" size="2">Ended December 31,</font></td>
  </tr>
  <tr>
    <td WIDTH="409">&nbsp;</td>
    <td WIDTH="420" COLSPAN="3" align="right">
    <font FACE="Times New Roman" style="text-decoration: underline" size="2">
    <p align="center">For the Years Ended June 30,</font></td>
    <td WIDTH="286" COLSPAN="2" align="center">
    <font FACE="Times New Roman" style="text-decoration: underline" size="2">
    (Unaudited)</font></td>
  </tr>
  <tr>
    <td WIDTH="409">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
    <td WIDTH="144" align="right">&nbsp;</td>
    <td WIDTH="144" align="right">&nbsp;</td>
    <td WIDTH="151" align="right">&nbsp;</td>
    <td WIDTH="135" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="409"><font FACE="Times New Roman" size="2">Equity
    Conversions of Debt With Related</font></td>
    <td WIDTH="132" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">2001</font></td>
    <td WIDTH="144" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">2002</font></td>
    <td WIDTH="144" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">2003</font></td>
    <td WIDTH="151" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">2002</font></td>
    <td WIDTH="135" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">2003</font></td>
  </tr>
  <tr>
    <td WIDTH="409"><font FACE="Times New Roman" size="2">Parties
    and Strategic Vendors</font></td>
    <td WIDTH="132" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="144" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="144" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="151" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="135" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="409">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
    <td WIDTH="144" align="right">&nbsp;</td>
    <td WIDTH="144" align="right">&nbsp;</td>
    <td WIDTH="151" align="right">&nbsp;</td>
    <td WIDTH="135" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="409"><font FACE="Times New Roman" size="2"><b>
    Related Party Conversions</b></font></td>
    <td WIDTH="132" align="right">&nbsp;</td>
    <td WIDTH="144" align="right">&nbsp;</td>
    <td WIDTH="144" align="right">&nbsp;</td>
    <td WIDTH="151" align="right">&nbsp;</td>
    <td WIDTH="135" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="409" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Number
    of shares</font></td>
    <td WIDTH="132" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">4,840,077</font></td>
    <td WIDTH="144" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">6,546,550</font></td>
    <td WIDTH="144" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">5,533,333</font></td>
    <td WIDTH="151" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">4,533,333</font></td>
    <td WIDTH="135" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="409">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
    <td WIDTH="144" align="right">&nbsp;</td>
    <td WIDTH="144" align="right">&nbsp;</td>
    <td WIDTH="151" align="right">&nbsp;</td>
    <td WIDTH="135" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="409" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Number
    of warrants</font></td>
    <td WIDTH="132" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">0</font></td>
    <td WIDTH="144" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">3,733,334</font></td>
    <td WIDTH="144" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">3,491,800</font></td>
    <td WIDTH="151" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">2,491,800</font></td>
    <td WIDTH="135" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="409">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
    <td WIDTH="144" align="right">&nbsp;</td>
    <td WIDTH="144" align="right">&nbsp;</td>
    <td WIDTH="151" align="right">&nbsp;</td>
    <td WIDTH="135" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="409" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Amount
    converted to equity</font></td>
    <td WIDTH="132" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$2,420,038</font></td>
    <td WIDTH="144" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$1,594,628</font></td>
    <td WIDTH="144" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$1,748,756</font></td>
    <td WIDTH="151" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$1,448,756</font></td>
    <td WIDTH="135" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$0</font></td>
  </tr>
  <tr>
    <td WIDTH="409">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
    <td WIDTH="144" align="right">&nbsp;</td>
    <td WIDTH="144" align="right">&nbsp;</td>
    <td WIDTH="151" align="right">&nbsp;</td>
    <td WIDTH="135" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="409" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2"><b>
    Strategic Vendor Conversions</b></font></td>
    <td WIDTH="132" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="144" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="144" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="151" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="135" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="409"><font FACE="Times New Roman" size="2">Number
    of shares</font></td>
    <td WIDTH="132" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">0</font></td>
    <td WIDTH="144" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">999,662</font></td>
    <td WIDTH="144" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">390,000</font></td>
    <td WIDTH="151" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">340,000</font></td>
    <td WIDTH="135" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="409" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="132" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="144" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="144" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="151" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="135" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="409"><font FACE="Times New Roman" size="2">Number
    of warrants</font></td>
    <td WIDTH="132" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">0</font></td>
    <td WIDTH="144" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">870,000</font></td>
    <td WIDTH="144" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">215,000</font></td>
    <td WIDTH="151" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">0</font></td>
    <td WIDTH="135" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="409" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="132" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="144" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="144" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="151" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="135" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="409"><font FACE="Times New Roman" size="2">Amount
    converted to equity</font></td>
    <td WIDTH="132" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$0</font></td>
    <td WIDTH="144" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$529,503</font></td>
    <td WIDTH="144" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$198,032</font></td>
    <td WIDTH="151" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$117,486</font></td>
    <td WIDTH="135" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$0</font></td>
  </tr>
  <tr>
    <td WIDTH="409" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="132" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="144" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="144" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="151" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="135" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="409"><font FACE="Times New Roman" size="2"><b>
    Total Related Party and Strategic</b></font></td>
    <td WIDTH="132" align="right">&nbsp;</td>
    <td WIDTH="144" align="right">&nbsp;</td>
    <td WIDTH="144" align="right">&nbsp;</td>
    <td WIDTH="151" align="right">&nbsp;</td>
    <td WIDTH="135" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="409" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2"><b>
    Party Conversions</b></font></td>
    <td WIDTH="132" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="144" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="144" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="151" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="135" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="409"><font FACE="Times New Roman" size="2">Number
    of shares</font></td>
    <td WIDTH="132" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">4,840,077</font></td>
    <td WIDTH="144" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">7,546,212</font></td>
    <td WIDTH="144" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">5,923,333</font></td>
    <td WIDTH="151" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">4,873,333</font></td>
    <td WIDTH="135" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="409" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="132" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="144" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="144" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="151" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="135" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="409"><font FACE="Times New Roman" size="2">Number
    of warrants</font></td>
    <td WIDTH="132" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">0</font></td>
    <td WIDTH="144" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">4,603,334</font></td>
    <td WIDTH="144" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">3,706,800</font></td>
    <td WIDTH="151" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">2,491,800</font></td>
    <td WIDTH="135" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="409" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="132" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="144" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="144" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="151" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="135" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="409"><font FACE="Times New Roman" size="2">Amount
    converted to equity</font></td>
    <td WIDTH="132" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$2,420,038</font></td>
    <td WIDTH="144" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$2,124,131</font></td>
    <td WIDTH="144" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$1,946,788</font></td>
    <td WIDTH="151" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$1,566,242</font></td>
    <td WIDTH="135" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$0</font></td>
  </tr>
  <tr>
    <td WIDTH="409" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="132" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="144" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="144" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="151" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="135" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="409"><font FACE="Times New Roman" size="2">Gain on
    Extinguishment of Debt</font></td>
    <td WIDTH="132" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$0</font></td>
    <td WIDTH="144" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$142,236</font></td>
    <td WIDTH="144" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$61,226</font></td>
    <td WIDTH="151" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$40,725</font></td>
    <td WIDTH="135" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">$0</font></td>
  </tr>
  </table>
</b>
<font FACE="Times New Roman" size="2">
<p>&nbsp;&nbsp;&nbsp; During the fiscal years ended June 30, 2002 and 2003 the Company was able to
negotiate extended payment terms for overdue accounts payable with strategic
vendors. These obligations are now classified as notes payable and included in current and long-term portions of
notes payable in the accompanying balance sheets, based upon the revised payment
terms. The company believes they can maintain its present repayment schedule, or
otherwise renegotiate such terms that are satisfactory to the Company and these
vendors. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; On December 31, 2003, the Company became in arrears with
respect to $420,872 of a balloon payment on a Note payable to its outside Law
Firm, Piper &amp; Rudnick LLC. The Company is in discussion with respect to such law
firm to extend and/or cancel all or portions of this debt. It should be noted
that Piper &amp; Rudnick hold warrants received in March of 2001 in exchange for
cancellation of certain payables. Such warrants have conversion rights into our
common stock for 2,233,490 shares that are being registered hereunder (see
Selling Shareholders list-page 65 hereof) and are cashless. Such warrants could
be exercised shares of our common stock which could then be sold in the open
market upon the effectiveness of this Registration Statement on Form S-1 in the
open market to recover our outstanding payable. See also Risk Factor Section on
Page 8 hereof. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; As of June 30, 2003, mPhase is obligated to pay Lucent
Technologies, Inc., the sum of $100,000 per month through November of 2003 for
development of mPhase's new Broadcast Television Switch that will enable the
Lucent Stinger Digital Subscriber Line Technology to deliver television as well
as data and voice over copper telephone lines. mPhase has no other material
commitments for capital expenditures. The Company entered a Development
Agreement, dated as of September 15, 2003, with Lucent Technologies, Inc. for
further development of its TV+ product. Under the terms of such agreement, the
Company paid Lucent an initial installment of $70,000 in December of 2003 plus
the obligation to pay 8 additional installments of $140,000 per month commencing
on January 1, 2004. Under the contract, Lucent will enhance the features of the
Television+ product to include a programming guide, near video on demand,
advanced management software and a low bitrate encoder. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; We have evaluated our cash requirements for fiscal year 2004
and into fiscal year 2005 and beyond based upon certain assumptions, including
our ability to raise additional working capital from equity financing and
increased sales of our POTS Splitter. The Company anticipated that it would need
to raise, at a minimum, approximately $2,000,000 primarily in private placement
of its common stock with accredited investors, in the current fiscal year. As of
January 30, 2004, the Company has raised approximately $1,990,000, and as such,
we will not need to curtail certain expenses as incurred at the present levels
including marketing and research and development expenses. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Management believes that the $2 million to be raised, in new
Private Placements in the capital markets, will be sufficient to cover its
current operating expenses and permit the company to maintain its present
operational levels. This amount may be supplemented with additional funds that
could be received from investors, including selling shareholders' listed in this
prospectus, currently holding warrants to purchase up to a total of
approximately $19.8 million shares of common stock at exercise prices of
approximately $.30 per share which are presently &quot;in the money&quot; and can be
exercised during the next 12 months; the likelihood and potential for which will
increase should this prospectus become effective and should the price of the
Company's common stock continue to rise. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; Should these cash flows not be available to us, we believe we
would have the ability to revise our operating plan and make certain further
reductions in expenses, so that our resources which were available at June 30,
2003, plus financing to be secured during fiscal year 2004, and expected POTS
splitter revenues, will be sufficient to meet our obligations until the end of
fiscal year 2004 and for the first half of fiscal year 2005. We have continued
to experience operating losses and negative cash flows. To date, we have funded
our operations with a combination of component sales, debt conversions with
related parties and strategic vendors, and private equity offerings. Management
believes that we will be able to secure the necessary financing in the
short-term to fund our operations into our next fiscal year. However, failure to
raise additional funds, or generate significant cash flows through revenues,
could have a material adverse effect on our ability to achieve our intended
business objectives. </p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; Current Developments</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; On February 3, 2004 the Company entered into a Research and
Development Agreement with the Bell Labs division of Lucent Technology, Inc. to
develop micro power source arrays fabricated using nanotextured superhydrophobic
materials. Under the terms of the contract, mPhase is obligated to pay a total
of $1.2 million with an initial deposit of $100,000 plus installments of
$100,000 per month commencing February 2004 and ending December 2004. </p>
</font><b>
<hr><p Style='page-break-before:always'><font FACE="Times New Roman">
<p align="center">BUSINESS <br>
Overview </p>
</font></b><font FACE="Times New Roman" size="2">
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; We develop, market and sell innovative DSL broadband
telecommunications equipment. Our main focus is developing the most cost
effective products to enable telecommunications service providers to deliver
digital quality television (together with data and voice) over ordinary copper
telephone lines. The primary markets for mPhase's television delivery products
are regions of the world outside of the United State that do not have coaxial
fiber infrastructure capable of delivering a large number of digital broadcast
television channels. mPhase is not seeking, at this point in time, to develop
robust feature-intensive expensive television platforms to compete with cable in
the United States currently both of our TV over DSL solutions support a single
television stream over a telephone wire. Therefore our television products are
targeted primarily for International markets outside of the United States. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; On February 3, 2003, mPhase entered into the emerging area of
NanoTechnology as a new and second line of business with its execution of a new
Research and Development Agreement with the Bell Labs division of Lucent
Technologies, Inc. NanoTechnology involves the synthetic assembly of new
structures and materials at the molecular level. NanoTechnology has many
potential applications including in industries such as biotechnology, semi
conductors and power cells. The Company is initially focusing its efforts in
developing new power cell NanoTechnology products designed for military
applications. </p>
<p><b>Outsourcing</b> </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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 out sources digital
engineering development for the Traverser&#153 DVDDS System to GTARC. It also out
sources analog engineering development and certain administrative functions to
Microphase Corporation and manufacturing of its POTS Splitter product to
Janifast Ltd. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; We have currently have no contracts in place for the
manufacturing of our products with either Microphase Corporation or Janifast
Ltd. or any other non-affiliated third party manufacturers. We periodically
execute purchase orders for the the manufacture of quantities of POTS Splitters
that are made by Janifast Ltd. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; mPhase has outsourced to Lucent Technologies, Inc. cost
reduction of its Traverser&#153 INI set top box and development of its new TV+
platform. With respect to manufacturing of its TV+ Platform, mPhase is targeting
leading contract manufacturing companies with strategically located facilities
globally 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The Company has entered into a number of significant
agreements with Lucent Technologies, Inc which include a Co-Branding Agreement,
dated as of January 21, 2003, allowing the Company to add the Lucent name and
Logo to its cost-reduced Traverser&#153 INI set top box. Such agreement is for an
initial period of one year and is subject to renewal on an annual basis by
mutual consent. In addition, the Company has entered into a Systems Integrator
Agreement, dated as of April 4, 2003 designating the Company as a reseller of
the Lucent Stinger DSL transport product when bundled as part of the mPhase TV+
platform globally. Such agreement gives mPhase the exclusive right to sell the
TV+ product worldwide containing the Lucent Stinger as the DSL transport
mechanism for delivering broadcast television, high speed data and voice over
copper telephone wires. In order to qualify for such status, as an accredited
reseller, Lucent Technologies, Inc. determined that the Company's TV+ platform
added significant software and hardware value to the Stinger DSL product by
enabling such product to deliver broadcast television over ADSL in addition to
the Stinger's well known existing world-class capabilities for the delivery of
voice and high-speed data over copper telephone lines. Such agreement is for an
initial two year term provided that either party may cancel such agreement with
60 days' notice to the other party. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; As a number of the Lucent Business Partner organization,
mPhase is able to leverage established relationships with an existing Stinger
customer base without having to expand its sales force. To date there are
approximately 4 million ports of the Stinger deployed around the world. MPhase
and the Lucent Global Business Partners group are also targeting other Business
partners in markets where there currently is a lack of cable television
infrastructure. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The Company has recently entered into a new Development
Agreement, dated as of September 15, 2003, with Lucent that provides for
continuing development and enhancement of capabilities of its TV+ product at a
cost of $1,190,000. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; mPhase also develops and designs component DSL products
including Plain Old Telephone Service Splitters (POTS Splitters) and low pass
filters. Since its inception in 1996, virtually all of mPhase's sales revenue
has been derived from the sales of POTS Splitters and other DSL component
products. Recently mPhase introduced its <i>intelligent</i> line of POTS
Splitter products. The <i>i</i>POTS is a device which allows telecommunications
service providers to perform DSL loop qualification from a central office
without having to deploy workers to the field. mPhase has established a worldwide non-exclusive distribution
agreement with Corning Cable for the <i>i</i>POTS product and continues to
market such product directly. </p>
<p><b>Industry Background </b> </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The Company believes there is a significant market for its
television over DSL products, in particular, for its latest TV+ Platform.
Telephone companies worldwide need to deliver a combination of services (i.e.,
voice, television and data) in order to reverse negative economic trends of
reduced margins and customers. The multichannel television business is a growing
industry. Much of the world is largely underserved, with little access to
digital television programming. Cable, outside the US and pockets of Europe, is
in the early stages of deployment. In fact, according to Kagan World Media, the
percent of television-owning households subscribing to multi-channel television
services outside of North America in 2002 was only 36%. Both the Traverser&#153
DVDDS and mPhaseTV+ platforms empower telecommunications service providers to
(a) capitalize upon this growing revenue-generating segment and (b) be able to
compete more effectively with other technologies, such as cable where installed,
and direct broadcast satellite (DBS) services. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; We believe the incentive for telephone companies to deploy
advanced digital services is significant. The traditional revenue model for
telecommunications service providers is shifting as fixed line calling revenues
are continuing to decline with the advent of as wireless telephony and voice
delivered over the Internet. Traditional telephone companies can no longer rely
on a captured market and need to offer new, revenue-generating services in order
to maintain or increase profitability and by offering new services to their
customers. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Cable television providers are also beginning to offer cable
telephony and cable modems for high-speed Internet service, in addition to their
traditional multichannel television services. Additionally, in the U.S., direct
broadcast satellites providers (DBS) are upgrading to two-way satellite
communication to provide data services. In more advanced markets, these
technologies have converged, leaving telephone, cable and direct satellite
television providers competing for the same customers and the same dollars. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; mPhase's flagship products enable telephone companies and
other communications service providers utilizing twisted pair telephone wires to
respond to these competitive threats and immediately offer fully integrated
broadband service packages to their subscribers. Importantly, with mPhase's
products, telecommunications service providers are able to compete with cable
and satellite providers in the high-margin multichannel digital television
market. Neither of mPhase's product solutions require a capital-intensive fiber
nor cable build- out, long lead times, or a technically challenging deployment.
Instead, utilizing their already installed copper telephone line infrastructure,
telephone companies can increase their per subscriber revenue, capture
additional marketshare, stave off competition and ultimately increase their
overall market valuation by becoming full-service communications providers
today. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Incumbent telecommunications service providers will have an
opportunity to preempt wide digital cable or satellite adoption that deploy
mPhase's systems DSL and become market leaders in providing data and video
services. Most telecommunications companies and industry analysts currently
understand that data-only solutions are not sufficient to attract new customers,
retain existing ones, and maintain or achieve profitability. </p>
<p><b>&nbsp;&nbsp;&nbsp; Our Television Over DSL Solution </b> </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; mPhase markets and sells a line of innovative DSL (digital
subscriber line)-based broadband telecommunications equipment. Our flagship
product line includes two systems enabling the delivery of television over DSL.
Both of these products facilitate telephone companies becoming full service
communications providers by enabling the simultaneous delivery of digital
broadcast television, high speed data and voice services over the existing
telephone line infrastructure. mPhase has these systems with a specific target
in mind, specifically, telephone companies in parts of the world where access to
multi-channel television is limited, as well as domestic, rural telephone
operators. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; mPhase introduced its first TV over DSL product, the
Traverser&#153 Digital Video and Data Delivery System, (DVDDS) in 1998. The DVDDS,
is an end-to-endsystembased upon proprietary technology developed in conjunction
with Georgia Tech Research Corporation. Because it is an end-to-end
video-over-ADSL (asymetric digital subscriber line) equipment. The proprietary
transport method utilized in the Traverser&#153 System is patent protected. The
intellectual property embodied by the DVDDS System includes the ability to
deliver a plurality of channels to a plurality of users, ensuring that all
channels are available to all users at all times. The Company continues to
market this product, and believes it to be ideal for customers particularly
interested in supporting television services with a minimal need to support
high-speed data customers. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The DVDDS is installed at Hart Telephone Company in Hartwell,
Georgia, where a 70-user system is currently operational. Hart Telephone
completed the construction of its digital headend toward the end of 2001,
signifying the commencement of commercial deployment. Another DVDDS system is
installed at the BMW manufacturing plant in Spartanburg, South Carolina for use
as a closed television system in a commercial setting. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; mPhase recently introduced its second product in its flagship
line, called the mPhaseTV+ platform. mPhaseTV+ is a modular solution utilizing
the industry-leading, standards-based Lucent Stinger DSL Access Concentrator for
transport. During July of 2003, mPhase successfully tested its TV+ product with
3 customers of Hart telephone. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Bell Labs approached mPhase about creating a hybrid, mPhaseTV+
solution that would capitalize upon the strengths of each company's DSL platform
in December of 2002. Prior to this, Bell Labs had been working in a contract
engineering capacity helping mPhase to cost-reduce its digital set top box. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The two companies elected to team and create what we believe
to be the most reliable, scaleable and cost-effective system for the delivery of
television services over copper telephone wires. This collaborative platform
combines the data centric strengths of Lucent's Stinger with the TV-centric
strengths of mPhase's Traverser&#153, resulting in a best of breed solution. For
mPhase, the TV+ Solution marks a shift in strategy from selling a complete,
proprietary platform to providing an industry-standard, modular solution. This
joint approach offered a number of advantages. For instance, by utilizing the
Lucent Stinger for transport, mPhase's mPhaseTV+ platform can capitalize upon
the proven, extremely robust and cost effective method of supporting and
delivering data combined with the Traverser's&#153 method of supporting video. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The mPhaseTV+ platform eliminates the need for telephone
companies to replace their already installed equipment. Because this solution is
modular, telephone companies that already have Stingers deployed can quickly and
easily upgrade to support television in addition to data and voice services.
There are currently 4 million Stinger ports deployed in 20 countries around the
globe that deliver voice and data over DSL. With minor modifications, mPhase's
BTS and Traverser&#153 CPE are also interoperable with other leading vendor's DSLAMs
on the market today, making it possible for any telephone company with an
installed base of equipment to quickly and relatively inexpensively become full
service communications providers. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The mPhaseTV+ platform is ideally suited for large-scale
deployments, and in parts of the world which cannot afford the cost of upgrading
to cable infastructure. In contrast to the DVDDS, the TV+ Platform is well
designed for markets where there either is currently or will likely be a demand
to support high speed data AND television services simultaneously and cost
effectively. </p>
<p><b>NanoTechnology </b> </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; mPhase has recently entered the business of NanoTechnology
which represents the latest scientific area involving the disciplines of
molecular engineering, quantum physics and electrochemistry, amongst others to
create new advances in products. mPhase is currently focusing upon the
development of advanced battery and power cell products for military
applications. </p>
<p><b>Business Development, Organization, and Acquisition Activities </b> </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; We were incorporated in New Jersey in 1979 under the name
Tecma Laboratory, Inc. In 1987, we changed our name to Tecma Laboratories, Inc.
As Tecma Laboratories, Inc., the Company has primarily engaged in the research,
development and exploitation of products in the skin care field. On February 17,
1997, we acquired Lightpaths, Inc., a Delaware corporation, which was engaged in
the development of telecommunications products incorporating DSL technology, and
we changed our name to Lightpaths TP Technologies, Inc. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; On January 29, 1997, we formed another wholly-owned
subsidiary called TLI Industries, Inc. The shares of TLI were spun off to our
stockholders on March 31,1997 after we 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, we
became the holding company of our wholly owned subsidiary, Lightpaths, Inc. on
February 17, 1997. </p>
<p>&nbsp;&nbsp;&nbsp; On June 2, 1997, we completed a reverse merger with Lightpaths TP
Technologies, Inc. and changed our name to mPhase Technologies, Inc. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; On June 25, 1998, we acquired Microphase Telecommunications,
Inc., a Delaware corporation, by issuing 2,500,000 shares of our common stock.
Microphase Telecommunications' principal assets were patents and patent
applications utilized in the development of our proprietary Traverser&#153
technology (as discussed in related footnote 11 of financial statements on P
F-35). See also &quot;Material Related Party Transactions,&quot; contained with &quot;Critical
Accounts Policies&quot; on P 27 and &quot;Certain Relationships and Related Transaction&quot; P
51. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In March 2000, we entered into a joint venture with Alphastar
International, Inc. to form a company called mPhase Television.net, Inc., (mPhaseTV)
in which we held a 50% interest. On May 1, 2000, we acquired an additional 6.5%
interest in mPhaseTV, and made it one of our consolidated subsidiaries. </p>
<p>&nbsp;&nbsp;&nbsp; On March 14, 2000, we entered into an agreement with BMW Manufacturing Corp.,
located in South Carolina. Under the agreement, we installed version 1.0 of the
Traverser&#153 for BMW's telephone transmission network. BMW has agreed that, upon its notice and consent, we
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 its deployment to 48 unique units. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Our flagship installation, Hart Telephone, has completed the
build and development of its digital headend during fourth quarter of 2001. The
completion of their digital headend marks the move from beta to commercial
deployment of the Traverser&#153 platform. Hart currently has approximately 70
customers receiving about 80 channels of television services. </p>
<p>&nbsp;&nbsp;&nbsp; In May of 2002 mPhase initiated discussions for development of a cost-reduced
intelligent network interface (INI) set top box with the Bell Laboratories
division of Lucent Technologies, Inc. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Effective December 1, 2002, mPhase entered into a Development
Agreement with the Bell Laboratories division of Lucent Technologies, Inc. for
the development of mPhase's broadcast television switch (BTS) as an intergrated
platform with the Lucent Stinger&#153 DSL Access Concentrator. </p>
<p>&nbsp;&nbsp;&nbsp; On December 9, 2002, pursuant to a Statement of Work, Lucent commenced
development of the BTS for mPhase. </p>
<p>&nbsp;&nbsp;&nbsp; On December 15, 2003, mPhase engaged Lucent for the cost-reduction of its
Traverser&#153 INI set top box. </p>
<p>&nbsp;&nbsp;&nbsp; On January 21, 2003, mPhase entered into a Co-Branding Agreement with Lucent
under which mPhase's INI set top box will be co-branded with the Lucent
Technologies, Inc. name and logo. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; On April 4, 2003, mPhase entered into a Systems Integration
Agreement with Lucent. Under the terms of the agreement, mPhase has been given
the exclusive right to sell worldwide a &quot;bundled&quot; solution consisting of mPhase
BTS and the Lucent Stinger. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In May of 2003, MPhase has announced development of the
mPhaseTV+ Platform with Lucent Technologies' Bell Labs. This modular product, as
described in the &quot;Our Solutions&quot; section earlier, utilizes the industry-standard
Lucent Stinger for transport. Bell Labs has been design contracted to design the mPhase BTS and Traverser&#153 CPE to be used in conjunction with the Lucent Stinger.
A redesigned cost reduced second generation set top box CPE equipment has been
completed. A prototype version of the BTS is also completed and has been
successfully tested with 3 customers at Hart telephone in July of 2003. The
first version of our TV+ product is scheduled to be completed during the second
quarter of fiscal year 2004. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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 years ended June 30, 2002 and June
30, 2003 respectively, we generated approximately $2.6 million and $1.6 million
in revenue, respectively, from the commercial sale of our component products.
Our other component products, including Filters and Central Office POTS Filter
Shelves, are marketed to other DSL equipment vendors. We do not believe that the
sales of our Traverser&#153, mPhaseTV+ or INI2 feature products will be materially
impaired by the sale of these component products to these potential competitors.
</p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; mPhase is in the process of evaluating a full range of
contract manufacturers, including manufacturers outside of the U.S. We believe
that there are many qualified manufacturers around the world. mPhase is likely
to contract with multiple companies depending on which countries the Traverser&#153
DVDDS and TV+ products are deployed and depending upon cost-competitiveness. </p>
<p><b>Our Products &amp; Services </b> </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; To date mPhase's revenue has been derived exclusively from
sales of DSL component telephone equipment parts, the majority of which has come
from our sales of POTS Splitter Shelves. We have derived no material revenue to
date with respect to either of our broadcast television platform over DSL
platforms. In our fiscal years ended June 30, 2003 and June 30, 2002 we
generated approximately $1.6 million and $2.6 million in revenue, respectively,
from the commercial sale of our component products and overall losses for such
years of $6,650,211 and $11,245,361, respectively. </p>
<p>&nbsp;&nbsp;&nbsp; mPhase supplies the telecommunications industry with products designed to
enable, enhance or support broadband DSL services. mPhase's line of TV-over-DSL
products include its legacy, end to end platform, the Traverser&#153 Digital Video
and Data Delivery System (DVDDS,) as well as its newly available mPhaseTV+
Platform. Additionally, mPhase markets a line of DSL component products ranging
from commodity items such as traditional POTS Splitters and microfilters to
higher-end, feature-rich products such as the recently introduced Intelligent
POTS Splitter. </p>
<p><i>&nbsp;&nbsp;&nbsp; Traverser&#153 DVDDS</i> </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; mPhase's legacy television-over-DSL System is the Traverser&#153
DVDDS. This system is a patented end-to-end solution enabling the delivery of
digital broadcast television, high speed data services, and traditional voice
services (requires Class5E voice switch) over a pair of copper telephone wires.
</p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The mPhase DVDDS consists of three key elements: a digital
headend called the Programming and Control Center (PCC), Central Office (CO)
equipment which includes the Universal Access Shelf and POTS Splitter Shelf, and
adjusted set top box called the INI. In order for a subscriber to receive
services from a telco via the Traverser&#153 System, all three components must be
installed. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Telecommunications service providers using the mPhase DVDDS
need to build a digital video head-end to receive television content. 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. The PCC can be co-located with a single central office or remotely
located and connected to each CO via DWDM, SONET or ATM. mPhase does not
manufacture digital head end equipment. However, after extensive lab and field
testing, it has established vendor relationships with a number of head end
equipment providers. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The Traverser&#153 DVDDS Central Office (CO) equipment, known as
the mPhase Universal Access Shelf and POTS splitter shelf, integrate video
signals from the PCC with the Internet and voice signals. The outputs are DSL
&quot;lines&quot; capable of carrying a single high- quality video stream, high-speed data
at speeds up to 2 Mbps downstream and telephone voice services. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Upon reaching the home or business, the DSL line is fed into
the Traverser&#153 INI set top box, which functions as a combined DSL modem and
digital set-top box. The set top box separates the three signals and routes them
to the television, PC and telephone. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The DVDDS is telco switching and operating equipment agnostic
and is not dependent on a specific operating configuration. However, because the
DVDDS is based upon proprietary technology, it does not interoperate with other
manufacturer's DSL equipment, at neither the CO nor the home. Our patented
television delivery method transmits signals in native MPEG-2 format to ensure
high quality and reliability. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; The Traverser&#153 utilizes technology we license exclusively from
Georgia Tech Company and technology which we license non-exclusively from
Globespan Semiconductor, Inc. Georgia Tech provided a significant part of the
engineering research and design to develop the Traverser&#153. The Traverser&#153 also
utilizes an advanced filler technology developed by Microphase Corp. </p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; mPhaseTV+ Platform</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; mPhase and Bell Labs Lucent Technologies have teamed together to
create an industry-standard, high quality and cost effective television over DSL
platform known as the mPhaseTV+ Platform. This solution consists of three key
elements: </p>
<p>The mPhase BTS (broadcast television switch) layer interfacing the video
headend and the DSLAM; </p>
<p>Lucent's Stinger DSL Access Concentrator, a field-tested central office (CO)
piece of equipment which provides DSL connections to individual customers; and </p>
<p>mPhase CPE, a highly integrated set top box to deliver video in the home
environment from the DSL link. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; This hybrid, collaborative platform capitalizes upon the
strengths of both Lucent's and mPhase's technology. The BTS embodies the same
video networking intelligence as the Traverser&#153 DVDDS. However, when combined
with the proven, robust Stinger, which effectively and cost-effectively supports
data, the end result is what we believe to be a best-of-breed, industry-standard
solution. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The mPhase BTS resides between the DSLAM and the video
headend and provides video networking intelligence that enables television
services over DSL. The BTS is also responsible for video-related functionality
such as demuxing and mapping MPEG-2 bitstreams, video subscriber management,
video content management and billing management. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; MPhase has developed, in conjunction with Bell Labs, a low
cost, efficient and compact digital set top box with an integrated DSL Modem
called the INI. Various versions of this device exist or are in development such
as a standards-based product inoperable with the Lucent Stinger as well as other
manufactures' DSLAMs, and a proprietary version interoperable with the mPhase
Traverser&#153. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Together with a digital video headend (or PCC) and the Lucent
Stinger, the mPhaseTV+ platform provides another end-to-end solution for
customers wanting to provide television and high-speed data services over their
existing copper infrastructure. Based on a streamlined, modular architecture,
future upgrade, additional features and ancillary services can be implemented
without major modifications to the entire system. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; The Company expects to sell the mPhaseTV+ platform to customers
planning to support large scale deployments, delivering both high speed data and
television services. The original Traverser&#153 DVDDS is better suited for smaller
deployments where the customer is primarily interested in delivering television
and not necessarily high speed data. Both products are suited for markets
lacking an existing coaxial cable infrastructure. Currently, both platforms
support a single television stream and are therefore not competitive in urban
and suburban U.S. markets where digital cable and DBS servers are prolific. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; The Company believes the initial major deployments and any
revenues from sales of its flagship products, the Traverser&#153 DVDDS and the TV+,
are not expected until the second quarter of fiscal year 2005. An upturn of
spending in the telephone industry should also increase sales and improve the
Company's margins and provide the Company with the opportunity to attain
profitability. </p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; Component Parts Pots Splitter Shelves Intelligent Pots
Splitter (iPots)</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; mPhase also designs and markets a line of DSL component products
ranging from commodity items such as carrier-class POTS splitters located at the
central office as well as CPE splitters and filters located in the home.
Recently, mPhase has introduced a line of innovative loop management products
intended to lower the operational costs involved with supporting DSL services.
The <i>i</i>POTS, (intelligent POTS Splitter), product line includes the <i>i</i>POTS<i>1</i>
and the <i>i</i>POTS<i>3</i>. These products mark a significant advancement in
automating loop management by utilizing &quot;intelligent functionality&quot; thereby
enabling testing of a telephone loop for DSL deployment without having to
dispatch personnel to the field to manually perform such tests. These products
reduce the operational costs of deploying and maintaining DSL services. The <i>i</i>POTS<i>3</i>
is an upgrade from the original <i>i</i>POTS<i>1</i>, allowing service providers
a 3-way view of the network and is compatible with DSLAM's of most vendors. The
<i>i</i>POTS<i>1</i> is designed for use only with the Lucent Stinger DSLAM. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; mPhase has established a worldwide non-exclusive distribution
agreement with Corning Cable Systems for the sale of the <i>i</i>POTS product
line. Utilizing Corning as a distribution channel potentially expands exposure
for this product, as Corning is one of the largest vendors of central office DSL
filtering equipment. In parallel, the Company continues to aggressively market
this product directly. </p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; mPhaseStretch&#153</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; mPhase has developed another product known as the mPhaseStretch&#153.
This product is a loop extender which enhances the performance of the legacy
Traverser&#153 DVDDS System by extending its transmission distance for the delivery
of voice, video and data up to 20,000 feet. The mPhaseStretch&#153 is a powered
device that is placed on the line at approximately 9,000 feet or before the
signal degrades. The addition of the Stretch gives mPhase what the Company
believes to be the greatest serviceable distance radius for the delivery of
converged services. Our current product is only compatible with the Traverser&#153
DVDDS. A universal version of the Stretch&#153, or a version interoperable with
other vendor's DSLAM equipment, (including the mPhase TV+/Lucent Stinger
solution) is currently being developed by mPhase. </p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; Microfilters</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; We have developed a complete line of microfilters, including a 2
and 4 pole filter for use in single and multiphone households, as well as a
network interface splitter. </p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; mPhase Television.Net, Inc.</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; mPhase Television. Net, Inc. (mPhase TV) has established
licensing agreements with content originators thus allowing service providers to
offer subscribers a full complement of U.S. television programming. mPhase TV
has secured rights to rebroadcast television content from U.S. network and cable
broadcasters. mPhase TV can offer programming content in the U.S. to U.S.
telephone service providers seeking to deploy either of mPhase's television
platforms. This eliminates the need for service providers from having to
negotiate many separate contracts with U.S. broadcast television programmers.
</p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; 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 that included 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 limited to providing the appropriate licenses and
relationships as opposed to offering a content aggregation solution. Telephone
companies purchasing content through mPhaseTV are required to build a full-scale
digital headend. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; In March of 2000, mPhase provided the initial funding for
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 Internal Inc. (Alphastar) to purchase
200,000 shares of our stock for $4.00 per share. The agreement required
Alphastar to provide mPhase Television the right to transmit television
broadcasts over Alphastar's digital satellite network. On May 1, 2000, we
acquired an additional 6.5% interest in mPhase Television for an additional
$1,500,000 in cash. We report mPhaseTV as a consolidated subsidiary. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; As part of its cost reduction efforts in fiscal year 2002,
mPhase renegotiated its joint venture relationship with Alphastar that
originally established mPhaseTV. Under the new arrangement, mPhaseTV terminated
its lease of the rights to use Alphastar's earth station satellite uplink and
downlink facility in Oxford, CT. Such facilities had enabled mPhaseTV to
aggregate television content from the multiple networks and content providers
eliminating the need for telecommunications service providers in the United
States from building a master headend as an additional cost to the Traverser&#153
DVDDS and TV+ platforms. As noted above, recent developments in technology have
significantly reduced the cost of such master headend facilities which
eliminates the need for mPhase to aggregate television content. mPhaseTV may
serve as a strategic asset for selling the mPhase's video over DSL solutions in
the U.S. by having secured the rights to transmit over DSL over a number of
television channels directly from the content providers. This eliminates the
need for a U.S. telecommunication services provider from purchasing either of
mPhase's television delivery platforms from having to assemble such rights
itself from each of the content providers. mPhase currently owns a 56%
controlling interest in mPhaseTV. </p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; Research and Development Activities</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; We have designed the Traverser&#153 and its ancillary component
parts in conjunction with Georgia Tech Research Institute which conducts a
majority of our digital research and development for the Traverser&#153 line of
products. Microphase Corporation contributed the analog technology incorporated
in the design of the Traverser&#153, as well as providing ongoing development of
analog components for the Traverser&#153. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; As of June 30, 2003, we had been billed approximately
$13,500,000 for research and development conducted by Georgia Tech Research
Institute (GTRC), of which approximately $1,770,480 remains outstanding. On
March 26, 1998, we entered into a license agreement with Georgia Tech which owns
the Digital Video and Data System technology. GTRC and its affiliates have
granted us the exclusive license to use and re-sell Traverser&#153 DVDDS worldwide.
We are obligated to pay Georgia Tech royalties of 5% on future sales of the
Traverser&#153DVDDS. The license agreement expires automatically when the patents
covering the invention expire. We are currently negotiating with Georgia Tech to
amend certain provisions of the agreement which would reduce the royalty in
connection with the settlement of mPhase's current account with GTRC. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; On February 13, 2003 mPhase announced that the Bell Labs
division of Lucent Technologies, Inc. would help redesign a cost-reduced
features enhanced version of mPhase's Traverser&#153 Intelligent Network Interface
digital set top box. The initial version of the newly- designed box will cost
approximately 50% less than mPhase original set top box. The newly designed set
top box will be developed in stages and will eventually support multiple
channels of television, an electronic programming guide, video-on-demand, MPEG-2
and MPEG 4 digital quality TV, video over IP and is compatible with both CAP and
DMT modulation. mPhase has contracted to pay Lucent a total of $625,000 relating
to the redesign and cost-reduction of its set top box and has paid as of March
31, 2003 $472,955 to Lucent representing installments due based upon percentage
of completion of the purchase order. In addition, mPhase has contracted to pay
Lucent $1,000,000 for development of its broadcast digital television switch and
integration of such switch with the Lucent Stinger resulting in mPhase's new
mPhaseTV+ Platform. As of March 30, 2003 mPhase has paid Lucent $100,000 for
such product and has an accrued balance of $200,000. mPhase is obligated to pay
Lucent $100,000 per month through November of 2003 for completion of the
mPhaseTV+ Platform. Finally, mPhase has recently entered into a new Development
Agreement, dated as of September 15, 2003, with Lucent to continue development
of new features and enhanced capabilities for its TV+ platform at a cost of
$1,190,000. </p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; Market</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; Currently, mPhase's target market for its television over DSL
solutions include telephone companies and telecommunications service providers
worldwide. By deploying converged voice, video and data over their existing
copper telephone infrastructure, telecommunications service providers can
increase revenue and profitability and retain valuable market share. In most
parts of the world, the telephone company is strongly positioned to be first to
market with an integrated bundle of communications services. There are over 1
billion telephone lines serving consumers around the globe compared to only
586.9 (source: Kagan World Media) million homes passed by cable. In today's
competitive telecommunications landscape, both the Traverser&#153 and the mPhaseTV+
platform have now become necessary solutions for all telecommunications service
providers to compete effectively in today's marketplace. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; We estimate that on average, a typical telco using either
mPhase's end-to-end system, the Traverser&#153 DVDDS, or it's mPhaseTV+ platform
utilizing the Lucent Stinger can generate significant revenue with a payback on
its initial investment in either system within 2-3 years depending on the size
and scope of the deployment. Importantly, this relatively short payback period
is still applicable in countries where the average cost of a basic cable
television package is well below the US average. The economics of mPhase's video
over DSL platforms are such that, for example, when charging as little as $7 per
month per subscriber for a basic television package, the system operator can
expect a full return on investment within a three-year period of time.
Furthermore, over 5 years a telecommunications service provider can achieved a
significantly higher rate of return on its investment in either of our TV
platforms than would be possible with deploying voice and data alone. mPhase has
developed a detailed and highly customizable return on investment model to
assist the telco in assessing its rates of return and profitability based on
additional revenue generated by the new services. </p>
<p>mPhase expects to derive the majority of its revenue from the sale of its
mPhaseTV+ television over DSL platform, developed in conjunction with Lucent
Technologies, for a number of reasons: </p>
<ol>
  <li>
<p ALIGN="JUSTIFY">The platform has been designed to achieve maximum cost
efficiencies. Initial versions of this product will be cost-competitive with the mPhase Traverser&#153 DVDDS. However, because this solution utilizes the Lucent
Stinger for transport, continued price reductions are expected. It is
anticipated that as Lucent continues to drive down the cost of the Stinger and
as further engineering efforts are completed in the Stinger to better and more
efficiently support broadcast video services, we believe the total per port cost
of the mPhaseTV+ platform will be the most cost-effective solution available on
the market. <br>
&nbsp;</p>
  </li>
  <li>
<p ALIGN="JUSTIFY">mPhase believes its business partnership with Lucent will
help validate our products and result in greater sales. mPhase will be able to
leverage Lucent's relationships with its estimated 250 business partners around
the globe, thereby increasing exposure for its mPhaseTV+ product set
significantly. <br>
&nbsp;</p>
  </li>
  <li>
<p ALIGN="JUSTIFY">The mPhaseTV+ platform more effectively supports the
delivery of data services than the Traverser&#153 DVDDS. Therefore, in markets where
large-scale data deployments will be required, the mPhaseTV+ platform brings to
mPhase a new competitive advantage. By contrast, the Traverser&#153 DVDDS is better
suited for deployments where the support of television services is the primary
and long-term objective, such as in commercial settings. </p>
  </li>
</ol>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; mPhase is currently targeting international incumbent
telephone companies and rural independent domestic local exchange carriers for
sale of its TV over DSL platforms. The Company expects to derive the majority of
its system sales abroad, specifically from telephone service providers in
Europe, Latin America, Asia and Africa. Additionally, the modular video elements
of mPhase's mPhaseTV+ platform (i.e., the BTS and INI) can be retrofitted to
existing Lucent Stinger deployments. mPhase, through the support of Lucent,
anticipates targeting many of the customers of Lucent that currently have
deployed over 4 million ports of the Stinger data and voice delivery product in
over 20 countries around the globe. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; mPhase believes that foreign telco markets will adopt its TV
over DSL product solutions more rapidly than domestic service providers since
there is not generally the demand outside of the United States for robust cable
features (such as simultaneous delivery of 3 different TV channels through one
set top box) as there is in the United States. Therefore, the Company has placed
much of its initial emphasis on targeting the international telco market. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The demand for alternative television options is high in
Europe, Asia and Latin America. According to the Yankee Group, European
countries have been early adopters of video-over-DSL and alternative video
delivery technologies, deploying and testing services more aggressively than
North America. These markets possess pockets of moderate to high-income
households willing and able to purchase advanced digital services, but very few
alternatives exist. According to the Gartner Group, another industry analyst,
the number of carriers in the Europe, Middle East and African regions planning
on deploying video over DSL services has &quot;leapt from 40 percent to almost 75% in
2002.&quot; Analysts from the Gartner Group commented that, &quot;This is a clear sign
that carriers realize they need to move upstream with broadband value-added
services.&quot; </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Cable television and digital broadcast satellite (DBS)
services are less competitive internationally than in North America. Because of
the limited expansion of cable, especially two-way digital cable and satellite
networks abroad, access to advanced communications services such as high-speed
Internet and digital television in many areas is limited to copper-based
delivery methods. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Parts of the world representing the largest opportunities for
mPhase include Latin America, Eastern Europe and parts of Africa. For instance,
multichannel television service providers in Latin America have only penetrated
18.3% of the 94.7 million television-owning households (source: Kagan World
Media). In Latin American telecommunications service providers deploying one of
mPhase's solutions for TV over DSL will be able to offer television services at
very competitive rates. Currently, multichannel television services are only
available to the top-tier consumers in Latin America as well as in other
developing parts of the world. mPhase's return on investment models indicate
that telecommunications service providers charging as little as $7 a month for
basic services can anticipate a return on investment within a very short period
of time. This attractive business model will help make digital multichannel
television service available to a large number of potential new users. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The U.S. multichannel television market is highly
competitive, because the penetration of cable services in North America is much
higher than the rest of the world and there are numerous service options for
multichannel pay TV customers, telecommunications service providers must provide
incentives for cable television subscribers to switch service providers.
However, in foreign markets, where (a) there is a high penetration of television
sets, a very limited number of broadcast television channels are received using
antennas from &quot;through-the-air&quot; broadcast and (b) direct-to-home satellite
providers cannot currently support the delivery of reliable, two-way data
services. In such markets we believe that a telephone company is much better
positioned to be the initial and primary provider of bundled converged services.
</p>
<p>&nbsp;&nbsp;&nbsp; The following table represents the estimated number of television viewers in
select countries. </p>
</font><b>
<table CELLSPACING="0" BORDER="0" WIDTH="75%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="381">&nbsp;</td>
    <td WIDTH="269" align="right">
    <font FACE="Times New Roman" size="2">TV</font></td>
    <td WIDTH="278" align="right">
    <font FACE="Times New Roman" size="2">*Multichannel</font></td>
  </tr>
  <tr>
    <td WIDTH="381">&nbsp;</td>
    <td WIDTH="269" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">Households</font></td>
    <td WIDTH="278" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">Subscribers</font></td>
  </tr>
  <tr>
    <td WIDTH="381">&nbsp;</td>
    <td WIDTH="269" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="278" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="381">&nbsp;</td>
    <td WIDTH="547" COLSPAN="2" align="right">
    <font FACE="Times New Roman" size="2">(in millions)</font></td>
  </tr>
  <tr>
    <td WIDTH="381" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    Worldwide</font></td>
    <td WIDTH="269" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">994</font></td>
    <td WIDTH="278" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">430.55</font></td>
  </tr>
  <tr>
    <td WIDTH="381"><font FACE="Times New Roman" size="2">Asia</font></td>
    <td WIDTH="269" align="right">
    <font FACE="Times New Roman" size="2">519.3</font></td>
    <td WIDTH="278" align="right">
    <font FACE="Times New Roman" size="2">207.6</font></td>
  </tr>
  <tr>
    <td WIDTH="381" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Europe</font></td>
    <td WIDTH="269" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">233.3</font></td>
    <td WIDTH="278" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">94.8</font></td>
  </tr>
  <tr>
    <td WIDTH="381"><font FACE="Times New Roman" size="2">Latin
    America</font></td>
    <td WIDTH="269" align="right">
    <font FACE="Times New Roman" size="2">118.7</font></td>
    <td WIDTH="278" align="right">
    <font FACE="Times New Roman" size="2">24</font></td>
  </tr>
  <tr>
    <td WIDTH="381" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">North
    America</font></td>
    <td WIDTH="269" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">112.7</font></td>
    <td WIDTH="278" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">104.15</font></td>
  </tr>
  </table>
</b>
<font FACE="Times New Roman" size="2">
<p>*</font><font FACE="Times New Roman PS" SIZE="5"><font FACE="Times New Roman PS" SIZE="2"> Multichannel subscribers
includes cable and DBS subscribers <br>
Source: Global Multichannel Markets 2002: Performance and Projections for 59
countries. Kagan World Media. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Competition in the telco market is becoming increasingly
aggressive due to changing telecommunications regulation, heightened competitive
threats from alternative technologies, such as cable and digital broadcast
satellite, and price declines in local and long distance telephony services. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Domestic telecommunications service providers face difficulty
in maintaining market share and revenue. Price declines in traditional voice
services and the proliferation of Internet telephony are impacting operating
margins. mPhase believes that the independent, rural domestic telco is the
especially vulnerable to these competitive threats and has a need to develop new
product delivery capabilities to increase revenues and margins. However,
independent telecommunications service providers are not as well capitalized as
the larger domestic regional bell operating companies and other large incumbent
service providers and therefore tend to be very cost conscious in equipment
deployment. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In areas where there is sparse cable deployment, or the cable
infrastructure is antiquated, there is an increasing demand for better quality
of service, more programming channels and additional services. The independent
telecommunications service providers operating in these areas can benefit from
the incremental revenue generated by services offered through mPhase's
TV-over-DSL platforms. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Beyond selling its solution to telephone companies, mPhase
believes it will eventually experience success in serving the global
multi-dwelling unit (MDU) market. This market consists of large residential or
multi-office complexes, hotels, and campus environments. The MDU can effectively
become its own multichannel television content distributor using either the
Traverser&#153 or the mPhaseTV+ solution by building a digital video head-end to
downlink broadcast television programming and installing mPhase's equipment. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; mPhase is in the process of evaluating market opportunities
in North America and around the world to address commercial applications of the
Traverser&#153 DVDDS and TV+ platforms. However, the Company believes that
commercial sales to manufacturing or enterprise customers will only represent a
marginal source of revenue because of the limited scope and demand for internal
broadcasting networks in the commercial market. </p>
<p><b>Sales Strategy </b> </p>
</font><font FACE="Times New Roman" SIZE="3">
<p ALIGN="left"></font>

<font FACE="Times New Roman PS"><font FACE="Times New Roman" size="2"><i>
&nbsp;&nbsp;&nbsp;
TV over DSL products</i> </font></p>
</font>

<font FACE="Times New Roman PS" SIZE="2">
<p ALIGN="left"><font FACE="Times New Roman">&nbsp;&nbsp;&nbsp; mPhase will
pursue sales opportunities through a variety of channels, including direct sales
by the Company's internal sales team, distributors and in conjunction with
Lucent Technologies, Inc. </p>
</font>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; mPhase's most recent product offering, the mPhaseTV+ was
designed to utilize Lucent Technologies' Stinger for transport. By adding an
mPhase BTS at the central office and mPhase's standards-based digital set top
box at the customer premises, mPhaseTV+ services can be added anywhere the
Stinger is or going to be deployed. The Lucent Stinger is an already proven
solution with over 4 million ports deployed in 20 countries around the globe. In
parts of the world lacking cable infrastructure where the Stinger is deployed
represents an opportunity to retrofit these deployments with television
services. And for new deployment opportunities, </p>
</font><font FACE="Times New Roman" size="2">
<p align="left">&nbsp;&nbsp;&nbsp; mPhase will be able to leverage the Lucent brand and the
reputation of the Stinger as a highly scaleable and cost-effective transport
medium. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; mPhase has also established a reseller agreement with Lucent,
making it a part of Lucent's Global Business Partner organization. As a result
of this agreement, mPhase can sell carriers a complete solution by reselling the
Lucent Stinger along with mPhase's BTS and Traverser&#153 INI Set Top Box. In
addition, mPhase and Lucent are developing a joint marketing program. As part of
this program, the two companies will identify target markets where their
combined television, voice and data over DSL solution is most competitive.
Together, Lucent and mPhase will approach Lucent's established global business
partners with the mPhaseTV+ solution for further marketing to targeted
telecommunications service providers. This partnership represents a tremendous
opportunity for mPhase, as Lucent has over 250 business partners in more than 40
countries around the globe. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; In markets where Lucent is directly selling into accounts deemed
to be strong potential markets, the two companies can collaborate their efforts
to bring forth a compelling product solution. </p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; Joint Venture Opportunities</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; There also exist opportunities for mPhase to capture recurring
revenue from the sale and deployment of its video over DSL systems through a
joint venture business model. Under this scenario, mPhase would sell its
equipment to a joint venture company, of which mPhase retains a minority
position. This company would negotiate either a line leasing or revenue share
program with the incumbent telephone company and subsequently deploy and operate
one of mPhase's television over DSL platforms. mPhase believes a JV may provide
additional opportunities for sales to international telephone carriers that may
not have the funds to procure mPhase's television over DSL system, yet recognize
the potential business opportunity for such a platform. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; Funding of the equipment and operation of the system would be
the responsibility of the JV. Member companies of the JV would include entities
interested in controlling television services such as the government and large
media groups. For example, mPhase is pursuing a JV in Turkey where the funding
partners include companies that own newspapers and television stations that are
looking to expand their revenues. Although a JV requires greater involvement
from mPhase in terms of organizing and coordinating the appropriate parties, the
long term potential benefits to mPhase are great. mPhase would not only secure
equipment sales, but would benefit from the recurring revenues from a JV engaged
in being a broadcast television service provider. </p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; DSL Component Products</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; mPhase also sells a line of DSL component products including:
POTS Splitter Shelves <i>i</i>POTS Splitters, in-line microfilters, Continuity
Test Cards and Network Intelligent Device splitters. These products are
essential components to any DSL installation, regardless of the DSL equipment
vendor. The mPhase components are interoperable with Digital Subscriber Line
Access Multiplexing equipment from a broad range of DSL manufacturers. Potential
customers for the DSL component products include other DSL equipment
manufacturers, re-sellers, network integrators and telecommunications service
providers deploying DSL worldwide. </p>
<p align="left">&nbsp;&nbsp;&nbsp; To date, mPhase has deployed over 250,000 POTS Splitter ports.
The mPhase DSL component products are sold both by mPhase directly as well as
through established distribution agreements. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; The Company recognizes the current depressed market conditions
that pervade the telecommunications equipment industry. However, the Company has
begun to experience a rebound in the market and anticipates sales to increase in
the second half of calendar year 2003. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; We are continuously in discussions with various original
equipment manufacturers of telecommunications equipment to identify
opportunities for joint bids for infrastructure deployment with major domestic
and international telecommunications service providers. We also continue to
market our component products directly. </p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; Intellectual Property, Patents and Licenses</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; 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. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; 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 regarding patent protection 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 that 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 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The intellectual property owned and licensed by us falls into
two general categories, analog and digital intellectual property. We have a
pending patent application that was filed in June 1999 claiming priority to
three provisional patent applications for the analog portion of our technology
used in relation to the Traverser&#153 DVDDS platform. </p>
<p>&nbsp;&nbsp;&nbsp; Our DSL filter technology enables increased video clarity over copper wire,
longer transmission distances and decreased signal error rate. The intellectual
property related to the DSL filters includes: </p>
<p>low pass filter shelves and POTS Splitters, which combine the Traverser&#153 DSL
spectrum from the traditional voice service; and </p>
<p ALIGN="JUSTIFY">ADSL filters, which are filters that conform to the worldwide
DSL standard and are utilized in the transmission of data and voice service at
up to 8 Mbps. We believe that both of these components are key to providing a
DSL signal at sufficient quality and service distances for combined video and
data delivery. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; We license our digital intellectual property. We also have an
exclusive, worldwide license to manufacture and market products using the
technology developed by Georgia Tech under our contract with them. The exclusive
license with Georgia Tech is applicable for the duration of their patent
protecting the system design and other technology related to the Traverser&#153
DVDDS platform. </p>
<p>&nbsp;&nbsp;&nbsp; The licensed patented and patent-pending technology developed at Georgia Tech
covers the capabilities of the Traverser&#153 DVDDS. </p>
<p>&nbsp;&nbsp;&nbsp; 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The digital intellectual property that we license provides
several unique aspects of the Traverser&#153 DVDDS. Among these 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,
or could be watching different channels with no degradation of service. The
proprietary design, which does not incorporate a Digital Subscriber Line Access
Multiplexer architecture, makes the Traverser&#153 DVDDS a true broadcast system
rather than a mere video delivery system. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The patent 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 covers the development of the Framer
and the Framer chip. The Framer is an Integrated Circuit which gives the
Traverser&#153 the capability of allocating both the downstream and upstream
bandwidth into virtually any application required. This feature allows the
Traverser&#153 to deliver both MPEG-2 Digital Video and Internet data simultaneously
and also allows for future applications of the Traverser&#153. This technology is
exclusively licensed worldwide to mPhase Technologies, Inc.The patent 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. </p>
<p>&nbsp;&nbsp;&nbsp; We also have patents pending that protect: </p>
<p ALIGN="JUSTIFY">the software management and control of the individual
Traverser&#153 links, the DVDDS, and the channel changing methodology and interface
to the electronic program guide at the customer site through the Intelligent
Network Interface; </p>
<p>apparatus and methods of remote control of the Intelligent Network Interface;
and, </p>
<p>systems and methods to provide subscribers means to playback previously
recorded video content. </p>
<p>&nbsp;&nbsp;&nbsp; We purchase from GlobeSpan telecommunication rate adaptive DSL chipsets used
in the Traverser&#153 DVDDS. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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&#153 technology,
our future operations could be adversely affected. </p>
<p align="left"><b>Regulation</b> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; The Federal Communication Commission, or FCC, and various state
public utility and service commissions, regulate most of our 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 our potential
penetration into certain markets. In addition, our business and results of
operations may also be adversely affected by the imposition of certain tariffs,
duties and other import restrictions on components which we obtain from
non-domestic component suppliers. Changes in current or future laws or
regulations, in the U.S. or elsewhere, could materially adversely affect our
business. </p>
<p align="left"><b>Competition</b> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; mPhase competes with broadband equipment manufacturers including
cable and digital broadcast satellite equipment manufacturers, as well as other
equipment vendors manufacturing DSL and/or video over DSL equipment. The global
telco customer base has the ability to adopt other forms of content distribution
if it chooses to compete in the multi-channel home entertainment market.
However, mPhase believes its television platforms are attractive to a broader
range of customers of telecommunication service providers. The following
sections outline the competitive landscape for mPhase. </p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; Direct Broadcast Satellite Services</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; In the US, direct broadcast satellite (DBS) providers have
experienced increased market penetration over the past few years. DBS service is
the only alternative television delivery method in rural areas where cable has
not been deployed, or antiquated analog cable is predominant. However, in some
cases, DBS service does not include local off-air channels and most DBS
operators are not able to provide competitively-priced wireless high-speed
Internet service. Technology enabling two-way, high-speed Internet access over
DBS is relatively new and we expect it will take time to reach broad market
acceptance as a cost-effective, reliable data delivery method. </p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; Cable Television Network Operators</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; Although the cable industry is our indirect competitor, the
Company believes that two-way cable service provides incentive to
telecommunications service providers to explore additional services. Cable
companies pose a serious competitive threat to telephone company market share.
However, in order for cable companies to compete for high-speed Internet and
telephony customers, the cable plant must be upgraded to two-way digital cable.
Cable companies have invested large amounts of capital to upgrade dense service
population areas in the US. However, cable operators typically underserved less
densely populated regions with antiquated analog cable systems. Outside of the
U.S., very little two-way cable plants have been installed. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; Telecommunications service providers around the world have the
incentive to deploy TV-over-DSL solutions either because of the threat of the
cable companies, or because of the lack of cable infrastructure. The Company
believes that its TV over DSL platforms are the most cost effective and robust
video delivery technology deployable by our primary target market of
international telecommunications service providers. Installing our platforms
will facilitate telephone companies in retaining and capturing market share, as
well as generating incremental revenue. mPhase's Traverser&#153 DVDDS and mPhaseTV+
solutions enable telecommunications service providers to compete effectively in
a converging services market with a &quot;triple play&quot; of services-digital
television, high-speed data and voice services in an attractive bundled package.
</p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; Other DSL and Video over Copper (VoC) Equipment Manufacturers</i>
</p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; mPhase competes with vendors of DSL equipment and system
software. Companies that supply DSL technology including 2Wire, ADC telecom,
Advanced Fiber Communications, Alcatel, Broadcom, Copper Mountain, Corning Cable
System, Ericson, Fujutsu, Motorola, Minerva, ECI Telecom, Turnstone, Westell,
Teradyne, TuT Systems, Marconi Communications, NEC, Nokia, Paradyne, Samsung,
Texas Instruments, DVTel, Inc. Pace Micro Tech., Net to Net, and Myrio. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; Other Video-over-DSL technologies compete with the Traverser&#153
DVDDS and TV+ platforms are summarized below. </p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; Differentiating Factors</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; mPhase believes that it offers the most reliable, scaleable and
cost effective television over copper solutions. The mPhase TV over DSL
solutions were designed specifically to enable delivery of broadcast television
over DSL. Both the Traverser&#153 DVDDS and the mPhaseTV+ platform are basic
solutions for delivery of digital broadcast television over DSL without
expensive features such as interactive television, video-on-demand and
simultaneous multi channel delivery over a copper telephone line. Such features
can be added to our platforms depending upon demand. mPhase television products
are solutions for parts of the world that are in need of &quot;just TV&quot; rather than
costly, feature rich solutions. We believe there is a significant market that is
not currently serviced world wide for delivery of broadcast
television programming on a cost-effective basis. mPhase's streamlined solutions
are designed to be the most cost-effective in emerging international markets. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; There are a number of telecommunications equipment providers
competing in the television over DSL space. For instance, a new division of
Motorola (formerly known as Next Level Communications) has secured over 100
customers predominantly in the United States. The majority of their video
deployments utilize a specific form of DSL known as VDSL (very fast digital
subscriber line). VDSL requires that telecommunications service providers
install fiber optics into the neighborhood, or close to the customer premises
because signals can only travel up to 3-4,000 feet over copper telephone wires.
As a result, compared to the mPhase solutions, the platform is significantly
more capital intensive and therefore expensive due to the cost of the
infrastructure upgrade (i.e., installing fiber optics closer to the customer
premises). Motorola has also introduced an ADSL version of its equipment, which
has a serviceable distance radius of approximately 8,000 feet. This newer
product could compete more directly with both of mPhase's TV over DSL solutions.
Motorola's Television over DSL products tend to be more feature rich and
expensive than mPhase's solutions. Motorola concentrates the majority of its
sales efforts within the US market where consumers demand a robust viewing
experience due to the penetration of fiber and cable. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; Another company that sells equipment similar to mPhase is
Alcatel. Alcatel is the leading supplier of DSLAMS (digital subscriber line
access multiplexers) around the globe. Alcatel has deployed several video over
DSL trials although its largest, with Aliant Telecom in Canada, was
discontinued. Historically, Alcatel has worked with multiple equipment vendors
to create a complete, end-to-end video solution, including software providers
and set top box provider, Pace. Recently Alcatel acquired iMagicTV, adding to
its product line for delivery of television over DSL. Alcatel recently announced
upgrades to its DSLAM line or products to better support the delivery of
converged voice, video and data. </p>
<p align="left">&nbsp;&nbsp;&nbsp; Other major competition in the DSLAM market include UT Starcom
and HUWAEI Company. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; Lucent also offers another video-over-DSL solution currently
deployed at SakTel in Canada. This solution, similar to Motorola's products,
offers greater functionality and features, however is more costly in terms of
per port equipment cost than the mPhaseTV+ platform. Finally, other smaller
vendors are emerging, partnering with third party equipment vendors to create a
video-over-DSL platform. Equipment providers such as Net to Net and Paradyne are
modifying their data platforms to support the delivery of television services.
However, mPhase believes it has certain cost of equipment advantages over other
vendors making its system more economically viable for potential customers. The
Company believes that the strength of the video-centric BTS coupled with the
strength of the data-centric Lucent Stinger make its solution extremely
competitive in its target markets. </p>
<p ALIGN="left"><i>&nbsp;&nbsp;&nbsp; Headend Equipment Providers</i> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; As discussed earlier, mPhase does not manufacturer digital head
end gear. All customers interested in deploying an mPhase video over DSL system
must build a digital headend to receive, digitize and groom the television
signals. Through extensive lab and field testing, mPhase has established an
approved vendor list of several headend providers. </p>
<p align="left"><b>Employees</b> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; We presently have thirteen (13) full employees, two (2) of whom
are also employed by Microphase Corporation. See the description in the section
entitled &quot;Certain Relationships and Related Transactions.&quot; Properties. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; We maintain our corporate headquarters at 587 Connecticut
Avenue, Norwalk, Connecticut 06854, under a facilities agreement with Microphase.
The agreement with Microphase provides that we lease office space, lab
facilities and administrative staff on a month-to-month basis. </p>
<p align="left">&nbsp;&nbsp;&nbsp; We also maintain an office and research facility at Georgia Tech
in Atlanta, Georgia as part of our basic ordering agreement with Georgia Tech.
</p>
</font><b>
<hr><p Style='page-break-before:always'><font FACE="Times New Roman">
<p align="center"><a name="legalproceeds"></a>LEGAL PROCEEDINGS </p>
</font></b><font FACE="Times New Roman" size="2">
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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 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. </p>
<p>&nbsp;&nbsp;&nbsp; From time to time we may be involved in various legal proceedings and other
matters arising in the normal course of business. </p>
</font><b>
<font FACE="Times New Roman">
<p align="center"><a name="ourmgmt"></a>OUR MANAGEMENT </p>
</font><font FACE="Times New Roman" size="2">
<p>Executive Officers and Directors </p>
</font></b><font FACE="Times New Roman" size="2">
<p>&nbsp;&nbsp;&nbsp; Our officers and directors, and their ages, as of June 30, 2003, are as
follows: </p>
</font><b>
<table CELLSPACING="0" BORDER="0" WIDTH="70%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="398"><font FACE="Times New Roman" size="2">Name</font></td>
    <td WIDTH="184" align="right">
    <font FACE="Times New Roman" size="2">Age</font></td>
    <td WIDTH="464" align="right">
    <font FACE="Times New Roman" size="2">Position(s)</font></td>
  </tr>
  <tr>
    <td WIDTH="398" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Necdet
    F. Ergul</font></td>
    <td WIDTH="184" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">80</font></td>
    <td WIDTH="464" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">Chairman of the Board
    and Director</font></td>
  </tr>
  <tr>
    <td WIDTH="398"><font FACE="Times New Roman" size="2">Ronald
    A. Durando</font></td>
    <td WIDTH="184" align="right">
    <font FACE="Times New Roman" size="2">46</font></td>
    <td WIDTH="464" align="right">
    <font FACE="Times New Roman" size="2">President, Chief
    Executive Officer And Director</font></td>
  </tr>
  <tr>
    <td WIDTH="398" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Gustave
    T. Dotoli (2)</font></td>
    <td WIDTH="184" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">68</font></td>
    <td WIDTH="464" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">Chief Operating Officer
    and Director</font></td>
  </tr>
  <tr>
    <td WIDTH="398"><font FACE="Times New Roman" size="2">Martin
    S. Smiley</font></td>
    <td WIDTH="184" align="right">
    <font FACE="Times New Roman" size="2">56</font></td>
    <td WIDTH="464" align="right">
    <font FACE="Times New Roman" size="2">Executive Vice
    President, Chief Financial Officer</font></td>
  </tr>
  <tr>
    <td WIDTH="398">&nbsp;</td>
    <td WIDTH="184" align="right">&nbsp;</td>
    <td WIDTH="464" align="right">
    <font FACE="Times New Roman" size="2">and General Counsel</font></td>
  </tr>
  <tr>
    <td WIDTH="398" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">David
    L. Klimek</font></td>
    <td WIDTH="184" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">50</font></td>
    <td WIDTH="464" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">Chief Technology
    Officer and Director</font></td>
  </tr>
  <tr>
    <td WIDTH="398"><font FACE="Times New Roman" size="2">Anthony
    H. Guerino, Esq. (1)(2)</font></td>
    <td WIDTH="184" align="right">
    <font FACE="Times New Roman" size="2">58</font></td>
    <td WIDTH="464" align="right">
    <font FACE="Times New Roman" size="2">Director</font></td>
  </tr>
  <tr>
    <td WIDTH="398" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Abraham
    Biderman (1)(2)</font></td>
    <td WIDTH="184" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">55</font></td>
    <td WIDTH="464" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">Director</font></td>
  </tr>
  <tr>
    <td WIDTH="398"><font FACE="Times New Roman" size="2">Michael
    P. McInerney</font></td>
    <td WIDTH="184" align="right">
    <font FACE="Times New Roman" size="2">48</font></td>
    <td WIDTH="464" align="right">
    <font FACE="Times New Roman" size="2">Director</font></td>
  </tr>
</table>
</b>
<font FACE="Times New Roman" size="2">
<p>(1) Member of Audit Committee. <br>
(2) Member of Compensation Committee. </p>
<p>The following is biographical information about each of our Officers and
Directors. </p>
<i>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Necdet F. Ergul</i> has served as our Chairman of the Board
since October 1996 with the exception of a three-month period in 2000 when he
temporarily resigned. Mr. Ergul also currently serves as the President and Chief
Executive Officer of Microphase Corporation, a leading developer of military
electronic defense and telecommunications technology, which he founded in 1955.
He is also a Director of Janifast Ltd. 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. </p>
<i>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Ronald A. Durando</i> is a co-founder of mPhase Technologies,
Inc. and has served as our President, Chief Executive Officer and a Director
since its inception in October 1996. In addition, Mr. Durando has been the Chief
Operating Officer of Microphase Corporation since 1994. From 1986 to 1994, he
was President and Chief Executive Officer of Nutley Securities, Inc., a
registered broker-dealer. He is also Chairman of the Board of Janifast Ltd., a
Hong Kong corporation for operational and manufacturing companies in China. Mr.
Durando is also President and Chief Executive Officer and Director of
PacketPort.com, Inc. </p>
<i>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Gustave T. Dotoli</i> has served as our Chief Operating
Officer and a Director since our inception in October 1996. In addition, Mr.
Dotoli has been the Vice President of Corporate Development of Microphase
Corporation since December of 1996. Mr. Dotoli is also a Director and Vice
President Corporate Secretary of PacketPort.com, Inc. He formerly was 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 Dickinson University in 1959. </p>
<i>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; David Klimek</i> is a co-founder of mPhase Technologies, Inc.
and has served as our Chief Technology Officer since June 1997 and as Director
of Engineering since its inception in October 1996. Mr. Klimek joined our 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&amp;D manager of Digital Controls, Inc. Mr. Klimek holds a B.S. in Electrical
Engineering from Milwaukee School of Engineering, Milwaukee, Wisconsin. </p>
</font>

<font FACE="Times New Roman PS" SIZE="2"><i>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Michael P. Mcinerney</i> is President of Lintel, Inc.
subsidiaries; Hart Telephone Company, a 10,000-line local exchange carrier in
Northeast Georgia, Hart Communications, a telecommunication company, Hart Cable,
a cable television company and Diversified Golf. Mr. McInerney was 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&amp;T. Mr. McInerney earned a Masters of Business
Administration degree at Winthrop college and a B.S. degree at the University of
Vermont. </p>
<i>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Anthony H. Guerino</i> 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. </p>
<i>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Abraham Biderman</i> has been a member of our board since
August 3, 2000. Mr. Biderman is Executive Vice President of Lipper &amp; Company;
Executive Vice President, Secretary and Treasurer of The Lipper Funds; and
Co-Manager of Lipper Convertibles, L.P. Prior to joining Lipper &amp; Company 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. </p>
<i>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Martin Smiley</i> joined us as Executive Vice President,
Chief Financial Officer and General Counsel on August 20, 2000. With over twenty
years experience as a corporate finance and securities attorney and as an
investment banker, Mr. Smiley serves as mPhase's strategic financial leader.
Prior to joining the Company, Mr. Smiley served as a Principal at Morrison &amp;
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. </p>
<p><b>Board Committees </b> </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Our Board of Directors has an audit committee and a
compensation committee. The audit committee approves of our independent
accountants and determines the appropriateness of their fees, reviews the scope
and results of the audit plans of the independent accountants, oversees the
scope and adequacy of our internal accounting control and record-keeping systems
and confers independently with the independent accountants. The audit committee
consists of Messrs. Biderman, and Guerino. Consistent with NASD regulations, an
audit charter was developed and adopted by the Board and the audit committee on
August 2, 2000. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The compensation committee makes recommendations to our Board
of Directors regarding our stock incentive plans and all matters of
compensation. The compensation committee consists of three (3) Directors,
Messrs. Biderman, Dotoli and Guerino. </p>
<p><b>Director Compensation </b> </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; For their attendance of Board and Committee meetings, we
compensate the Directors in cash as well as in the form of stock options granted
under our Stock Incentive Plan, which grants are included in the table &quot;Security
Ownership of Certain Beneficial Owners and Management&quot; and the notes thereto.
</p>
<p><b>Executive Compensation </b> </p>
<p>The following table sets forth, for the fiscal year ended June 30, 2003 and
the two previous fiscal years, the compensation paid by us to, as well as any
other compensation paid to or earned by, </p>
<p>our Chief Executive Officer; and </p>
<p ALIGN="JUSTIFY">our four most highly compensated executive officers, other
than the Chief Executive Officer, whose compensation during the fiscal year
ended June 30, 2003 was greater than $100,000 for services rendered to us in all
capacities during such year. </p>
</font><b>
<font FACE="Times New Roman" style="font-size: 11pt">
<hr><p Style='page-break-before:always'></font>

<font FACE="Times New Roman PS">
<p align="center">Summary Compensation Table </p>
</font>
<table CELLSPACING="0" BORDER="0" WIDTH="80%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="269">&nbsp;</td>
    <td WIDTH="361" COLSPAN="3" align="right">
    <font FACE="Times New Roman" style="text-decoration: underline" size="2">
    <p align="center">Annual Compensation</font></td>
    <td WIDTH="419" COLSPAN="3" align="right">
    <font FACE="Times New Roman" style="text-decoration: underline" size="2">
    <p align="center">Long-Term Compensation</font></td>
  </tr>
  <tr>
    <td WIDTH="269">&nbsp;</td>
    <td WIDTH="77" align="right">&nbsp;</td>
    <td WIDTH="149" align="right">&nbsp;</td>
    <td WIDTH="135" align="right">&nbsp;</td>
    <td WIDTH="145" align="right">&nbsp;</td>
    <td WIDTH="139" align="right">&nbsp;</td>
    <td WIDTH="135" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="269"><font FACE="Times New Roman" size="2">Name
    And</font></td>
    <td WIDTH="77" align="right">&nbsp;</td>
    <td WIDTH="149" align="right">&nbsp;</td>
    <td WIDTH="135" align="right">&nbsp;</td>
    <td WIDTH="284" COLSPAN="2" align="center">
    <font FACE="Times New Roman" size="2">Securities</font></td>
    <td WIDTH="135" align="right">
    <font FACE="Times New Roman" size="2">Restricted</font></td>
  </tr>
  <tr>
    <td WIDTH="269">&nbsp;</td>
    <td WIDTH="77" align="right">&nbsp;</td>
    <td WIDTH="149" align="right">&nbsp;</td>
    <td WIDTH="135" align="right">&nbsp;</td>
    <td WIDTH="284" COLSPAN="2" align="center">
    <font FACE="Times New Roman" size="2">Underlying</font></td>
    <td WIDTH="135" align="right">
    <font FACE="Times New Roman" size="2">Stock</font></td>
  </tr>
  <tr>
    <td WIDTH="269">&nbsp;</td>
    <td WIDTH="77" align="right">&nbsp;</td>
    <td WIDTH="149" align="right">&nbsp;</td>
    <td WIDTH="135" align="right">&nbsp;</td>
    <td WIDTH="284" COLSPAN="2" align="center">
    <font FACE="Times New Roman" size="2">Options/Sars</font></td>
    <td WIDTH="135" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="269"><font FACE="Times New Roman" size="2">
    Principal Position</font></td>
    <td WIDTH="77" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">Year</font></td>
    <td WIDTH="149" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">Salary</font></td>
    <td WIDTH="135" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">Bonus</font></td>
    <td WIDTH="145" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">Award(s)</font></td>
    <td WIDTH="139" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">(Shares)</font></td>
    <td WIDTH="135" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">(Shares)</font></td>
  </tr>
  <tr>
    <td WIDTH="269">&nbsp;</td>
    <td WIDTH="77" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="149" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="135" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="145" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="139" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="135" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="269" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Ronald
    A. Durando(1)(2)</font></td>
    <td WIDTH="77" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">2003</font></td>
    <td WIDTH="149" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$234,504</font></td>
    <td WIDTH="135" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="145" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="139" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="135" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">450,000</font></td>
  </tr>
  <tr>
    <td WIDTH="269"><font FACE="Times New Roman" size="2">&nbsp;
    Chief Executive Officer</font></td>
    <td WIDTH="77" align="right">
    <font FACE="Times New Roman" size="2">2002</font></td>
    <td WIDTH="149" align="right">
    <font FACE="Times New Roman" size="2">388,504</font></td>
    <td WIDTH="135" align="right">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="145" align="right">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="139" align="right">&nbsp;</td>
    <td WIDTH="135" align="right">
    <font FACE="Times New Roman" size="2">1,850,000</font></td>
  </tr>
  <tr>
    <td WIDTH="269" style="border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">&nbsp; and President</font></td>
    <td WIDTH="77" align="right" style="border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">2001</font></td>
    <td WIDTH="149" align="right" style="border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">395,004</font></td>
    <td WIDTH="135" align="right" style="border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="145" align="right" style="border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="139" align="right" style="border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="135" align="right" style="border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">1,225,000</font></td>
  </tr>
  <tr>
    <td WIDTH="269" style="border-top-style: solid; border-top-width: 1">
    <font FACE="Times New Roman" size="2">Gustave T. Dotoli(1)(2)</font></td>
    <td WIDTH="77" align="right" style="border-top-style: solid; border-top-width: 1">
    <font FACE="Times New Roman" size="2">2003</font></td>
    <td WIDTH="149" align="right" style="border-top-style: solid; border-top-width: 1">
    <font FACE="Times New Roman" size="2">193,254</font></td>
    <td WIDTH="135" align="right" style="border-top-style: solid; border-top-width: 1">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="145" align="right" style="border-top-style: solid; border-top-width: 1">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="139" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="135" align="right" style="border-top-style: solid; border-top-width: 1">
    <font FACE="Times New Roman" size="2">350,000</font></td>
  </tr>
  <tr>
    <td WIDTH="269" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">&nbsp;
    Chief Operating Officer</font></td>
    <td WIDTH="77" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">2002</font></td>
    <td WIDTH="149" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">313,504</font></td>
    <td WIDTH="135" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="145" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="139" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="135" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">1,225,000</font></td>
  </tr>
  <tr>
    <td WIDTH="269" style="border-bottom-style: solid; border-bottom-width: 1">&nbsp;</td>
    <td WIDTH="77" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">2001</font></td>
    <td WIDTH="149" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">342,917</font></td>
    <td WIDTH="135" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="145" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="139" align="right" style="border-bottom-style: solid; border-bottom-width: 1">&nbsp;</td>
    <td WIDTH="135" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">860,000</font></td>
  </tr>
  <tr>
    <td WIDTH="269" style="border-top-style: solid; border-top-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">David L. Klimek(1)</font></td>
    <td WIDTH="77" align="right" style="border-top-style: solid; border-top-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">2003</font></td>
    <td WIDTH="149" align="right" style="border-top-style: solid; border-top-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">90,958</font></td>
    <td WIDTH="135" align="right" style="border-top-style: solid; border-top-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="145" align="right" style="border-top-style: solid; border-top-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="139" align="right" style="border-top-style: solid; border-top-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="135" align="right" style="border-top-style: solid; border-top-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">75,000</font></td>
  </tr>
  <tr>
    <td WIDTH="269"><font FACE="Times New Roman" size="2">&nbsp;
    Chief Technology Officer</font></td>
    <td WIDTH="77" align="right">
    <font FACE="Times New Roman" size="2">2002</font></td>
    <td WIDTH="149" align="right">
    <font FACE="Times New Roman" size="2">106,606</font></td>
    <td WIDTH="135" align="right">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="145" align="right">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="139" align="right">&nbsp;</td>
    <td WIDTH="135" align="right">
    <font FACE="Times New Roman" size="2">162,500</font></td>
  </tr>
  <tr>
    <td WIDTH="269" style="border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="77" align="right" style="border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">2001</font></td>
    <td WIDTH="149" align="right" style="border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">175,577</font></td>
    <td WIDTH="135" align="right" style="border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="145" align="right" style="border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="139" align="right" style="border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="135" align="right" style="border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">110,000</font></td>
  </tr>
  <tr>
    <td WIDTH="269" style="border-top-style: solid; border-top-width: 1; border-bottom-style: none; border-bottom-width: medium">
    <font FACE="Times New Roman" size="2">Martin S. Smiley</font></td>
    <td WIDTH="77" align="right" style="border-top-style: solid; border-top-width: 1; border-bottom-style: none; border-bottom-width: medium">
    <font FACE="Times New Roman" size="2">2003</font></td>
    <td WIDTH="149" align="right" style="border-top-style: solid; border-top-width: 1; border-bottom-style: none; border-bottom-width: medium">
    <font FACE="Times New Roman" size="2">109,583</font></td>
    <td WIDTH="135" align="right" style="border-top-style: solid; border-top-width: 1; border-bottom-style: none; border-bottom-width: medium">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="145" align="right" style="border-top-style: solid; border-top-width: 1; border-bottom-style: none; border-bottom-width: medium">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="139" align="right" style="border-top-style: solid; border-top-width: 1; border-bottom-style: none; border-bottom-width: medium">&nbsp;</td>
    <td WIDTH="135" align="right" style="border-top-style: solid; border-top-width: 1; border-bottom-style: none; border-bottom-width: medium">
    <font FACE="Times New Roman" size="2">200,000</font></td>
  </tr>
  <tr>
    <td WIDTH="269" style="border-top-style: none; border-top-width: medium" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">&nbsp; Executive VP,
    Chief</font></td>
    <td WIDTH="77" align="right" style="border-top-style: none; border-top-width: medium" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">2002</font></td>
    <td WIDTH="149" align="right" style="border-top-style: none; border-top-width: medium" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">l58,712</font></td>
    <td WIDTH="135" align="right" style="border-top-style: none; border-top-width: medium" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="145" align="right" style="border-top-style: none; border-top-width: medium" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="139" align="right" style="border-top-style: none; border-top-width: medium" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="135" align="right" style="border-top-style: none; border-top-width: medium" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">540,000</font></td>
  </tr>
  <tr>
    <td WIDTH="269"><font FACE="Times New Roman" size="2">&nbsp;
    Financial Officer</font></td>
    <td WIDTH="77" align="right">
    <font FACE="Times New Roman" size="2">2001</font></td>
    <td WIDTH="149" align="right">
    <font FACE="Times New Roman" size="2">163,435</font></td>
    <td WIDTH="135" align="right">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="145" align="right">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="139" align="right">&nbsp;</td>
    <td WIDTH="135" align="right">
    <font FACE="Times New Roman" size="2">670,000</font></td>
  </tr>
  <tr>
    <td WIDTH="269" style="border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">&nbsp; &amp; General
    Counsel</font></td>
    <td WIDTH="77" align="right" style="border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="149" align="right" style="border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="135" align="right" style="border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="145" align="right" style="border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="139" align="right" style="border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="135" align="right" style="border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
</table>
</b>
<font FACE="Times New Roman" size="2">
<ol>
  <li>
<p ALIGN="left">Includes $7,500 stipend as a director for fiscal years ended
June 30, 2001 and June 30, 2002. </p>
  </li>
  <li>
<p ALIGN="left">Does not include warrants to purchase 1,395,400 shares of common stock
issued Mr. Durando and Warrants to purchase 1,096,400 of common stock of Mr.
Dotoli respectively to cancel previously unpaid compensation. Such warrants
relate to $234,362 and $35,000 of unpaid cash compensation to Mr. Durando for
fiscal years 2002 and 2003 and $184,105 and $27,500 of unpaid cash compensation
to Mr. Dotoli for fiscal years 2002 and 2003, respectively the amount of which
is included as cash compensation in the above table. 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. </p>
  </li>
</ol>
</font><b>
<hr><p Style='page-break-before:always'><font FACE="Times New Roman">
<p align="center"><a name="stockoptions"></a>STOCK OPTIONS </p>
</font>
</b><font FACE="Times New Roman" size="2">
<p ALIGN="JUSTIFY">The following table contains information regarding options
granted in the fiscal year ended June 30, 2003 to the executive officers named
in the summary compensation table above. For the fiscal year ended June 30,
2003, mPhase granted options to acquire up to an aggregate of 1,615,000 shares
to employees and directors. </p>
</font>
<b>
<div align="center">
  <center>
<table CELLSPACING="0" BORDER="0" WIDTH="85%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="1212" colspan="9">

<font FACE="Times New Roman PS" SIZE="5"><b>
    <p align="center">
    <font FACE="Times New Roman" size="2">Option Grants in
    Last Fiscal Year</font></b></font></td>
  </tr>
  <tr>
    <td WIDTH="1212" colspan="9" align="center">

<font FACE="Times New Roman PS" SIZE="5"><b>
    <font FACE="Times New Roman" size="2">(Individual Grants)</font></b></font></td>
  </tr>
  <tr>
    <td WIDTH="176">&nbsp;</td>
    <td WIDTH="136" align="right">
    <font FACE="Times New Roman" size="2">Number of</font></td>
    <td WIDTH="149" align="right">
    <font FACE="Times New Roman" size="2">% of Total</font></td>
    <td WIDTH="126" align="right">
    <font FACE="Times New Roman" size="2">Weighted</font></td>
    <td WIDTH="127" align="right">
    <font FACE="Times New Roman" size="2">Weighted</font></td>
    <td WIDTH="122" align="right">&nbsp;</td>
    <td WIDTH="150" align="right">&nbsp;</td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="116" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="176">&nbsp;</td>
    <td WIDTH="136" align="right">
    <font FACE="Times New Roman" size="2">Securities</font></td>
    <td WIDTH="149" align="right">
    <font FACE="Times New Roman" size="2">Options/SARS</font></td>
    <td WIDTH="126" align="right">
    <font FACE="Times New Roman" size="2">Average</font></td>
    <td WIDTH="127" align="right">
    <font FACE="Times New Roman" size="2">Average</font></td>
    <td WIDTH="122" align="right">&nbsp;</td>
    <td WIDTH="376" align="right" colspan="3">
    <font FACE="Times New Roman" size="2">Potential Realizable
    Value of</font></td>
  </tr>
  <tr>
    <td WIDTH="176">&nbsp;</td>
    <td WIDTH="136" align="right">
    <font FACE="Times New Roman" size="2">Underlying</font></td>
    <td WIDTH="149" align="right">
    <font FACE="Times New Roman" size="2">Granted to</font></td>
    <td WIDTH="126" align="right">
    <font FACE="Times New Roman" size="2">Exercise</font></td>
    <td WIDTH="127" align="right">
    <font FACE="Times New Roman" size="2">Market</font></td>
    <td WIDTH="122" align="right">&nbsp;</td>
    <td WIDTH="376" COLSPAN="3" align="right">
    <font FACE="Times New Roman" size="2">Assumed Annual Rates of
    Stock Price</font></td>
  </tr>
  <tr>
    <td WIDTH="176">&nbsp;</td>
    <td WIDTH="136" align="right">
    <font FACE="Times New Roman" size="2">Options/SARS</font></td>
    <td WIDTH="149" align="right">
    <font FACE="Times New Roman" size="2">Employees</font></td>
    <td WIDTH="126" align="right">
    <font FACE="Times New Roman" size="2">or Base</font></td>
    <td WIDTH="127" align="right">
    <font FACE="Times New Roman" size="2">Price</font></td>
    <td WIDTH="122" align="right">&nbsp;</td>
    <td WIDTH="376" COLSPAN="3" align="right">
    <font FACE="Times New Roman" size="2">Appreciation for 5 Year
    Option Term</font></td>
  </tr>
  <tr>
    <td WIDTH="176">&nbsp;</td>
    <td WIDTH="136" align="right">
    <font FACE="Times New Roman" size="2">Granted</font></td>
    <td WIDTH="149" align="right">
    <font FACE="Times New Roman" size="2">in Fiscal</font></td>
    <td WIDTH="126" align="right">
    <font FACE="Times New Roman" size="2">Price</font></td>
    <td WIDTH="127" align="right">
    <font FACE="Times New Roman" size="2">on Grant</font></td>
    <td WIDTH="122" align="right">
    <font FACE="Times New Roman" size="2">Expiration</font></td>
    <td WIDTH="150" align="right">&nbsp;</td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="116" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="176" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">Name</font></td>
    <td WIDTH="136" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">(#)</font></td>
    <td WIDTH="149" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">Year</font></td>
    <td WIDTH="126" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">($/Share)</font></td>
    <td WIDTH="127" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">Date</font></td>
    <td WIDTH="122" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">Date</font></td>
    <td WIDTH="150" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">0%</font></td>
    <td WIDTH="110" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">5%</font></td>
    <td WIDTH="116" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">10%</font></td>
  </tr>
  <tr>
    <td WIDTH="176" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="136" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="149" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="126" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="127" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="122" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="150" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="110" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="116" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="176" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Ronald
    A.</font></td>
    <td WIDTH="136" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="149" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="126" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="127" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="122" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="150" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="116" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="176" style="border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">Durando</font></td>
    <td WIDTH="136" align="right" style="border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">450,000</font></td>
    <td WIDTH="149" align="right" style="border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">27.9</font></td>
    <td WIDTH="126" align="right" style="border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$.40</font></td>
    <td WIDTH="127" align="right" style="border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$.31</font></td>
    <td WIDTH="122" align="right" style="border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">2008</font></td>
    <td WIDTH="150" align="right" style="border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$0</font></td>
    <td WIDTH="110" align="right" style="border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$0</font></td>
    <td WIDTH="116" align="right" style="border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$44,665</font></td>
  </tr>
  <tr>
    <td WIDTH="176" style="border-top-style: solid; border-top-width: 1; border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">Gustave T. Dotoli</font></td>
    <td WIDTH="136" align="right" style="border-top-style: solid; border-top-width: 1; border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">350,000</font></td>
    <td WIDTH="149" align="right" style="border-top-style: solid; border-top-width: 1; border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">21.7</font></td>
    <td WIDTH="126" align="right" style="border-top-style: solid; border-top-width: 1; border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">.40</font></td>
    <td WIDTH="127" align="right" style="border-top-style: solid; border-top-width: 1; border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">.31</font></td>
    <td WIDTH="122" align="right" style="border-top-style: solid; border-top-width: 1; border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">2008</font></td>
    <td WIDTH="150" align="right" style="border-top-style: solid; border-top-width: 1; border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">0</font></td>
    <td WIDTH="110" align="right" style="border-top-style: solid; border-top-width: 1; border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">$0</font></td>
    <td WIDTH="116" align="right" style="border-top-style: solid; border-top-width: 1; border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">$34,740</font></td>
  </tr>
  <tr>
    <td WIDTH="176" style="border-top-style: solid; border-top-width: 1; border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">David Klimek</font></td>
    <td WIDTH="136" align="right" style="border-top-style: solid; border-top-width: 1; border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">75,000</font></td>
    <td WIDTH="149" align="right" style="border-top-style: solid; border-top-width: 1; border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">4.6</font></td>
    <td WIDTH="126" align="right" style="border-top-style: solid; border-top-width: 1; border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">.40</font></td>
    <td WIDTH="127" align="right" style="border-top-style: solid; border-top-width: 1; border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">.31</font></td>
    <td WIDTH="122" align="right" style="border-top-style: solid; border-top-width: 1; border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">2008</font></td>
    <td WIDTH="150" align="right" style="border-top-style: solid; border-top-width: 1; border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">0</font></td>
    <td WIDTH="110" align="right" style="border-top-style: solid; border-top-width: 1; border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$0</font></td>
    <td WIDTH="116" align="right" style="border-top-style: solid; border-top-width: 1; border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$7,445</font></td>
  </tr>
  <tr>
    <td WIDTH="176" style="border-top-style: solid; border-top-width: 1; border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">Martin Smiley</font></td>
    <td WIDTH="136" align="right" style="border-top-style: solid; border-top-width: 1; border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">200,000</font></td>
    <td WIDTH="149" align="right" style="border-top-style: solid; border-top-width: 1; border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">12.4</font></td>
    <td WIDTH="126" align="right" style="border-top-style: solid; border-top-width: 1; border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">.40</font></td>
    <td WIDTH="127" align="right" style="border-top-style: solid; border-top-width: 1; border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">.31</font></td>
    <td WIDTH="122" align="right" style="border-top-style: solid; border-top-width: 1; border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">2008</font></td>
    <td WIDTH="150" align="right" style="border-top-style: solid; border-top-width: 1; border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">0</font></td>
    <td WIDTH="110" align="right" style="border-top-style: solid; border-top-width: 1; border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">$0</font></td>
    <td WIDTH="116" align="right" style="border-top-style: solid; border-top-width: 1; border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">$19,850</font></td>
  </tr>
</table>
  </center>
</div>
</b>
<font FACE="Times New Roman" size="2">
<p ALIGN="JUSTIFY">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, 2003. 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, 2003,
and the exercise price of the options. </p>
</font>
<b>
<div align="center">
  <center>
<table CELLSPACING="0" BORDER="0" WIDTH="85%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="1051" height="19" colspan="7" align="center">

<font FACE="Times New Roman PS" SIZE="5"><b>
    <font FACE="Times New Roman" size="2">
    <p align="center">Fiscal Year-End Option Values</font></b></font></td>
  </tr>
  <tr>
    <td WIDTH="262" height="19">&nbsp;</td>
    <td WIDTH="122" align="right" height="19">&nbsp;</td>
    <td WIDTH="137" align="right" height="19">&nbsp;</td>
    <td WIDTH="274" COLSPAN="2" align="center" height="19">
    <font FACE="Times New Roman" size="2">Number of Securities</font></td>
    <td WIDTH="256" COLSPAN="2" align="center" height="19">
    <font FACE="Times New Roman" size="2">Value of Unexercised</font></td>
  </tr>
  <tr>
    <td WIDTH="262" height="19">&nbsp;</td>
    <td WIDTH="122" align="right" height="19">
    <font FACE="Times New Roman" size="2">Shares</font></td>
    <td WIDTH="137" align="right" height="19">
    <font FACE="Times New Roman" size="2">Value</font></td>
    <td WIDTH="274" COLSPAN="2" align="center" height="19">
    <font FACE="Times New Roman" size="2">Underlying Unexercised</font></td>
    <td WIDTH="256" COLSPAN="2" align="center" height="19">
    <font FACE="Times New Roman" size="2">In-the-Money Options at</font></td>
  </tr>
  <tr>
    <td WIDTH="262" height="19">&nbsp;</td>
    <td WIDTH="122" align="right" height="19">
    <font FACE="Times New Roman" size="2">Acquired</font></td>
    <td WIDTH="137" align="right" height="19">
    <font FACE="Times New Roman" style="text-decoration: underline" size="2">
    Realized</font></td>
    <td WIDTH="274" COLSPAN="2" align="center" height="19">
    <font FACE="Times New Roman" style="text-decoration: underline" size="2">
    Options at year end (#)</font></td>
    <td WIDTH="256" COLSPAN="2" align="center" height="19">
    <font FACE="Times New Roman" style="text-decoration: underline" size="2">
    Year-End ($)</font></td>
  </tr>
  <tr>
    <td WIDTH="262" height="19">&nbsp;</td>
    <td WIDTH="122" align="right" height="19">
    <font FACE="Times New Roman" size="2">on</font></td>
    <td WIDTH="137" align="right" height="19">&nbsp;</td>
    <td WIDTH="140" align="right" height="19">&nbsp;</td>
    <td WIDTH="134" align="right" height="19">&nbsp;</td>
    <td WIDTH="130" align="right" height="19">&nbsp;</td>
    <td WIDTH="126" align="right" height="19">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="262" height="19" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">Name</font></td>
    <td WIDTH="122" align="right" height="19" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">Exercise</font></td>
    <td WIDTH="137" align="right" height="19" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">$</font></td>
    <td WIDTH="140" align="right" height="19" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">Exercisable</font></td>
    <td WIDTH="134" align="right" height="19" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">Unexercisable</font></td>
    <td WIDTH="130" align="right" height="19" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">Exercisable</font></td>
    <td WIDTH="126" align="right" height="19" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">Unexercisable</font></td>
  </tr>
  <tr>
    <td WIDTH="262" height="19" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="122" align="right" height="19" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="137" align="right" height="19" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="140" align="right" height="19" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="134" align="right" height="19" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="130" align="right" height="19" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="126" align="right" height="19" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="262" height="19" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">Ronald A. Durando</font></td>
    <td WIDTH="122" align="right" height="19" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="137" align="right" height="19" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="140" align="right" height="19" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">4,225,000</font></td>
    <td WIDTH="134" align="right" height="19" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="130" align="right" height="19" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$59,000</font></td>
    <td WIDTH="126" align="right" height="19" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">$-</font></td>
  </tr>
  <tr>
    <td WIDTH="262" height="19">
    <font FACE="Times New Roman" size="2">Gustave T. Dotoli</font></td>
    <td WIDTH="122" align="right" height="19">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="137" align="right" height="19">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="140" align="right" height="19">
    <font FACE="Times New Roman" size="2">2,860,000</font></td>
    <td WIDTH="134" align="right" height="19">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="130" align="right" height="19">
    <font FACE="Times New Roman" size="2">39,000</font></td>
    <td WIDTH="126" align="right" height="19">
    <font FACE="Times New Roman" size="2">-</font></td>
  </tr>
  <tr>
    <td WIDTH="262" height="19" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">David Klimek</font></td>
    <td WIDTH="122" align="right" height="19" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="137" align="right" height="19" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="140" align="right" height="19" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">547,500</font></td>
    <td WIDTH="134" align="right" height="19" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="130" align="right" height="19" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">4,650</font></td>
    <td WIDTH="126" align="right" height="19" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">-</font></td>
  </tr>
  <tr>
    <td WIDTH="262" height="19">
    <font FACE="Times New Roman" size="2">Martin Smiley</font></td>
    <td WIDTH="122" align="right" height="19">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="137" align="right" height="19">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="140" align="right" height="19">
    <font FACE="Times New Roman" size="2">1,285,000</font></td>
    <td WIDTH="134" align="right" height="19">
    <font FACE="Times New Roman" size="2">-</font></td>
    <td WIDTH="130" align="right" height="19">
    <font FACE="Times New Roman" size="2">18,400</font></td>
    <td WIDTH="126" align="right" height="19">
    <font FACE="Times New Roman" size="2">-</font></td>
  </tr>
  </table>
  </center>
</div>
</b>
<font FACE="Times New Roman" size="2">
<p><b>Employment Agreements </b> </p>
<p>&nbsp;&nbsp;&nbsp; All employment agreements with our current management have expired and are in
the process of being renegotiated subject to approval of the Board of Directors
of the Company. </p>
<p><b>Long-Term Stock Incentive Plan </b> </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; We have a Long-Term Stock Incentive Plan, under which we have
reserved for issuance 15,000,000 shares of common stock. Our shareholders
approved our 2001 Stock Incentive Plan at our annual meeting of shareholders on
May 30, 2001. The plan provides for grants of incentive stock options and
nonqualified stock options to our key employees and consultants and those key
employees and consultants of our subsidiaries. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; With respect to our current plan, the compensation committee
of the Board of Directors administers and interprets our current plan. The
exercise price of common stock underlying an option may be greater, less than or
equal to fair market value. However, the exercise price of an incentive stock
option must be equal to or greater than the fair market value of a share of
common stock on the date such incentive stock option is granted. The maximum
term of an option is five years from the date of grant. In the event of a
dissolution, liquidation or change in control transaction, we may require option
holders to either exercise their options within 30 days or surrender such
options (or unexercised portion thereof). </p>
<p>&nbsp;&nbsp;&nbsp; Upon stockholder approval, the Board of Directors merged our prior Long-Term
Stock Incentive Plan into the 2001 Plan. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The purpose of the 2001 Plan is to promote our long-term
growth and profitability by providing key people with incentives to improve
stockholder value and contribute to our growth and financial success and by
enabling us to attract, retain and reward the best available people. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The maximum number of shares of common stock that we may
issue with respect to awards under the 2001 Plan is 20,000,000 shares, in
addition to the shares previously authorized for issuance under our Company
plan, but which are not issued before our current plan is merged into the 2001
Plan. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The maximum number of shares of common stock subject to
awards of any combination that may be granted under the 2001 Plan during any
fiscal year to any one individual is limited to 2,500,000 subject to the
exceptions made by the Board of Directors. These limits will be adjusted to
reflect any stock dividends, split-ups and reverse stock split, unless the Board
determines otherwise. If any award, or portion of an award, under the 2001 Plan
expires or terminates unexercised, becomes unexercisable or is forfeited or
otherwise terminated, surrendered or canceled as to any shares, or if any shares
of common stock are surrendered to us in connection with any award (whether or
not such surrendered shares were acquired pursuant to any award), or if any
shares are withheld by us, the shares subject to such award and the surrendered
or withheld shares will thereafter be available for further awards under the
2001 Plan. Those shares that are surrendered to or withheld by us, or that are
forfeited after issuance, however, will not be available for incentive stock
options. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The 2001 Plan is administered by our Board of Directors or by
a committee or committees as the Board of Directors may appoint from time to
time. The administrator has full power and authority to take all actions
necessary to carry out the purpose and intent of the 2001 Plan, including, but
not limited to, the authority to: (i) determine who is eligible for awards, and
the time or times at which such awards will be granted; (ii) determine the types
of awards to be granted; (iii) determine the number of shares covered by or used
for reference purposes for each award; (iv) impose such terms, limitations,
restrictions and conditions upon any such award as the administrator deems
appropriate; (v) modify, amend, extend or renew outstanding awards, or accept
the surrender of outstanding awards and substitute new awards (provided however,
that, except as noted below, any modification that would materially adversely
affect any outstanding award may not be made without the consent of the holder);
(vi) accelerate or otherwise change the time in which an award may be exercised
or becomes payable and to waive or accelerate the lapse, in whole or in part, of
any restriction or condition with respect to such award, including, but not
limited to, any restriction or condition with respect to the vesting or
exercisability of an award following termination of any grantee's employment or
consulting relationship; and (vii) establish objectives and conditions, if any,
for earning awards and determining whether awards will be paid after the end of
a performance period. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In the event of changes in our common stock by reason of any
stock dividend, split-up, recapitalization, merger, consolidation, business
combination or exchange of shares and the like, the administrator may make
adjustments to the number and kind of shares reserved for issuance or with
respect to which awards may be granted under the 2001 Plan, in the aggregate or
per individual per year, and to the number, kind and price of shares covered by
outstanding award. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Without the consent of holders of awards, the administrator
in its discretion is authorized to make adjustments in the terms and conditions
of, and the criteria included in, awards in recognition of unusual or
nonrecurring events affecting us, or our financial statements or those of any of
our affiliates, or of changes in applicable laws, regulations, or accounting
principles, whenever the administrator determines that such adjustments are
appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the 2001 Plan. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Participation in the 2001 Plan will be open to all of our
employees, officers, directors and other individuals providing bona fide
services to us or any of our affiliates, as the administrator may select from
time to time. All three (3) non-employee directors and approximately ten (10)
employees will be eligible to participate in the 2001 Plan. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The 2001 Plan allows for the grant of stock options, stock
appreciation rights, stock awards, phantom stock awards and performance awards.
The administrator may grant these awards separately or in tandem with other
awards. The administrator will also determine the prices, expiration dates and
other material conditions governing the exercise of the awards. We, or any of
our affiliates, may make or guarantee loans to assist grantees in exercising
awards and satisfying any withholding tax obligations arising from awards.</p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Because participation and the types of awards available for
grant under the 2001 Plan are subject to the discretion of the administrator,
the benefits or amounts that any participant or groups of participants may
receive if the 2001 Plan is approved are not currently determinable. For this
purpose, the benefits or amounts that participants may receive if the 2001 Plan
is approved do not include awards granted under the Prior Plan that are amended
and restated to become awards covering the same number of shares under the terms
of the 2001 Plan. These amended and restated awards are not contingent on
stockholder approval since the Prior Plan was previously approved by the
stockholders. </p>
<p>&nbsp;&nbsp;&nbsp; Our Board of Directors may terminate, amend or modify all or any provision of
the 2001 Plan at any time. </p>
</font><b>
<hr><p Style='page-break-before:always'><font FACE="Times New Roman">
<p align="center">COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
</p>
</font></b><font FACE="Times New Roman" size="2">
<p ALIGN="JUSTIFY">The members of the Compensation Committee during fiscal 2002
were Messrs. Dotoli, Mr. Biderman and Guerino. Mr. Dotoli is our Chief Operating
Officer. Neither Messrs Guerino nor Biderman is not one of our officers or
employees. None of our 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 2001 that has a director or executive officer serving on
our Board of Directors except that Mr. Dotoli is also a member of the Board of
Directors of PacketPort.com, Inc., a company in which Mr. Durando serves as
Chief Executive Officer. Mr. Ergul is a controlling shareholder and Director of
Microphase corporation (which provides certain administrative services to mPhase)
and Mr. Dotoli and Mr. Durando are Officers of Microphase., Mr. Dotoli, together
with Mr. Durando and Mr. Ergul, are controlling shareholders, officers and
directors of Janifast Ltd. Janifast Ltd. has produced components for the
Traverser&#153, and is expected to produce a material amount of DSL components for
us in the future. </p>
</font><b>
<hr><p Style='page-break-before:always'><font FACE="Times New Roman">
<p align="center"><a name="securityownership"></a>SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
</p>
</font>
</b><font FACE="Times New Roman" size="2">
<p>&nbsp;&nbsp;&nbsp; The following table sets forth as of June 30, 2003, certain information
regarding the beneficial ownership of our shares: </p>
<p>by each person who is known by us to be the beneficial owner of more than
five percent (5%) of its outstanding common stock; </p>
<p>each of our directors; </p>
<p>by each executive officer named in the Summary Compensation Table; and </p>
<p>by all of our directors and executive officers as a group. </p>
</font>
<b>
<table CELLSPACING="0" BORDER="0" WIDTH="75%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="508"><font FACE="Times New Roman" size="2">Name
    and Address of Beneficial Owner(1)</font></td>
    <td WIDTH="215" align="right">
    <font FACE="Times New Roman" size="2">Number of</font></td>
    <td WIDTH="263" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="508">&nbsp;</td>
    <td WIDTH="215" align="right">
    <font FACE="Times New Roman" size="2">&quot;Shares&quot;</font></td>
    <td WIDTH="263" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="508">&nbsp;</td>
    <td WIDTH="215" align="right">
    <font FACE="Times New Roman" size="2">of Common</font></td>
    <td WIDTH="263" align="right">
    <font FACE="Times New Roman" size="2">Percentage</font></td>
  </tr>
  <tr>
    <td WIDTH="508">&nbsp;</td>
    <td WIDTH="215" align="right">
    <font FACE="Times New Roman" size="2">Stock</font></td>
    <td WIDTH="263" align="right">
    <font FACE="Times New Roman" size="2">Ownership</font></td>
  </tr>
  <tr>
    <td WIDTH="508">&nbsp;</td>
    <td WIDTH="215" align="right">
    <font FACE="Times New Roman" size="2">Beneficially</font></td>
    <td WIDTH="263" align="right">
    <font FACE="Times New Roman" size="2">of Common</font></td>
  </tr>
  <tr>
    <td WIDTH="508">&nbsp;</td>
    <td WIDTH="215" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">Owned</font></td>
    <td WIDTH="263" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">Stock(2)</font></td>
  </tr>
  <tr>
    <td WIDTH="508">&nbsp;</td>
    <td WIDTH="215" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="263" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="508" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Necdet
    F. Ergul(7)(9)</font></td>
    <td WIDTH="215" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">16,477,451</font></td>
    <td WIDTH="263" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">21.0%</font></td>
  </tr>
  <tr>
    <td WIDTH="508"><font FACE="Times New Roman" size="2">Ronald
    A. Durando(3)(7)</font></td>
    <td WIDTH="215" align="right">
    <font FACE="Times New Roman" size="2">15,584,548</font></td>
    <td WIDTH="263" align="right">
    <font FACE="Times New Roman" size="2">19.9%</font></td>
  </tr>
  <tr>
    <td WIDTH="508" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Gustave
    T. Dotoli(7)(10)</font></td>
    <td WIDTH="215" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">4,596,100</font></td>
    <td WIDTH="263" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">6.1%</font></td>
  </tr>
  <tr>
    <td WIDTH="508"><font FACE="Times New Roman" size="2">J. Lee
    Barton(4)(6)(7)(8)</font></td>
    <td WIDTH="215" align="right">
    <font FACE="Times New Roman" size="2">3,589,000</font></td>
    <td WIDTH="263" align="right">
    <font FACE="Times New Roman" size="2">5.0%</font></td>
  </tr>
  <tr>
    <td WIDTH="508" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">David
    Klimek(7)</font></td>
    <td WIDTH="215" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">715,000</font></td>
    <td WIDTH="263" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">1.0%</font></td>
  </tr>
  <tr>
    <td WIDTH="508"><font FACE="Times New Roman" size="2">Lintel,
    Inc.(6)</font></td>
    <td WIDTH="215" align="right">
    <font FACE="Times New Roman" size="2">4,114,219</font></td>
    <td WIDTH="263" align="right">
    <font FACE="Times New Roman" size="2">5.7%</font></td>
  </tr>
  <tr>
    <td WIDTH="508" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Abraham
    Biderman(5)(7)</font></td>
    <td WIDTH="215" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">312,733</font></td>
    <td WIDTH="263" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">*</font></td>
  </tr>
  <tr>
    <td WIDTH="508"><font FACE="Times New Roman" size="2">Anthony
    Guerino(7)</font></td>
    <td WIDTH="215" align="right">
    <font FACE="Times New Roman" size="2">302,500</font></td>
    <td WIDTH="263" align="right">
    <font FACE="Times New Roman" size="2">*</font></td>
  </tr>
  <tr>
    <td WIDTH="508" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Michael
    McInerney(7)(8)</font></td>
    <td WIDTH="215" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">168,900</font></td>
    <td WIDTH="263" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">*</font></td>
  </tr>
  <tr>
    <td WIDTH="508"><font FACE="Times New Roman" size="2">Martin
    Smiley(11)</font></td>
    <td WIDTH="215" align="right">
    <font FACE="Times New Roman" size="2">3,841,050</font></td>
    <td WIDTH="263" align="right">
    <font FACE="Times New Roman" size="2">5.2%</font></td>
  </tr>
  <tr>
    <td WIDTH="508" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    Microphase Corp,(12)</font></td>
    <td WIDTH="215" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">14,169,535</font></td>
    <td WIDTH="263" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">18.2%(12)</font></td>
  </tr>
  <tr>
    <td WIDTH="508"><font FACE="Times New Roman" size="2">
    Janifast(13)</font></td>
    <td WIDTH="215" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">8,550,000</font></td>
    <td WIDTH="263" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman" size="2">11.7%(13)</font></td>
  </tr>
  <tr>
    <td WIDTH="508">&nbsp;</td>
    <td WIDTH="215" align="right">&nbsp;</td>
    <td WIDTH="263" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="508" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">All
    executive Officers &amp; Directors as a group</font></td>
    <td WIDTH="215" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="263" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="508" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">(eight
    people) (8)</font></td>
    <td WIDTH="215" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">49,701,501</font></td>
    <td WIDTH="263" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">53.1%</font></td>
  </tr>
  <tr>
    <td WIDTH="508">&nbsp;</td>
    <td WIDTH="215" align="right">&nbsp;</td>
    <td WIDTH="263" align="right">&nbsp;</td>
  </tr>
</table>
</b>
<font FACE="Times New Roman" size="2">
<p>*</font><font FACE="Times New Roman PS" SIZE="5"><font FACE="Times New Roman PS" SIZE="2"> Less than 1% </p>
<ol>
  <li>Unless otherwise indicated, the address of each beneficial owner is 587
Connecticut Avenue, Norwalk, Connecticut 06854-1711. </li>
  <li>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 72,086,186 shares outstanding on October 27,
2003, and, with respect to each person holding options or warrants to purchase
shares that are exercisable within 60 days after October 27, 2003, 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: </li>
</ol>
</font><b>
<table CELLSPACING="0" BORDER="0" WIDTH="55%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="403" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Necdet
    F. Ergul</font></td>
    <td WIDTH="213" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">6,541,250</font></td>
  </tr>
  <tr>
    <td WIDTH="403"><font FACE="Times New Roman" size="2">Ronald
    A. Durando</font></td>
    <td WIDTH="213" align="right">
    <font FACE="Times New Roman" size="2">6,142,067</font></td>
  </tr>
  <tr>
    <td WIDTH="403" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Gustave
    Dotoli</font></td>
    <td WIDTH="213" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">3,513,067</font></td>
  </tr>
  <tr>
    <td WIDTH="403"><font FACE="Times New Roman" size="2">J. Lee
    Barton</font></td>
    <td WIDTH="213" align="right">
    <font FACE="Times New Roman" size="2">295,000</font></td>
  </tr>
  <tr>
    <td WIDTH="403" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Lintel,
    Inc.</font></td>
    <td WIDTH="213" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">-</font></td>
  </tr>
  <tr>
    <td WIDTH="403"><font FACE="Times New Roman" size="2">David
    Klimek</font></td>
    <td WIDTH="213" align="right">
    <font FACE="Times New Roman" size="2">322,500</font></td>
  </tr>
  <tr>
    <td WIDTH="403" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Martin
    Smiley</font></td>
    <td WIDTH="213" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">2,443,007</font></td>
  </tr>
  <tr>
    <td WIDTH="403"><font FACE="Times New Roman" size="2">Michael
    McInerney</font></td>
    <td WIDTH="213" align="right">
    <font FACE="Times New Roman" size="2">155,500</font></td>
  </tr>
  <tr>
    <td WIDTH="403" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">Abraham
    Biderman</font></td>
    <td WIDTH="213" align="right" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">307,500</font></td>
  </tr>
  <tr>
    <td WIDTH="403"><font FACE="Times New Roman" size="2">Anthony
    Guerino</font></td>
    <td WIDTH="213" align="right">
    <font FACE="Times New Roman" size="2">302,500</font></td>
  </tr>
  </table>
</b>

<font FACE="Times New Roman PS" SIZE="2">
<ol start="3">
  <li>Includes 1,396,148 shares held by Durando Investment LLC, and 7,350,000
shares and 1,200,000 warrants held by Janifast which Mr. Durando controls and
230,000 shares owned by Karen and Ronald Durando Foundation; and 95,000 shares
owned by Durando Charitable Remainder Trust. </li>
  <li>Includes 100,000 shares owned by Kim Barton, his wife and 100,000 shares
owned by Betty Barton, his daughter. Mr. Barton resigned from the Board of
Directors in March 2002. </li>
  <li>Includes 5,233 shares of common stock, options and warrants for 272,500
shares of common stock. Does not include 1,103,225 shares held by Lipper &amp; Co,
where Mr. Biderman is a director. <br>
&nbsp;</li>
  <li>The address for Lintel, Inc. and J. Lee Barton, who is Chief Executive
Officer of Lintel, Inc. is 196 North Forest Avenue, P.O. Box 388, Hartwell, GA
30643. </li>
  <li>Includes options for 25,000 shares of common stock received as compensation
for participation on the Board of Directors. </li>
  <li>Mr. Michael P. McInerney, President of Lintel, Inc. subsidiaries, was
appointed to the Board at the 2002 Annual Shareholders meeting. </li>
  <li>Includes 200,000 shares owned by Berrin Snyder, his daughter and 150,000
owned by Eda Peterson, his daughter. Also includes 8,244,667 shares and
3,200,000 warrants and 1,200,000 shares and warrants to purchase 1,200,000
shares issuable pursuant to the terms of a convertible note held by Microphase
Corporation, a company in which Mr. Ergul is the President and Chief Executive
Officer. </li>
  <li>Includes 195,000 shares owned by Patricia and Gustave Dotoli Foundation;
and 30,000 shares owned by Dotoli Charitable Remainder Trust. </li>
  <li>Includes 333,334 shares and warrants to purchase 333,334 shares issuable
pursuant to the terms of a convertible note. </li>
  <li>Includes 8,244,667 shares and 3,200,000 warrants and 1,200,000 shares and
warrants to purchase 1,200,000 shares issuable pursuant to the terms of a
convertible note held by Microphase Corporation, the totals of which are
included in the total beneficially owned shares of Necdet F. Ergul. </li>
  <li>Includes 7,350,000 shares and 1,200,000 warrants, the totals of which are
included in the total beneficially owned shares of Ronald A. Durando. </li>
</ol>
</font><b>
<hr><p Style='page-break-before:always'>
<p align="center"><a name="certainrelationships"></a>CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS</b></font></font></font><font FACE="Times New Roman PSMT" SIZE="5">
</p>
</font><font FACE="Times New Roman PS" SIZE="2"><b>
<p>Material Related Party Transactions</b></font><font FACE="Times New Roman PSMT" SIZE="2">
</p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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 retransmission accreditation to
proprietary television content that the Company plans to provide with its
flagship product, the Traverser&#153 within its incorporated joint venture mPhase
Television.Net, in which the Company owns a 56.5% interest. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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&#153. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In addition the Company has tested its TV+ platform in July
of 2003 with 3 customers of Hart Telephone. 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 and COB of Janifast Limited. Mr. Durando and Mr. Dotoli are officers
of Microphase Corporation. Mr. Dotoli is also a shareholder of Janifast Limited.
Mr. Ergul, the chairman of the board of mPhase, owns a controlling interest and
is a director of Microphase Corporation and is a director and shareholder of
Janifast Limited. 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. </p>
</font><font FACE="Times New Roman PS" SIZE="2"><b>
<p>Transactions with Officers, Directors and their Affiliates</b></font><font FACE="Times New Roman PSMT" SIZE="2">
</p>
<p>&nbsp;&nbsp;&nbsp; Directors that are significant shareholders of Janifast Limited include
Messrs Ronald A. Durando, Gustave T. Dotali, and Necdet F. Ergul. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; On November 11, 2002 and November 12, 2002, the Company
issued warrants to purchase 2,491,080 shares of common stock of the Company
which were valued at $480,917 or $.193 per share with an exercise price of $.01
per share for the cancellation of unpaid compensation to two officer's of the
Company as of October 14, 2002. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In March of 2003, Messrs, Durando, Dotoli and Smiley
participated in a private placement of the company investing $20,000, $20,000
and $75,000 respectively, receiving common stock of mPhase at $.30 per share
plus 5 year warrants of mPhase to purchase a like amount of common stock at $.30
per share. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In March of 2003, Messrs. Durando the CEO and President and
Smiley the CFO and General Counsel of the Company lent the Company $30,000 and
$100,000 respectively evidenced by two promissory notes bearing interest at 12%
per annum due in September of 2003. As of June 30,2003 the Company prepaid Mr.
Durando's promissory note in full together with accrued interest. In June 2003,
Mr. Smiley agreed to extend his note until July, 2004. Also in June, 2003,
Microphase agreed to convert $360,000 of accounts payable to a note payable,
interest at 12%, due in July, 2004. The notes have provisions for prepayment by
the Company, and, at the option of the holder, provide for the conversion of
unpaid principal and interest into units valued at $.30 each, each unit
consisting of one share of the Company's common stock and a one warrant to
purchase the Company's common stock at $.30 per share for a period of 5 years.
</p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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.
</p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. </p>
<p>&nbsp;&nbsp;&nbsp; Mr. Michael McInerney, an outside Director, is employed by Lintel Inc. and
Mr. Abraham Biderman was employed until September 30, 2003 by our former
investment banking firm Lipper &amp; Company. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Abraham Biderman became a member of our Board in August 2000.
Mr. Biderman is the Executive Vice President of Lipper &amp; 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In September 2001, certain of our officers and directors
purchased an aggregate of 2,000,000 shares of common stock for an aggregate
investment of $1,000,000. Theseissuances included 1,000,000 shares to Mr. L.
Barton, a director at that time, for an investment of $500,000; 400,000 shares
to Mr. Ronald A. Durando, the Company's president and a director, for an
investment of $200,000; 400,000 shares to Mr. Gustave Dotoli , the Company's
vice-president and a director, for an investment of $200,000; and; 200,000
shares to Mr. Martin S. Smiley, the Company's vice-president, for an investment
of $100,000; and were exempt pursuant to Section 4(2) and/or Rule 506 of
Regulation D of the Act. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; For consulting services rendered in connection with the joint
venture, 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. </p>
<p>&nbsp;&nbsp;&nbsp; Messrs. Biderman, McInerney and Mr. Anthony Guerino own a relatively small
amount of stock, warrants and options in mPhase Technologies, Inc. </p>
<font FACE="Times New Roman PS" SIZE="2"><b>
<p>Transactions with Microphase Corporation</b></font><font FACE="Times New Roman PSMT" SIZE="2">
</p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; mPhase's President and Chairman of the Board of the Company
are also employees of Microphase. On May 1, 1997, the Company entered into an
agreement with Microphase, whereby it will use office space as well as the
administrative services of Microphase, including the use of accounting
personnel. This agreement was for $5,000 per month and was on a month-to-month
basis. In July 1998, the office space agreement was revised to increase the rent
to $10,000 and in January 2000 to $11,050 per month. In July 2002, such amount
was increased to $12,200 per month, and as of January 1, 2003 such rent was
reduced to $10,000 per month. Additionally, in July 1998, mPhase entered into an
agreement with Microphase, whereby mPhase reimburses Microphase $40,000 per
month for technical research and development assistance. Such agreement was
amended as of January 1, 2002 to reduce such payment to $20,000 per month. Such
amount was reduced to $6,000 per month starting January 1, 2003. Microphase also
charges fees for specific projects on a project-by-project basis. During the
years ended June 30, 2001, 2002 and 2003 and for the period from inception
(October 2, 1996) to June 30, 2003, $2,128,983, $1,212,594, $648,102, and
$7,224,526, respectively, have been charged to expense or inventory under these
Agreements and is included in operating expenses in the accompanying
consolidated statements of operations. Management believes that amounts charged
to the Company by Microphase are commensurate to amounts that would be incurred
if outside third parties were used. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; On February 15, 1997, mPhase entered into a Technology,
Patent and Trademark License Agreement (the &quot;Agreement&quot;) 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 had been charged to expense
under this Agreement and is included in licensing fees in the consolidated
statement of operations. As of June 25, 1998, the Company acquired MicroTel and
as of that date this Agreement was no longer in effect. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The Company is obligated to pay a 3% royalty to Microphase on
revenues from its proprietary Traverser&#153 Digital Video and Data Delivery System
and DSL component products. During the years ended June 30, 2001, 2002 and 2003
mPhase recorded royalties to Microphase totaling $297,793, $78,762 and $47,304,
respectively. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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 warrants to purchase 2,200,000 mPhase common stock. </p>
</font>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; During the fiscal year ended June 30, 2003 Microphase
received 4,033,333 shares of common stock plus five year warrants to purchase
1,000,000 shares of common stock of mPhase at $.30 per share in exchange for the
cancellation of accounts payable totaling $920,000. As of June 30, 2002, the
Company had $92,405 included in other liabilities-related parties in the
accompanying consolidated balance sheet and as of June 30, 2003 $360,000 in
notes payable-related parties. Additionally, at June 30, 2003, approximately
$142,000 of undelivered purchase orders remain outstanding with Microphase. </p>
<font FACE="Times New Roman PS" SIZE="2"><b>
<p>Transactions with Janifast</b></font><font FACE="Times New Roman PSMT" SIZE="2">
</p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Janifast Ltd., a Hong Kong corporation manufacturer, which
has produced components for our prototype Traverser&#153 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Pursuant to a debt conversion agreement between the Company
and Janifast Ltd., for the year ended June 30, 2001, Janifast Ltd. received
1,200,000 shares of the Company's common stock. For the year ended June 30, 2002
pursuant to debt conversion agreements, Janifast Ltd. received 3,450,000 shares
of mPhase common stock and 1,200,000 warrants to purchase mPhase common stock.
During the year ended June 30,2003 Janifast Ltd. was issued 1,500,000 shares of
mPhase common stock in connection with the cancellation of $360,000 of
outstanding liabilities of mPhase, the value of which was based upon the price
of the Company's common stock on the effective date of the settlement. No gain
or loss was recognized in connection with conversions by Janifast Ltd. for the
fiscal year ended June 30, 2003. During the years ended June 30, 2001, 2002 and
2003 and the period from inception (October 2, 1996) to June 30, 2003
$8,932,378, $1,759,308 and $10,691,686 respectively, of invoices for products
and services have been charged to inventory or expense- other
liabilities-related parties as long term liabilities in the consolidated balance
sheet and as of June 30, 2003 no amounts remain payable to Janifast Ltd.
Additionally, at June 30, 2003, approximately $1,435,000 of undelivered purchase
orders remain outstanding with Janifast Ltd. </p>
</font><font FACE="Times New Roman PS" SIZE="2"><b>
<p>Transactions with Lintel, Inc and Affiliates</b></font><font FACE="Times New Roman PSMT" SIZE="2">
</p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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 completion of beta testing and the commencement of production of the
Traverser&#153. 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. Mr. J. Lee Barton, the
president and chief executive officer of Lintel Inc., (Lintel is the parent of
Hart Telephone Company), and at that time Mr. Barton was a Director of the
Company, received a $285,000 bonus, a stock award of 140,000 shares and 100,000
options in addition to the 125,000 granted to Hart for Beta testing services in
the year ended June 30, 2000 and 120,000 options for services as a Director for
the year ended June 30, 2001. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Michael McInerney, one of our directors, is the president of
Lintel, Inc. Prior to becoming a Director of mPhase, Mr. McInerney received
options to purchase 25,000 shares of mPhase common stock for the fiscal year
ended June 30, 1999, of which 5,000 options were exercised during the fiscal
year ended June 30, 2000. Mr. McInerney received options for 23,000 shares of
common stock in the fiscal year ended June 30, 2001 and 15,000 options for
consulting and beta testing services in the fiscal year ended June 30, 2002. In
addition for the fiscal years ended June 30, 2002 and June 30, 2003 Mr.
McInerney received options and warrants to purchase a total of 62,500 shares and
for 35,000 shares of mPhase common stock, respectively. </p>
</font><font FACE="Times New Roman PS" SIZE="2"><b>
<p>Transactions with Other Related Parties</b></font><font FACE="Times New Roman PSMT" SIZE="2">
</p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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 was included in
general and administrative expenses in the statement of operations for the 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-</font>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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The agreement stipulated for mPhase's joint venture partner,
AlphaStar International, Inc., (&quot;Alphastar&quot;), 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, 2003 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. </p>
<p>&nbsp;&nbsp;&nbsp; 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 consolidated balance sheet as of June 30, 2003. </p>
<p>&nbsp;&nbsp;&nbsp; During the fiscal years ended June 30, 2001, 2002 and 2003, the joint venture
was charged $1,009,420, $64,039 and $0, respectively for fees and costs by its
joint venture partner and its affiliates. </p>
<font FACE="Times New Roman PS" SIZE="2"><b>
<p>Transactions with Strategic Vendors</b></font><font FACE="Times New Roman PSMT" SIZE="2">
</p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. As of
August 11, 2003 the Company is $35,000 in arrears with respect to the $5,000 per
month payment of the Promissory Note. On December 31, 2003, the Company became
in arrears with respect to $420,872 of a balloon payment on a Note payable to
its outside Law Firm, Piper &amp; Rudnick LLC. The Company is in discussion with
respect to such law firm to extend and/or cancel all or portions of this debt.
It should be noted that Piper &amp; Rudnick hold warrants received in March of 2001
in exchange for cancellation of certain payables. Such warrants have conversion
rights into our common stock for 2,233,490 shares that are being registered
hereunder (see Selling Shareholders list-page 65 hereof) and are cashless. Such
warrants could be exercised shares of our common stock which could then be sold
in the open market upon the effectiveness of this Registration Statement on Form
S-1 in the open market to recover our outstanding payable. See also Risk Factor
Section on Page 8 hereof. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; On October 14, 2002, the Company entered into a memorandum on
intention with Georgia Tech Research Corporation (GTRC) and its affiliate,
Georgia Tech Applied Research Corporation (GTARC), which memorandum was revised
on November 12, 2002 and in October of 2003 and is subject to the approval of
the respective board of directors of the parties thereto and the exchange of
mutual releases. The memorandum provides for the settlement of any and all
amounts outstanding to GTRC and GTARC in consideration of the issuance of
warrants to purchase 5,069,242 shares of the Company's common stock at $.01 per
share (with a cashless exercise right) in exchange for cancellation of an
approximately $1.3 million portion of the Company's accounts payable. In
addition the Company would issue a term promissory note in the principal amount
of $674,235 with interest at prime+1% and varied payments through 2008 in
exchange for cancellation of an account payable by the Company in an same
amount. The non-current amount of two promissory notes plus two warrants that
were part of the proposed transaction as originally negotiated and as reflected
in the memorandum of November 12, 2002 are reflected on the balance sheet dated
June 30, 2003 as long-term debt and other liabilities for the amounts that were
expected on June 30, 2003 to be converted to the two promissory notes payable
and the warrants respectively. As of February 12, 2004 we are finalizing an
agreement to convert all of such payables, approximating $1.8 million and
including amounts reflected as Notes Payable as of June 30, 2003 and September
30, 2003, into a warrant convertible into our Common Stock on a cashless basis
of approximately $.35 per share. This agreement is still subject to final
execution of legal documentation by GTRC. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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 fiscal
year ended June 30, 2002 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. During
the twelve months ending June 30, 2003, certain strategic vendors and related
parties converted approximately $1.9 million of accounts payable and accrued
expenses into 5,923,333 shares of the
</font>Company's common stock and warrants to purchase 3,706,800
shares of common stock of mPhase. . Such vendors include Microphase Corporation,
Janifast, Ltd., and Strategic Vendors including Piper Rudnick LLP, mPhase's
outside counsel. Conversions with related parties only consisted of the
following: </p>
<div align="center">
  <center>
<table CELLSPACING="0" BORDER="0" WIDTH="75%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="147">&nbsp;</td>
    <td WIDTH="263">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="212" COLSPAN="2" align="center">
    <font FACE="Times New Roman PSMT" SIZE="2">For the Six Months</font></td>
  </tr>
  <tr>
    <td WIDTH="147">&nbsp;</td>
    <td WIDTH="263">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="212" COLSPAN="2" align="center">
    <font FACE="Times New Roman PSMT" SIZE="2">Ended December 31,</font></td>
  </tr>
  <tr>
    <td WIDTH="147">&nbsp;</td>
    <td WIDTH="263">&nbsp;</td>
    <td WIDTH="307" COLSPAN="3" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <p align="center">
    <font FACE="Times New Roman PSMT" SIZE="2">For the Years Ended June 30,</font></td>
    <td WIDTH="212" COLSPAN="2" align="center">
    <u>
    <font FACE="Times New Roman PSMT" SIZE="2">(Unaudited)</font></u></td>
  </tr>
  <tr>
    <td WIDTH="147">&nbsp;</td>
    <td WIDTH="263">&nbsp;</td>
    <td WIDTH="102" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="101" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="104" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="108" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="410" COLSPAN="2"><font FACE="Times New Roman PS" SIZE="2"><i><b>
    Equity Conversions of Debt and Other</b></i></font></td>
    <td WIDTH="102" align="right"><font FACE="Times New Roman PSMT" SIZE="2">2001</font></td>
    <td WIDTH="101" align="right"><font FACE="Times New Roman PSMT" SIZE="2">2002</font></td>
    <td WIDTH="104" align="right"><font FACE="Times New Roman PSMT" SIZE="2">2003</font></td>
    <td WIDTH="104" align="right"><font FACE="Times New Roman PSMT" SIZE="2">2002</font></td>
    <td WIDTH="108" align="right"><font FACE="Times New Roman PSMT" SIZE="2">2003</font></td>
  </tr>
  <tr>
    <td WIDTH="410" COLSPAN="2"><font FACE="Times New Roman PS" SIZE="2"><i><b>
    Financial Instruments with Related Parties</b></i></font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: solid; border-bottom-width: 1">&nbsp;</td>
    <td WIDTH="101" align="right" style="border-bottom-style: solid; border-bottom-width: 1">&nbsp;</td>
    <td WIDTH="104" align="right" style="border-bottom-style: solid; border-bottom-width: 1">&nbsp;</td>
    <td WIDTH="104" align="right" style="border-bottom-style: solid; border-bottom-width: 1">&nbsp;</td>
    <td WIDTH="108" align="right" style="border-bottom-style: solid; border-bottom-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="147">&nbsp;</td>
    <td WIDTH="263">&nbsp;</td>
    <td WIDTH="102" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="101" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="104" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="104" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="108" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="147"><font FACE="Times New Roman PS" SIZE="2"><b>Janifast</b></font></td>
    <td WIDTH="263">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="108" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="410" COLSPAN="2" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    Number of shares</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    2,400,000</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    3,450,000</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    1,500,000</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    1,500,000</font></td>
    <td WIDTH="108" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="410" COLSPAN="2"><font FACE="Times New Roman PSMT" SIZE="2">
    Number of warrants</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    1,200,000</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="108" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="410" COLSPAN="2" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    Amount converted to equity</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $1,200,000</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $720,000</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $360,000</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $360,000</font></td>
    <td WIDTH="108" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
  </tr>
  <tr>
    <td WIDTH="410" COLSPAN="2"><font FACE="Times New Roman PS" SIZE="2"><b>
    Microphase Corporation</b></font></td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="108" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="410" COLSPAN="2" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    Number of shares</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    1,278,000</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    2,700,000</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    4,033,333</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    3,033,333</font></td>
    <td WIDTH="108" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="410" COLSPAN="2"><font FACE="Times New Roman PSMT" SIZE="2">
    Number of warrants</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    2,200,000</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    1,000,000</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="108" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="410" COLSPAN="2" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    Amount converted to equity</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $639,000</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $740,000</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $920,000</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $620,000</font></td>
    <td WIDTH="108" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
  </tr>
  <tr>
    <td WIDTH="410" COLSPAN="2"><font FACE="Times New Roman PS" SIZE="2"><b>
    Lintel Corporation and Affiliates</b></font></td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="108" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="410" COLSPAN="2" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    Number of shares (A)</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    954,000</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="108" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="410" COLSPAN="2"><font FACE="Times New Roman PSMT" SIZE="2">
    Number of warrants</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="108" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="410" COLSPAN="2" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    Amount converted to equity</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $477,000</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
    <td WIDTH="108" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
  </tr>
  <tr>
    <td WIDTH="147"><font FACE="Times New Roman PS" SIZE="2"><b>Officers</b></font></td>
    <td WIDTH="263">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="108" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="410" COLSPAN="2" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    Number of shares</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    333,334</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="108" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="410" COLSPAN="2"><font FACE="Times New Roman PSMT" SIZE="2">
    Number of warrants (B)</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    333,334</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    2,491,800</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    4,491,800</font></td>
    <td WIDTH="108" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="410" COLSPAN="2" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    Amount converted to equity</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $103,000</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $480,967</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $480,967</font></td>
    <td WIDTH="108" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
  </tr>
  <tr>
    <td WIDTH="410" COLSPAN="2"><font FACE="Times New Roman PS" SIZE="2"><b>
    Joint Venture Partner and Affiliates</b></font></td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="108" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="410" COLSPAN="2" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    Number of shares</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    208,077</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    63,216</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="108" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="410" COLSPAN="2"><font FACE="Times New Roman PSMT" SIZE="2">
    Number of warrants</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="108" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="410" COLSPAN="2" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    Amount converted to equity</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $104,038</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $31,628</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
    <td WIDTH="108" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
  </tr>
  <tr>
    <td WIDTH="410" COLSPAN="2"><font FACE="Times New Roman PS" SIZE="2"><b>
    Total Related Party Conversions</b></font></td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="108" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="410" COLSPAN="2" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    Number of shares</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    4,840,077</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    6,546,550</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    5,533,333</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    4,533,333</font></td>
    <td WIDTH="108" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="410" COLSPAN="2"><font FACE="Times New Roman PSMT" SIZE="2">
    Number of warrants</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    3,733,334</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    3,491,800</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    4,491,800</font></td>
    <td WIDTH="108" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="410" COLSPAN="2" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    Amount converted to equity</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $2,420,038</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $1,594,628</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $1,760,967</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $1,460,967</font></td>
    <td WIDTH="108" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $0</font></td>
  </tr>
  <tr>
    <td WIDTH="147">&nbsp;</td>
    <td WIDTH="263">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="108" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="929" colspan="7"><font FACE="Times New Roman PSMT" SIZE="2">(A)
    Includes Mr. L. Barton in Fiscal 2001, a former Director of the Company.<p>(B)
    Includes $12,206 settlement expense incurred to the Company's President and
    Vice President in connection with the exchange
    of warrants to
    purchase the company's common stock to cancel unpaid
    compensation, which is included as a reduction to gain on Settlements in
    fiscal 2003.</font></td>
  </tr>
  </table>
  </center>
</div>
<font FACE="Times New Roman PS" SIZE="5"><b>
<hr><p Style='page-break-before:always'>
<p align="center">SELLING STOCKHOLDERS</b></font></font><font FACE="Times New Roman PSMT" SIZE="5">
</p>
</font>
<font FACE="Times New Roman PSMT" SIZE="2">
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The following table sets forth information regarding the
beneficial ownership of shares of common stock by the selling stockholders as of
the date of this prospectus, and the number of shares of common stock covered by
this prospectus. Except as otherwise noted below, none of the selling
stockholders has held any position or office, or has had any other material
relationship with us or any of our affiliates within the past three years. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The number of shares of common stock that may be actually
purchased by certain selling stockholders under the warrants and the number of
shares of common stock that may be actually sold by each selling stockholder
will be determined by such selling stockholder. Because certain selling
stockholder may purchase all, some or none of the shares of common stock which
can be purchased under the warrants and each selling stockholder may sell all,
some or none of the shares of common stock which each holds, and because the
offering contemplated by this prospectus is not currently being underwritten, no
estimate can be given as to the number of shares of common stock that will be
held by the selling stockholders upon termination of the offering. The
information set forth in the following table regarding the beneficial ownership
after resale of shares is based on the basis that each selling stockholder will
purchase the maximum number of shares of common stock provided for by the
warrants owned by the selling stockholder and each selling stockholder will sell
all of the shares of common stock owned by that selling stockholder and covered
by this prospectus. </p>
<table CELLSPACING="0" BORDER="0" WIDTH="95%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1; border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1; border-top-style: solid; border-top-width: 1">
    <font FACE="Times New Roman" size="2"><b>Beneficial</b></font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1; border-top-style: solid; border-top-width: 1">
    <font FACE="Times New Roman" size="2"><b>Maximum Number of</b></font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1; border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1; border-top-style: solid; border-top-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1; border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2">NAME</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1; border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2"><b>Shares</b></font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1; border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2"><b>Shares Being Offered</b></font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1; border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman" size="2"><b>Note</b></font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1; border-bottom-style: solid; border-bottom-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1; border-top-style: solid; border-top-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">ALEXANDER HASENFIELD</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1; border-top-style: solid; border-top-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">57,144</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1; border-top-style: solid; border-top-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">57,144</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1; border-top-style: solid; border-top-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">A-1</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1; border-top-style: solid; border-top-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">ALEXANDER HASENFIELD INC. PROFIT
    SHARING AND RETIREMENT PLAN</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">219,050</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">85,716</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">A-2</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">ANNESE, DAVID E.</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">600,000</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">600,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">A-3</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">ASPIOTES, NICHOLAS &amp; ASPIOTES, NANCY</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">400,000</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">400,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">A-4</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">BETH MAYER ASSOCIATES</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">1,359,986</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">253,652</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">A-5</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">BIDERMAN, ABRAHAM</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">407,500</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">100,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">A-6</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">*</font></td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">CHENG, TOMMY</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">573,250</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">200,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">A-7</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">CONGREGATION OF NEW SQUARE</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">400,000</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">400,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">A-8</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">CONGREGATION SHAREI CHAIM</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">1,338,387</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">1,200,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">A-9</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">CONGREGATION SHARIT HAPLETA</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">150,000</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">75,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">A-10</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">DAVID FARBER &amp; DEBORAH FARBER JTWROS</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">600,000</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">600,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">A-11</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">DEVELIN, MICHAEL</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">125,000</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">125,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">A-12</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">DOTOLI, FRANKLIN</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">50,000</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">50,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">A-13</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">ERGUL, NECDET</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">1,516,250</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">100,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">A-14</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">**</font></td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">F&amp;N ASSOCIATES</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">250,269</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">57,144</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">A-15</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">FENMORE HOLDINGS LLC</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">1,428,572</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">1,428,572</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">A-16</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">FIRST MEDIA GROUP</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">75,000</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">75,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">A-17</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">FISHER, MAYER</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">40,000</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">40,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">A-18</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">FRIEDMAN, MORRIS</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">1,200,000</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">600,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">A-19</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">GASPARINI, PETER</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">466,000</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">97,500</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">A-20</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">GIDAS, PETER &amp; GIDAS, CINDY</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">300,000</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">300,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">A-21</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">GOLDENBURG, LEON</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">600,000</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">600,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">A-22</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">GTRC</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">5,069,242</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">5,069,242</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">A-23</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">GUERINO, ANTHONY</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">402,500</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">100,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">A-24</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">*</font></td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">HAA, INC.</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">666,668</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">333,334</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">A-25</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">HASENFIELD-STEIN, INC. PENSION TRUST</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">142,858</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">142,858</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">A-26</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">IBER INTERNATIONAL LTD.</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">2,742,858</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">1,142,858</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">A-27</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">KENTUCKY NATIONAL INSURANCE COMPANY</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">57,144</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">57,144</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">A-28</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">KLIMEK, DAVID</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">1,122,500</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">100,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">A-29</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">*</font></td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">LALIBERTE, EMILE</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">50,000</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">50,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">A-30</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">LEVITANSKY, RIVKAH</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">600,000</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">600,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">A-31</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">MARY PARK PROPERTIES</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">2,943,526</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">1,382,858</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">A-32</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">MCINERNY, MICHAEL</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">255,500</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">100,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">A-33</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">*</font></td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">MEDEIROS, ANA CLAUDIA</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">300,000</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">300,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">A-34</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">MOISHE, BAIS YAAKON</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">600,000</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">600,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">A-35</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">NEUBART, GARRETT S.</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">50,000</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">50,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">A-36</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">REB EPHRAIM CHAIM &amp; MIRIAM RACHEL
    KLEIN CHARITABLE FOUNDATION</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">925,000</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">800,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">A-37</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">ROOZ, MAYER</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">4,000</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">4,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">A-38</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">ROSENTHAL, ELIEZER M.</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">600,000</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">600,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">A-39</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">ROSENTHAL, JUDY</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">400,000</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">400,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">A-40</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">RUTGERS CASUALTY INSURANCE COMPANY</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">210,716</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">85,716</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">A-41</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">RUTGERS ENHANCED INSURANCE COMPANY</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">285,716</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">285,716</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">A-42</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">SIMON, STEVE</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">150,000</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">150,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">A-43</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">STEIN, NACHUM</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">1,018,365</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">228,572</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">A-44</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">STEIN, S.</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">50,000</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">50,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">A-45</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">TANNENBAUM, ELLONA</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">100,000</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">100,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">A-46</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">TENNENHAUS, EDMUND</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">2,000,000</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">2,000,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">A-47</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">THOMPSON, PHIL</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">100,000</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">100,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">A-48</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">TOWER 50 PARTNERS L.P.</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">3,000,000</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">3,000,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">A-49</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">TURCHAN, THEODORE &amp; TURCHAN, EILEEN</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">400,000</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">400,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">A-50</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">WEINBERGER, GEORGE</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">2,450,000</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">2,000,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">A-51</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">WERDIGER FAMILY FOUNDATION INC.</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">600,000</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">600,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">
    <font FACE="Times New Roman" size="2">A-52</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1; border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">WESTROCK ADVISORS</font></td>
    <td WIDTH="86" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1; border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">750,000</font></td>
    <td WIDTH="152" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1; border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">750,000</font></td>
    <td WIDTH="73" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1; border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">
    <font FACE="Times New Roman" size="2">A-53</font></td>
    <td WIDTH="49" align="right" style="border-left-style: solid; border-left-width: 1; border-right-style: solid; border-right-width: 1; border-bottom-style: solid; border-bottom-width: 1" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="471" style="border-style: solid; border-width: 1">
    <font FACE="Times New Roman" size="2">Grand Total</font></td>
    <td WIDTH="86" align="right" style="border-style: solid; border-width: 1">
    <font FACE="Times New Roman" size="2">40,203,001</font></td>
    <td WIDTH="152" align="right" style="border-style: solid; border-width: 1">
    <font FACE="Times New Roman" size="2">29,027,026</font></td>
    <td WIDTH="73" align="right" style="border-style: solid; border-width: 1">&nbsp;</td>
    <td WIDTH="49" align="right" style="border-style: solid; border-width: 1">&nbsp;</td>
  </tr>
</table>
<p>* Mr. Biderman, Mr. Guerino, Mr. Klimek, and Mr. McInerny are directors of
our Company. </p>
<p>** Mr. Ergul, Chairman of the Board of the Company, is a majority shareholder
of Microphase Corporation. </p>
<table CELLSPACING="0" BORDER="0" WIDTH="80%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td width="774" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    (A-1) Includes warrants to purchase up to 28,572 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774"><font FACE="Times New Roman" size="2">(A-2) Includes
    warrants to purchase up to 42,858 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    (A-3) Includes warrants to purchase up to 300,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774"><font FACE="Times New Roman" size="2">(A-4) Includes
    warrants to purchase up to 200,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    (A-5) Includes warrants to purchase up to 126,826 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774"><font FACE="Times New Roman" size="2">(A-6) Includes options
    to purchase up to 100,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    (A-7) Includes options to purchase up to 200,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774"><font FACE="Times New Roman" size="2">(A-8) Includes
    warrants to purchase up to 200,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    (A-9) Includes warrants to purchase up to 600,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774"><font FACE="Times New Roman" size="2">(A-10) Includes
    warrants to purchase up to 75,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    (A-11) Includes warrants to purchase up to 300,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774"><font FACE="Times New Roman" size="2">(A-12) Includes
    options to purchase up to 125,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    (A-13) Includes options to purchase up to 50,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774"><font FACE="Times New Roman" size="2">(A-14) Includes
    options to purchase up to 100,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    (A-15) Includes warrants to purchase up to 28,572 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774"><font FACE="Times New Roman" size="2">(A-16) Includes
    warrants to purchase up to 714,286 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    (A-17) Includes no warrants or options.</font></td>
  </tr>
  <tr>
    <td width="774"><font FACE="Times New Roman" size="2">(A-18) Includes
    warrants to purchase up to 20,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    (A-19) Includes warrants to purchase up to 300,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774"><font FACE="Times New Roman" size="2">(A-20) Includes
    options to purchase up to 97,500 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    (A-21) Includes warrants to purchase up to 150,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774"><font FACE="Times New Roman" size="2">(A-22) Includes
    warrants to purchase up to 300,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    (A-23) Includes warrants to purchase up to 5,069,242 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774"><font FACE="Times New Roman" size="2">(A-24) Includes
    options to purchase up to 100,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    (A-25) Includes warrants to purchase up to 333,334 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774"><font FACE="Times New Roman" size="2">(A-26) Includes
    warrants to purchase up to 71,429 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    (A-27) Includes warrants to purchase up to 571,429 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774"><font FACE="Times New Roman" size="2">(A-28) Includes
    warrants to purchase up to 28,572 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    (A-29) Includes options to purchase up to 100,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774"><font FACE="Times New Roman" size="2">(A-30) Includes
    options to purchase up to 50,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    (A-31) Includes warrants to purchase up to 300,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774"><font FACE="Times New Roman" size="2">(A-32) Includes
    warrants to purchase up to 691,429 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    (A-33) Includes options to purchase up to 100,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774"><font FACE="Times New Roman" size="2">(A-34) Includes
    warrants to purchase up to 150,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    (A-35) Includes warrants to purchase up to 300,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774"><font FACE="Times New Roman" size="2">(A-36) Includes
    warrants to purchase up to 25,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    (A-37) Includes warrants to purchase up to 400,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774"><font FACE="Times New Roman" size="2">(A-38) Includes
    warrants to purchase up to 2,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    (A-39) Includes warrants to purchase up to 300,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774"><font FACE="Times New Roman" size="2">(A-40) Includes
    warrants to purchase up to 200,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    (A-41) Includes warrants to purchase up to 42,858 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774"><font FACE="Times New Roman" size="2">(A-42) Includes
    warrants to purchase up to 142,858 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    (A-43) Includes options to purchase up to 150,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774"><font FACE="Times New Roman" size="2">(A-44) Includes
    warrants to purchase up to 114,286 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    (A-45) Includes options to purchase up to 50,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="774"><font FACE="Times New Roman" size="2">(A-46) Includes no
    warrants or options.</font></td>
  </tr>
</table>
<table CELLSPACING="0" BORDER="0" WIDTH="80%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td width="776" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    (A-47) Includes warrants to purchase up to 1,000,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="776"><font FACE="Times New Roman" size="2">(A-48) Includes
    options to purchase up to 100,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="776" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    (A-49) Includes warrants to purchase up to 1,500,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="776"><font FACE="Times New Roman" size="2">(A-50) Includes
    warrants to purchase up to 200,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="776" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    (A-51) Includes warrants to purchase up to 1,000,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="776"><font FACE="Times New Roman" size="2">(A-52) Includes
    warrants to purchase up to 300,000 shares of common stock.</font></td>
  </tr>
  <tr>
    <td width="776" bgcolor="#E6E6E6"><font FACE="Times New Roman" size="2">
    (A-53) Includes warrants to purchase up to 750,000 shares of common stock.</font></td>
  </tr>
</table>
<font FACE="Times New Roman PS" SIZE="5"><b>
<hr><p Style='page-break-before:always'>
<p align="center"><a name="planofdistribution"></a>PLAN OF DISTRIBUTION</b></font></font><font FACE="Times New Roman PSMT" SIZE="5">
</p>
</font><font FACE="Times New Roman PSMT" SIZE="2">
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; We are registering for resale by the selling stockholders and
certain transferees a total of shares of common stock, of which shares are
issued and outstanding and up to shares are issuable upon exercise of warrants.
We will not receive any of the proceeds from the sale by the selling
stockholders of the shares of common stock, although we may receive up to
approximately $$4,546,741 upon the conversion of convertible notes and the
exercise of all of the warrants and options by the selling stockholders. We will
bear all fees and expenses incident to our obligation to register the shares of
common stock. If the shares of common stock are sold through broker-dealers or
agents, the selling stockholder will be responsible for any compensation to such
broker-dealers or agents. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The selling stockholders may pledge or grant a security
interest in some or all of the shares of common stock owned by them and, if they
default in the performance of their secured obligations, the pledgees or secured
parties may offer and sell the shares of common stock from time to time pursuant
to this prospectus. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The selling stockholders also may transfer and donate the
shares of common stock in other circumstances in which case the transferees,
donees, pledgees or other successors in interest will be the selling beneficial
owners for purposes of this prospectus. </p>
    <p>&nbsp;&nbsp;&nbsp; The selling stockholders will sell their shares of common stock subject
    to the following: </p>
    <ol type="i">
      <li>
      <p ALIGN="JUSTIFY">all or a portion of the shares of common stock
      beneficially owned by the selling stockholders or their respective pledgees, donees, transferees or successors in interest, may be sold on
      the OTC Bulletin Board Market, any national securities exchange or
      quotation service on which the shares of our common stock may be listed or
      quoted at the time of sale, in the over-the-counter market, in privately
      negotiated transactions, through the writing of options, whether such
      options are listed on an options exchange or otherwise, short sales or in
      a combination of such transactions; <br>
&nbsp;</p>
      </li>
      <li>each sale may be made at market prices prevailing at the time of
      such sale, at negotiated prices, at fixed prices, or at varying prices
      determined at the time of sale; <br>
&nbsp;</li>
      <li>
      <p ALIGN="JUSTIFY">some or all of the shares of common stock may be
      sold through one or more broker-dealers or agents and may involve crosses,
      block transactions, or hedging transactions. The selling stockholders may
      enter into hedging transactions with broker-dealers or agents, which may
      in turn engage in short sales of the common stock in the course of hedging
      in positions they assume. The selling stockholders may also sell shares of
      common stock short and deliver shares of common stock to close out short
      positions, or loan or pledge shares of common stock to broker-dealers or
      agent that in turn may sell such shares; and <br>
&nbsp;</p>
      </li>
      <li>
      <p ALIGN="JUSTIFY">in connection with such sales through one or more
      broker-dealers or agents, such broker-dealers or agents may receive
      compensation in the form of discounts, concessions or commissions from the
      selling stockholders and may receive commissions from the purchasers of
      the shares of common stock for whom they act as broker-dealer or agent or
      to whom they sell as principal (which discounts, concessions or
      commissions as to particular broker-dealers or agents may be in excess of
      those customary in the types of transactions involved). Any broker-dealer
      or agent participating in any such sale may be deemed to be an
      &quot;underwriter&quot; within the meaning of the Securities Act and will be
      required to deliver a copy of this prospectus to any person who purchases
      any share of common stock from or through such broker-dealer or agent. We
      have been advised that, as of the date hereof, none of the selling
      stockholders have made any arrangements with any broker-dealer or agent
      for the sale of their shares of common stock. </p>
      </li>
</ol>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The selling stockholders and any broker-dealer participating
in the distribution of the shares of common stock may be deemed to be
&quot;underwriters&quot; within the meaning of the Securities Act, and any profits
realized by the selling stockholders and any commissions paid, or any discounts
or concessions allowed to any such broker-dealer may be deemed to be
underwriting commissions or discounts under the Securities Act. In addition, any
shares of common stock covered by this prospectus which qualify for sale
pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to this
prospectus. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; If required at the time a particular offering of the shares
of common stock is made, a prospectus supplement or, if appropriate, a
post-effective amendment to the shelf registration statement of which this
prospectus is a part, will be distributed which will set forth the aggregate
amount of shares of common stock being offered and the terms of the offering,
including the name or names of any broker-dealers or agents, any discounts,
commissions and other terms constituting compensation from the selling
stockholder and any discounts, commissions or concessions allowed or reallowed
or paid to broker-dealers. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Under the securities laws of some states, the shares of
common stock may be sold in such states only through registered or licensed
brokers or dealers. In addition, in some states the shares of common stock may
not be sold unless such shares have been registered or qualified for sale in
such state or an exemption from registration or qualification is available and
is complied with. There can be no assurance that any selling stockholder will
sell any or all of the shares of common stock registered pursuant to the shelf
registration statement, of which this prospectus forms a part. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The selling stockholders and any other person participating
in such distribution will be subject to applicable provisions of the Exchange
Act and the rules and regulations thereunder, including, without limitation,
Regulation M of the Exchange Act, which may limit the timing of purchases and
sales of any of the shares of common stock by the selling stockholders and any
other participating person. Regulation M may also restrict the ability of any
person engaged in the distribution of the shares of common stock to engage in
market-making activities with respect to the shares of common stock. All of the
foregoing may affect the marketability of the shares of common stock and the ability of any person or entity to engage in
market-making activities with respect to the shares of common stock. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; We will bear all expenses of the registration of the shares
of common stock including, without limitation, Securities and Exchange
Commission filing fees and expenses of compliance with state securities or &quot;blue
sky&quot; laws. The selling stockholders will pay all underwriting discounts and
selling commissions and expenses, brokerage fees and transfer taxes, as well as
the fees and disbursements of counsel to and experts for the selling
stockholders, if any. We will indemnify the selling stockholders against
liabilities, including some liabilities under the Securities Act, in accordance
with the registration rights agreement or the selling stockholders will be
entitled to contribution. We will be indemnified by the selling stockholders
against civil liabilities, including liabilities under the Securities Act that
may arise from any written information furnished to us by the selling
stockholders for use in this prospectus, in accordance with the related
registration rights agreement or will be entitled to contribution. Once sold
under this shelf registration statement, of which this prospectus forms a part,
the shares of common stock will be freely tradable in the hands of persons other
than our affiliates. </p>
                <font FACE="Times New Roman PS" SIZE="5"><b>
                <hr><p Style='page-break-before:always'>
                <p align="center"><a name="descriptionofsecurities"></a>DESCRIPTION OF SECURITIES</b></font></font><font FACE="Times New Roman PSMT" SIZE="5">
                </p>
</font><font FACE="Times New Roman PSMT" SIZE="2">
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Our authorized capital stock consists of 150,000,000 shares
of common stock, without par value. As of April 23, 2004, approximately 85
million shares of our common stock are issued and outstanding and held by
approximately 11,000 stockholders of record. Of the shares of our issued and
outstanding common stock, shares are covered by this prospectus. In addition
shares or our common stock authorized but unissued as of the date of this
prospectus will be issued on exercise of warrants held by certain selling
stockholders. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The following description of our capital stock is a summary
of the material terms of such stock. It does not purport to be complete and is
subject in all respects to the provisions of our Certificate of Incorporation
and our Bylaws, copies of which have been filed as exhibits to the registration
statement of which this prospectus is a part and to applicable New Jersey law.
</p>
<font FACE="Times New Roman PS" SIZE="2"><b>
<p>Common Stock</b></font><font FACE="Times New Roman PSMT" SIZE="2"> </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Each holder of our common stock is entitled to one vote for
each share held of record on all matters submitted to a vote of stockholders.
Cumulative voting for the election of Directors is not provided for in our
Certificate of Incorporation, which means that the holders of a majority of the
shares of common stock voted elects the Directors then standing for election.
The holders of outstanding shares of common stock are entitled to receive
dividends out of assets legally available for dividends, at such appropriate
times and in such amounts as our Board of Directors decides. The common stock is
not entitled to preemptive rights or other subscription rights and is not
subject to conversion or redemption. Upon liquidation, dissolution or winding up
of our affairs, the holders of common stock will be entitled to share ratably in
all assets remaining after the payment of liabilities. Shares of common stock
shall be transferred only on our books upon surrender to us or a duly appointed
transfer agent of the certificate or certificates properly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer. </p>
</font><font FACE="Times New Roman PS" SIZE="2"><b>
<p>Common Stock Warrants</b></font><font FACE="Times New Roman PSMT" SIZE="2">
</p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; This prospectus also covers shares of common stock
purchasable pursuant to outstanding warrants and options. The exercise price of
these warrants range from $.01 to $1.05. These warrants and options have
expiration terms ranging from 2005 to 2008. </p>
</font><font FACE="Times New Roman PS" SIZE="2"><b>
<p>Filling Vacancies on the Board</b></font><font FACE="Times New Roman PSMT" SIZE="2">
</p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The Certificate of Incorporation provides that any vacancy on
the Board that results from an increase in the number of Directors during the
interim between annual meetings or special meetings of shareholders may be
filled by the Board. These provisions could temporarily prevent any shareholder
from obtaining majority representation on the Board by enlarging the Board and
filling the new directorships with its own nominees. </p>
</font><font FACE="Times New Roman PS" SIZE="5"><b>
<hr><p Style='page-break-before:always'>
<p align="center">New Jersey Shareholders Protection Act</b></font></font><font FACE="Times New Roman PSMT" SIZE="5">
</p>
</font><font FACE="Times New Roman PSMT" SIZE="2">
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; There are provisions of New Jersey law, and our Certificate
of Incorporation and Bylaws, that may have an anti-takeover effect. These
provisions are designed to protect shareholders against coercive, unfair or
inadequate tender offers and other abusive tactics and to encourage any person
contemplating a business combination with us to negotiate with our Board of
Directors for the fair and equitable treatment of all shareholders. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; New Jersey has adopted a type of anti-takeover statute known
as the New Jersey Shareholders Protection Act. Subject to numerous
qualifications and exceptions, the statute prohibits an interested shareholder
of a corporation from effecting a business combination with the corporation for
a period of five years unless the corporation's board approved the combination prior to the
shareholder becoming an interested shareholder. In addition, but not in
limitation of the five-year restriction, if applicable, corporations covered by
the New Jersey statute may not engage at any time in a business combination with
any interested shareholder of that corporation unless the combination is
approved by the board prior to the interested shareholder's stock acquisition
date, the combination receives the approval of two-thirds of the voting stock of
the corporation not beneficially owned by the interested shareholder, or the
combination meets minimum financial terms specified by the statute. An
&quot;interested shareholder&quot; is defined to include any beneficial owner of 10% or
more of the voting power of the outstanding voting stock of the corporation and
any affiliate or associate of the corporation who within the prior five year
period has at any time owned 10% or more of the voting power. The term &quot;business
combination&quot; is defined broadly to include, among other things: </p>
<p>the merger or consolidation of the corporation with the interested
shareholder or any corporation that after the merger or consolidation would be
an affiliate or associate of the interested shareholder, </p>
<p>the sale, lease, exchange, mortgage, pledge, transfer or other disposition to
an interested shareholder or any affiliate or associate of the interested
shareholder of 10% or more of the corporation's assets, or </p>
<p>the issuance or transfer to an interested shareholder or any affiliate or
associate of the interested shareholder of 5% or more of the aggregate market
value of the stock of the corporation. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The effect of the statute is to protect non-tendering,
post-acquisition minority shareholders from mergers in which they will be
&quot;squeezed out&quot; after the merger, by prohibiting transactions in which an
acquirer could favor itself at the expense of minority shareholders. The New
Jersey statute generally applies to corporations that are organized under New
Jersey law, have either their principal executive offices or significant
business operations located in New Jersey, and have a class of stock registered
or traded on a national securities exchange or registered with the Securities
and Exchange Commission pursuant to Section 12(g) of the Securities Exchange Act
of 1934. </p>
                    <font FACE="Times New Roman PS" SIZE="5"><b>
                    <hr><p Style='page-break-before:always'>
                    <p align="center"><a name="legalmatters"></a>LEGAL MATTERS</b></font></font><font FACE="Times New Roman PSMT" SIZE="5">
                    </p>
</font><font FACE="Times New Roman PSMT" SIZE="2">
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The validity of the common stock we are offering pursuant to
this prospectus will be passed upon by Martin S. Smiley General Counsel to the
Company. Mr. Smiley beneficially owns an aggregate of 3,841,050 shares of common
stock and 0 shares are being registered as part of this prospectus. </p>
<font FACE="Times New Roman PS" SIZE="5"><b>
<hr><p Style='page-break-before:always'>
<p align="center"><a name="experts"></a>EXPERTS</b></font></font><font FACE="Times New Roman PSMT" SIZE="5"> </p>
</font><font FACE="Times New Roman PSMT" SIZE="2">
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The financial statements and schedules included in this
prospectus and elsewhere in the registration statement, to the extent and for
the periods indicated in their reports, have been audited or reviewed, as the
case may be, by Rosenberg Rich Baker Berman &amp; Company and audited or reviewed,
as the case may be, by Arthur Andersen, LLP and Schuhalter, Coughlin &amp; Suozzo,
PC, independent public accountants, and are included in reliance upon the
authority of said firms as experts in giving said reports. Prior to the date of
this prospectus, Arthur Andersen was indicted in connection with its rendering
of services to another company. Therefore, Arthur Andersen withdrew from
practice before the SEC effective prior to the date hereof and many of the
accountants at Arthur Andersen have left their current jobs or have been
searching for a new place of employment. Based on these factors, after
reasonable efforts, including numerous phone calls, we were unable to contact
our former audit partner at Arthur Andersen and therefore were unable to obtain
Arthur Andersen's consent to the inclusion of their report dated October 12,
2001. Accordingly, we have dispensed with the requirement to file their consent
in reliance upon Rule 437a of the securities act. Because Arthur Andersen has
not consented to the inclusion of their report in this prospectus, you will not
be able to recover against Arthur Andersen under Section 11 of the securities
act for any untrue statements of a material fact contained in the financial
statements audited by Arthur Andersen or any omissions to state a material fact
required to be stated therein. As of June 30, 2003, Schuhalter, Coughlin &amp;
Suozzo, PC, owns approximately 417,600 shares of common stock directly and
indirectly; options to purchase 245,000 shares of common stock and warrants to
purchase 315,800 shares of common stock, of which of such shares are being
registered pursuant to this prospectus. All of such securities owned by
Schuhalter, Coughlin &amp; Suozzo, PC, other than 146,800 shares of common stock
which it has acquired on the open market subsequent to April 2001, were issued
to Schuhalter, Coughlin &amp; Suozzo, PC in consideration for non-audit consulting
services and/or satisfaction of payables related to non-audit consulting
services and were issued after Schuhalter, Coughlin &amp; Suozzo, PC was no longer
our independent public accountants. </p>
<font FACE="Times New Roman PS" SIZE="5"><b>
<hr><p Style='page-break-before:always'>
<p align="center"><a name="addinformation"></a>WHERE YOU CAN FIND ADDITIONAL INFORMATION</b></font></font><font FACE="Times New Roman PSMT" SIZE="5">
</p>
</font>
<font FACE="Times New Roman PSMT" SIZE="2">
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; We are subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the &quot;Exchange Act&quot;). In accordance
with the Exchange Act, we file reports, proxy statements and other information
with the Securities and Exchange Commission. Our reports, proxy statements and
other information filed with the SEC may be inspected and copied at the public
reference facilities maintained by the SEC at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. Copies of such material also may be obtained at
prescribed rates from the Public Reference Branch of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549-1004. Please call the SEC at 1-800-SEC-0330
for further information on the public reference rooms. The SEC maintains a web
site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC. </p>
    <p>&nbsp;&nbsp;&nbsp; You may request a copy of these filings, at no cost by writing or
    telephoning us at the following address: </p>
    <p align="center">mPhase Technologies, Inc. <br>
    587 Connecticut
                Avenue <br>
    Norwalk, Connecticut 06854-0566 <br>
    Attention: General
                Counsel <br>
    (203) 831-2242 </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; You should rely only on the information incorporated by
reference or provided in this prospectus or any prospectus supplement. We have
not authorized anyone else to provide you with different information. The
selling security holders will not make an offer of the shares of our common
stock in any state where the offer is not permitted. You should not assume that
the information in this prospectus or any prospectus supplement is accurate as
of any date other than the date on the front of those documents. </p>
<hr><p Style='page-break-before:always'>
<div align="center">
  <center>
<table CELLSPACING="0" BORDER="0" WIDTH="80%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="100%" colspan="2" align="center">
    <font FACE="Times New Roman PS" SIZE="5"><b>mPHASE
    TECHNOLOGIES, INC.</b></font></td>
  </tr>
  <tr>
    <td WIDTH="100%" colspan="2" align="center">
    <font FACE="Times New Roman PS" SIZE="5"><b>INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS</b></font></td>
  </tr>
  <tr>
    <td WIDTH="76%">&nbsp;</td>
    <td WIDTH="24%" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="76%" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Report of
    Rosenberg Rich Baker Berman &amp; Company</font></td>
    <td WIDTH="24%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">F-1</font></td>
  </tr>
  <tr>
    <td WIDTH="76%"><font FACE="Times New Roman PSMT" SIZE="2">Report of Arthur
    Andersen LLP</font></td>
    <td WIDTH="24%" align="right"><font FACE="Times New Roman PSMT" SIZE="2">F-2</font></td>
  </tr>
  <tr>
    <td WIDTH="76%" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Report of
    Schuhalter, Coughlin &amp; Suozzo, PC</font></td>
    <td WIDTH="24%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">F-3</font></td>
  </tr>
  <tr>
    <td WIDTH="76%"><font FACE="Times New Roman PSMT" SIZE="2">Consolidated
    Balance Sheets as of June 30, 2002, June 30, 2003 and December 31, 2003</font></td>
    <td WIDTH="24%" align="right"><font FACE="Times New Roman PSMT" SIZE="2">F-4</font></td>
  </tr>
  <tr>
    <td WIDTH="76%"><font FACE="Times New Roman PSMT" SIZE="2">(Unaudited)</font></td>
    <td WIDTH="24%" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="76%" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Consolidated
    Statements of Operations for the years ended June 30, 2001, 2002, 2003, and
    for the</font></td>
    <td WIDTH="24%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">F-5</font></td>
  </tr>
  <tr>
    <td WIDTH="76%" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">period from
    inception (October 2, 1996) through June 30, 2003</font></td>
    <td WIDTH="24%" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="76%"><font FACE="Times New Roman PSMT" SIZE="2">Unaudited
    Consolidated Statements of Operations for the six months ended December 31,
    2002 and</font></td>
    <td WIDTH="24%" align="right"><font FACE="Times New Roman PSMT" SIZE="2">F-6</font></td>
  </tr>
  <tr>
    <td WIDTH="76%"><font FACE="Times New Roman PSMT" SIZE="2">2003, and for the
    period from inception (October 2, 1996) through December 31, 2003</font></td>
    <td WIDTH="24%" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="76%" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Consolidated
    Statements of Changes in Stockholders' Equity (Deficit) for the period from
    inception</font></td>
    <td WIDTH="24%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">F-7-12</font></td>
  </tr>
  <tr>
    <td WIDTH="76%" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(October 2, 1996)
    to June 30, 1998 and for each of the six years in the period ended June 30,
    2003</font></td>
    <td WIDTH="24%" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="76%"><font FACE="Times New Roman PSMT" SIZE="2">Unaudited
    Consolidated Statement of Changes in Shareholders' Deficit for the six
    months ended</font></td>
    <td WIDTH="24%" align="right"><font FACE="Times New Roman PSMT" SIZE="2">F-13</font></td>
  </tr>
  <tr>
    <td WIDTH="76%"><font FACE="Times New Roman PSMT" SIZE="2">December 31, 2003</font></td>
    <td WIDTH="24%" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="76%" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Consolidated
    Statements of Cash Flows for the years ended June 30, 2001, 2002 and 2003,
    and for</font></td>
    <td WIDTH="24%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">F-14</font></td>
  </tr>
  <tr>
    <td WIDTH="76%" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">the period from
    inception (October 2, 1996) through June 30, 2003</font></td>
    <td WIDTH="24%" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="76%"><font FACE="Times New Roman PSMT" SIZE="2">Unaudited
    Consolidated Statements of Cash Flows for the six months ended December 31,
    2002</font></td>
    <td WIDTH="24%" align="right"><font FACE="Times New Roman PSMT" SIZE="2">F-15</font></td>
  </tr>
  <tr>
    <td WIDTH="76%"><font FACE="Times New Roman PSMT" SIZE="2">and 2003, and for
    the period from inception (October 2, 1996) through December 31, 2003</font></td>
    <td WIDTH="24%" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="76%" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Notes to
    Consolidated Financial Statements</font></td>
    <td WIDTH="24%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">F-16</font></td>
  </tr>
</table>
  </center>
</div>
<hr><p Style='page-break-before:always'>
          <font FACE="Times New Roman PS" SIZE="5"><b>
          <p align="center"><a name="richbakerberman"></a>REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS</b></font></font><font FACE="Times New Roman PSMT" SIZE="5">
          </p>
</font><font FACE="Times New Roman PSMT" SIZE="2">
<p>To the Board of Directors and Stockholders of <br>
mPhase Technologies, Inc.: </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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, 2003 and 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 each of the
two years in the period ended June 30, 2003 and for the period from inception
(October 2, 1996) to June 30, 2003. 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, 2001. Such amounts are included in the cumulative from inception to
June 30, 2003 totals of the statements of operations, changes in stockholders'
equity (deficit) and cash flows and reflect total net loss of 83 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that we plan
and perform the audits 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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, 2003 and 2002 and the results of their operations
and their cash flows for each of the two years in the period ended June 30, 2003
and for the period from inception to June 30, 2003, in conformity with
accounting principles generally accepted in the United States. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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 stockholders 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. </p>
<p>Rosenberg Rich Baker Berman &amp; Company <br>
Bridgewater, NJ </p>
<p>September 10, 2003 </p>
<hr><p Style='page-break-before:always'>
          <font FACE="Times New Roman PS" SIZE="5"><b>
          <p align="center"><a name="arthurandersen"></a>REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS</b></font></font><font FACE="Times New Roman PSMT" SIZE="5">
          </p>
</font><font FACE="Times New Roman PSMT" SIZE="2">
<p>To the Board of Directors and Stockholders of <br>
mPhase Technologies, Inc.: </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. </p>
<p>Arthur Andersen LLP <br>
Stamford, Connecticut </p>
<p>October 12, 2001 </p>
<p ALIGN="JUSTIFY">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. </p>
<hr><p Style='page-break-before:always'>
        <font FACE="Times New Roman PS" SIZE="5"><b>
        <p align="center"><a name="schuhalter"></a>REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS</b></font></font><font FACE="Times New Roman PSMT" SIZE="5">
        </p>
</font><font FACE="Times New Roman PSMT" SIZE="2">
<p>To the Board of Directors and Stockholders of <br>
mPhase Technologies, Inc.: </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; We have audited the statements of operations, changes in
stockholders's 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. </p>
<p>Schuhalter, Coughlin &amp; Suozzo, PC <br>
Raritan, New Jersey </p>
<p>January 28, 1999 </p>
<hr><p Style='page-break-before:always'>
<div align="center">
  <center>
<table CELLSPACING="0" BORDER="0" WIDTH="80%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="991" colspan="5" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    <font FACE="Times New Roman PS" SIZE="4"><b>mPHASE
    TECHNOLOGIES, INC.</b></font></font></td>
  </tr>
  <tr>
    <td WIDTH="991" colspan="5" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    <font FACE="Times New Roman PS" SIZE="4"><b>(A DEVELOPMENT
    STAGE COMPANY)</b></font></font></td>
  </tr>
  <tr>
    <td WIDTH="991" colspan="5" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    <font FACE="Times New Roman PS" SIZE="4"><b>CONSOLIDATED
    BALANCE SHEETS</b></font></font></td>
  </tr>
  <tr>
    <td WIDTH="618">&nbsp;</td>
    <td WIDTH="243" align="center" colspan="2">
    <p align="center"><font FACE="Times New Roman PSMT" SIZE="2">June 30,</font></td>
    <td WIDTH="130" COLSPAN="2" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    December</font></td>
  </tr>
  <tr>
    <td WIDTH="618">&nbsp;</td>
    <td WIDTH="125" align="center">&nbsp;</td>
    <td WIDTH="118" align="center">&nbsp;</td>
    <td WIDTH="130" COLSPAN="2" align="center"><font FACE="Times New Roman PSMT" SIZE="2">31,</font></td>
  </tr>
  <tr>
    <td WIDTH="618">&nbsp;</td>
    <td WIDTH="125" align="center"><font FACE="Times New Roman PSMT" SIZE="2">2002</font></td>
    <td WIDTH="118" align="center"><font FACE="Times New Roman PSMT" SIZE="2">2003</font></td>
    <td WIDTH="130" COLSPAN="2" align="center"><font FACE="Times New Roman PSMT" SIZE="2">2003</font></td>
  </tr>
  <tr>
    <td WIDTH="618">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
    <td WIDTH="118" align="right">&nbsp;</td>
    <td WIDTH="130" COLSPAN="2" align="right">
    <p align="center"><font size="2">(unaudited)</font></td>
  </tr>
  <tr>
    <td WIDTH="618"><font FACE="Times New Roman PS" SIZE="2"><b>ASSETS</b></font></td>
    <td WIDTH="125" align="right">&nbsp;</td>
    <td WIDTH="118" align="right">&nbsp;</td>
    <td WIDTH="130" COLSPAN="2" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="618"><font FACE="Times New Roman PSMT" SIZE="2">Current assets:</font></td>
    <td WIDTH="125" align="right">&nbsp;</td>
    <td WIDTH="118" align="right">&nbsp;</td>
    <td WIDTH="130" COLSPAN="2" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="618" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Cash and cash
    equivalents</font></td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$47,065</font></td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$396,860</font></td>
    <td WIDTH="130" COLSPAN="2" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $319,923</font></td>
  </tr>
  <tr>
    <td WIDTH="618"><font FACE="Times New Roman PSMT" SIZE="2">Accounts
    receivable, net of bad debt reserve of $2,906 and $0, respectively</font></td>
    <td WIDTH="125" align="right"><font FACE="Times New Roman PSMT" SIZE="2">273,780</font></td>
    <td WIDTH="118" align="right"><font FACE="Times New Roman PSMT" SIZE="2">287,135</font></td>
    <td WIDTH="130" COLSPAN="2" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    182,136</font></td>
  </tr>
  <tr>
    <td WIDTH="618" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Stock
    subscription receivable</font></td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">110,000</font></td>
    <td WIDTH="130" COLSPAN="2" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    175,000</font></td>
  </tr>
  <tr>
    <td WIDTH="618"><font FACE="Times New Roman PSMT" SIZE="2">Inventory</font></td>
    <td WIDTH="125" align="right"><font FACE="Times New Roman PSMT" SIZE="2">3,342,716</font></td>
    <td WIDTH="118" align="right"><font FACE="Times New Roman PSMT" SIZE="2">2,103,328</font></td>
    <td WIDTH="130" COLSPAN="2" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    1,488,451</font></td>
  </tr>
  <tr>
    <td WIDTH="618" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Prepaid expenses
    and other current assets</font></td>
    <td WIDTH="125" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">830,589</font></td>
    <td WIDTH="118" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">100,329</font></td>
    <td WIDTH="130" COLSPAN="2" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    69,911</font></td>
  </tr>
  <tr>
    <td WIDTH="618"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Total current
    assets</font></td>
    <td WIDTH="125" align="right"><font FACE="Times New Roman PSMT" SIZE="2">4,494,150</font></td>
    <td WIDTH="118" align="right"><font FACE="Times New Roman PSMT" SIZE="2">2,997,652</font></td>
    <td WIDTH="130" COLSPAN="2" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    2,235,421</font></td>
  </tr>
  <tr>
    <td WIDTH="618" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Property and
    equipment, net</font></td>
    <td WIDTH="125" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">1,742,186</font></td>
    <td WIDTH="118" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">581,890</font></td>
    <td WIDTH="130" COLSPAN="2" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    240,067</font></td>
  </tr>
  <tr>
    <td WIDTH="618"><font FACE="Times New Roman PSMT" SIZE="2">Patents and
    licenses, net</font></td>
    <td WIDTH="125" align="right"><font FACE="Times New Roman PSMT" SIZE="2">685,349</font></td>
    <td WIDTH="118" align="right"><font FACE="Times New Roman PSMT" SIZE="2">184,857</font></td>
    <td WIDTH="130" COLSPAN="2" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    129,924</font></td>
  </tr>
  <tr>
    <td WIDTH="618" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Other assets</font></td>
    <td WIDTH="125" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">20,830</font></td>
    <td WIDTH="118" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">17,250</font></td>
    <td WIDTH="130" COLSPAN="2" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    17,250</font></td>
  </tr>
  <tr>
    <td WIDTH="618"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Total assets</font></td>
    <td WIDTH="125" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">$6,942,515</font></td>
    <td WIDTH="118" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">$3,781,649</font></td>
    <td WIDTH="130" COLSPAN="2" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    $2,622,661</font></td>
  </tr>
  <tr>
    <td WIDTH="618" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="130" COLSPAN="2" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="618"><font FACE="Times New Roman PS" SIZE="2"><b>LIABILITIES AND
    STOCKHOLDERS' EQUITY (DEFICIT)</b></font></td>
    <td WIDTH="125" align="right">&nbsp;</td>
    <td WIDTH="118" align="right">&nbsp;</td>
    <td WIDTH="130" COLSPAN="2" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="618" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Current
    liabilities:</font></td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="130" COLSPAN="2" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="618"><font FACE="Times New Roman PSMT" SIZE="2">Accounts payable</font></td>
    <td WIDTH="125" align="right"><font FACE="Times New Roman PSMT" SIZE="2">$2,819,245</font></td>
    <td WIDTH="118" align="right"><font FACE="Times New Roman PSMT" SIZE="2">$2,352,961</font></td>
    <td WIDTH="130" COLSPAN="2" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    $2,731,266</font></td>
  </tr>
  <tr>
    <td WIDTH="618" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Accrued expenses</font></td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">673,065</font></td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">885,735</font></td>
    <td WIDTH="130" COLSPAN="2" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    430,016</font></td>
  </tr>
  <tr>
    <td WIDTH="618"><font FACE="Times New Roman PSMT" SIZE="2">Due to related
    parties</font></td>
    <td WIDTH="125" align="right"><font FACE="Times New Roman PSMT" SIZE="2">35,000</font></td>
    <td WIDTH="118" align="right"><font FACE="Times New Roman PSMT" SIZE="2">187,372</font></td>
    <td WIDTH="130" COLSPAN="2" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    584,902</font></td>
  </tr>
  <tr>
    <td WIDTH="618" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Notes payable,
    current</font></td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">353,339</font></td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">762,735</font></td>
    <td WIDTH="130" COLSPAN="2" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    822,804</font></td>
  </tr>
  <tr>
    <td WIDTH="618"><font FACE="Times New Roman PSMT" SIZE="2">Deferred revenue</font></td>
    <td WIDTH="125" align="right"><font FACE="Times New Roman PSMT" SIZE="2">214,180</font></td>
    <td WIDTH="118" align="right"><font FACE="Times New Roman PSMT" SIZE="2">214,180</font></td>
    <td WIDTH="130" COLSPAN="2" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    214,180</font></td>
  </tr>
  <tr>
    <td WIDTH="618" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Notes payable,
    related parties</font></td>
    <td WIDTH="125" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="118" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="130" COLSPAN="2" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    460,000</font></td>
  </tr>
  <tr>
    <td WIDTH="618"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Total current
    liabilities</font></td>
    <td WIDTH="125" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">4,094,829</font></td>
    <td WIDTH="118" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">4,402,983</font></td>
    <td WIDTH="130" COLSPAN="2" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    5,243,169</font></td>
  </tr>
  <tr>
    <td WIDTH="618" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Notes payable,
    net of current portion</font></td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">1,014,218</font></td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">586,303</font></td>
    <td WIDTH="130" COLSPAN="2" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
  </tr>
  <tr>
    <td WIDTH="618"><font FACE="Times New Roman PSMT" SIZE="2">Other liabilities</font></td>
    <td WIDTH="125" align="right"><font FACE="Times New Roman PSMT" SIZE="2">1,211,249</font></td>
    <td WIDTH="118" align="right"><font FACE="Times New Roman PSMT" SIZE="2">1,561,249</font></td>
    <td WIDTH="130" COLSPAN="2" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    2,085,484</font></td>
  </tr>
  <tr>
    <td WIDTH="618" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Other
    liabilities, related parties</font></td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">665,068</font></td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="130" COLSPAN="2" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
  </tr>
  <tr>
    <td WIDTH="618"><font FACE="Times New Roman PSMT" SIZE="2">Notes payable,
    related parties</font></td>
    <td WIDTH="125" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="118" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">460,000</font></td>
    <td WIDTH="130" COLSPAN="2" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
  </tr>
  <tr>
    <td WIDTH="618" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="130" COLSPAN="2" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="618"><font FACE="Times New Roman PS" SIZE="2"><b>COMMITMENTS AND
    CONTINGENCIES (Note 13)</b></font></td>
    <td WIDTH="125" align="right">&nbsp;</td>
    <td WIDTH="118" align="right">&nbsp;</td>
    <td WIDTH="130" COLSPAN="2" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="618"><font FACE="Times New Roman PS" SIZE="2"><b>STOCKHOLDERS'
    EQUITY (DEFICIT):</b></font></td>
    <td WIDTH="125" align="right">&nbsp;</td>
    <td WIDTH="118" align="right">&nbsp;</td>
    <td WIDTH="130" COLSPAN="2" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="618" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Common Stock,
    stated value $.01, 150,000,000 shares authorized;</font></td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">608,075</font></td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">714,535</font></td>
    <td WIDTH="130" COLSPAN="2" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    748,615</font></td>
  </tr>
  <tr>
    <td WIDTH="618" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">60,807,508,
    71,453,521 and 71,961,525 (unaudited), shares issued and</font></td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="130" COLSPAN="2" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="618" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">outstanding,
    respectively</font></td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="130" COLSPAN="2" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="618"><font FACE="Times New Roman PSMT" SIZE="2">Additional
    paid-in capital</font></td>
    <td WIDTH="125" align="right"><font FACE="Times New Roman PSMT" SIZE="2">100,751,28</font></td>
    <td WIDTH="118" align="right"><font FACE="Times New Roman PSMT" SIZE="2">104,081,04</font></td>
    <td WIDTH="130" COLSPAN="2" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    105,135,24</font></td>
  </tr>
  <tr>
    <td WIDTH="618" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">4</font></td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">9</font></td>
    <td WIDTH="130" COLSPAN="2" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="618"><font FACE="Times New Roman PSMT" SIZE="2">Deferred
    compensation</font></td>
    <td WIDTH="125" align="right"><font FACE="Times New Roman PSMT" SIZE="2">(23,923)</font></td>
    <td WIDTH="118" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="130" COLSPAN="2" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
  </tr>
  <tr>
    <td WIDTH="618" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Deficit
    accumulated during development stage</font></td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(101,366,2</font></td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(108,016,4</font></td>
    <td WIDTH="130" COLSPAN="2" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    (110,581,8</font></td>
  </tr>
  <tr>
    <td WIDTH="618">&nbsp;</td>
    <td WIDTH="125" align="right"><font FACE="Times New Roman PSMT" SIZE="2">86)</font></td>
    <td WIDTH="118" align="right"><font FACE="Times New Roman PSMT" SIZE="2">97)</font></td>
    <td WIDTH="130" COLSPAN="2" align="right"><font FACE="Times New Roman PSMT" SIZE="2">74)</font></td>
  </tr>
  <tr>
    <td WIDTH="618" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Unrecognized
    capital losses</font></td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(4,026)</font></td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="130" COLSPAN="2" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
  </tr>
  <tr>
    <td WIDTH="618"><font FACE="Times New Roman PSMT" SIZE="2">Less-treasury
    stock, 13,750 shares, at cost</font></td>
    <td WIDTH="125" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">(7,973)</font></td>
    <td WIDTH="118" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">(7,973)</font></td>
    <td WIDTH="130" COLSPAN="2" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    (7,973)</font></td>
  </tr>
  <tr>
    <td WIDTH="618"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Total
    stockholders' equity (deficit)</font></td>
    <td WIDTH="125" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">(42,849)</font></td>
    <td WIDTH="118" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">(3,228,886)</font></td>
    <td WIDTH="130" COLSPAN="2" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    (4,705,992)</font></td>
  </tr>
  <tr>
    <td WIDTH="618" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Total liabilities
    and stockholders' equity</font></td>
    <td WIDTH="125" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$6,942,515</font></td>
    <td WIDTH="118" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$3,781,649</font></td>
    <td WIDTH="130" COLSPAN="2" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $2,622,661</font></td>
  </tr>
  <tr>
    <td WIDTH="618">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
    <td WIDTH="118" align="right">&nbsp;</td>
    <td WIDTH="130" COLSPAN="2" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="861" COLSPAN="3"><font FACE="Times New Roman PSMT" SIZE="2">The
    accompanying notes are an integral part of these consolidated balance
    sheets.</font></td>
    <td WIDTH="130" COLSPAN="2">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="861" COLSPAN="3">&nbsp;</td>
    <td WIDTH="130"></td>
    <td width="1"></td>
  </tr>
</table>
  </center>
</div>
<hr><p Style='page-break-before:always'>
<div align="center">
  <center>
  <table CELLSPACING="0" BORDER="0" WIDTH="80%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
    <tr>
      <td WIDTH="993" COLSPAN="5" height="19" align="center">
      <font FACE="Times New Roman PS" SIZE="4"><b>mPHASE TECHNOLOGIES, INC.</b></font></td>
    </tr>
    <tr>
      <td WIDTH="993" COLSPAN="5" height="19" align="center">
      <font FACE="Times New Roman PS" SIZE="4"><b>(A DEVELOPMENT STAGE COMPANY)</b></font></td>
    </tr>
    <tr>
      <td WIDTH="993" COLSPAN="5" height="1" align="center">
      <font FACE="Times New Roman PS" SIZE="4"><b>CONSOLIDATED STATEMENTS OF
      OPERATIONS</b></font></td>
    </tr>
    <tr>
      <td WIDTH="544" height="19">&nbsp;</td>
      <td WIDTH="121" align="center" height="19">&nbsp;</td>
      <td WIDTH="111" align="center" height="19">&nbsp;</td>
      <td WIDTH="105" align="center" height="19">&nbsp;</td>
      <td WIDTH="112" align="center" height="19">
      <font FACE="Times New Roman PSMT" SIZE="2">From</font></td>
    </tr>
    <tr>
      <td WIDTH="544" height="19">&nbsp;</td>
      <td WIDTH="121" align="center" height="19">&nbsp;</td>
      <td WIDTH="111" align="center" height="19">&nbsp;</td>
      <td WIDTH="105" align="center" height="19">&nbsp;</td>
      <td WIDTH="112" align="center" height="19">
      <font FACE="Times New Roman PSMT" SIZE="2">Inception</font></td>
    </tr>
    <tr>
      <td WIDTH="544" height="19">&nbsp;</td>
      <td WIDTH="337" COLSPAN="3" align="center" height="19">
      <font FACE="Times New Roman PSMT" SIZE="2">For the Years Ended June 30,</font></td>
      <td WIDTH="112" align="center" height="19">
      <font FACE="Times New Roman PSMT" SIZE="2">(October 2,</font></td>
    </tr>
    <tr>
      <td WIDTH="544" height="19">&nbsp;</td>
      <td WIDTH="121" align="center" height="19">&nbsp;</td>
      <td WIDTH="111" align="center" height="19">&nbsp;</td>
      <td WIDTH="105" align="center" height="19">&nbsp;</td>
      <td WIDTH="112" align="center" height="19">
      <font FACE="Times New Roman PSMT" SIZE="2">1996)</font></td>
    </tr>
    <tr>
      <td WIDTH="544" height="19">&nbsp;</td>
      <td WIDTH="121" align="center" height="19">
      <font FACE="Times New Roman PSMT" SIZE="2">2001</font></td>
      <td WIDTH="111" align="center" height="19">
      <font FACE="Times New Roman PSMT" SIZE="2">2002</font></td>
      <td WIDTH="105" align="center" height="19">
      <font FACE="Times New Roman PSMT" SIZE="2">2003</font></td>
      <td WIDTH="112" align="center" height="19">
      <font FACE="Times New Roman PSMT" SIZE="2">to June 30,</font></td>
    </tr>
    <tr>
      <td WIDTH="544" height="19">&nbsp;</td>
      <td WIDTH="121" align="center" height="19">&nbsp;</td>
      <td WIDTH="111" align="center" height="19">&nbsp;</td>
      <td WIDTH="105" align="center" height="19">&nbsp;</td>
      <td WIDTH="112" align="center" height="19">
      <font FACE="Times New Roman PSMT" SIZE="2">2003</font></td>
    </tr>
    <tr>
      <td WIDTH="544" height="19">&nbsp;</td>
      <td WIDTH="121" align="right" height="19">&nbsp;</td>
      <td WIDTH="111" align="right" height="19">&nbsp;</td>
      <td WIDTH="105" align="right" height="19">&nbsp;</td>
      <td WIDTH="112" align="right" height="19">&nbsp;</td>
    </tr>
    <tr>
      <td WIDTH="544" height="15" bgcolor="#E6E6E6"><font FACE="Times New Roman PS" SIZE="2"><b>
      TOTAL NET REVENUES</b></font></td>
      <td WIDTH="121" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">$10,524,134</font></td>
      <td WIDTH="111" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">$2,582,446</font></td>
      <td WIDTH="105" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">$1,581,639</font></td>
      <td WIDTH="112" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">$14,967,695</font></td>
    </tr>
    <tr>
      <td WIDTH="544" height="19">&nbsp;</td>
      <td WIDTH="121" align="right" height="19">&nbsp;</td>
      <td WIDTH="111" align="right" height="19">&nbsp;</td>
      <td WIDTH="105" align="right" height="19">&nbsp;</td>
      <td WIDTH="112" align="right" height="19">&nbsp;</td>
    </tr>
    <tr>
      <td WIDTH="544" height="19" bgcolor="#E6E6E6"><font FACE="Times New Roman PS" SIZE="2"><b>
      COSTS AND EXPENSES:</b></font></td>
      <td WIDTH="121" align="right" height="19" bgcolor="#E6E6E6">&nbsp;</td>
      <td WIDTH="111" align="right" height="19" bgcolor="#E6E6E6">&nbsp;</td>
      <td WIDTH="105" align="right" height="19" bgcolor="#E6E6E6">&nbsp;</td>
      <td WIDTH="112" align="right" height="19" bgcolor="#E6E6E6">&nbsp;</td>
    </tr>
    <tr>
      <td WIDTH="544" height="15"><font FACE="Times New Roman PSMT" SIZE="2">
      Cost of Sales (See also Note 11 Related Party Transactions)</font></td>
      <td WIDTH="121" align="right" height="15">
      <font FACE="Times New Roman PSMT" SIZE="2">5,804,673</font></td>
      <td WIDTH="111" align="right" height="15">
      <font FACE="Times New Roman PSMT" SIZE="2">2,415,129</font></td>
      <td WIDTH="105" align="right" height="15">
      <font FACE="Times New Roman PSMT" SIZE="2">1,493,394</font></td>
      <td WIDTH="112" align="right" height="15">
      <font FACE="Times New Roman PSMT" SIZE="2">9,844,952</font></td>
    </tr>
    <tr>
      <td WIDTH="544" height="15" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
      Research and development (including non-cash stock</font></td>
      <td WIDTH="121" align="right" height="15" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">10,779,570</font></td>
      <td WIDTH="111" align="right" height="15" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">3,819,583</font></td>
      <td WIDTH="105" align="right" height="15" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">3,538,305</font></td>
      <td WIDTH="112" align="right" height="15" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">34,347,079</font></td>
    </tr>
    <tr>
      <td WIDTH="544" height="19" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
      related charges of $0, $267,338, $385,495 and $2,045,669,</font></td>
      <td WIDTH="121" align="right" height="19" bgcolor="#E6E6E6">&nbsp;</td>
      <td WIDTH="111" align="right" height="19" bgcolor="#E6E6E6">&nbsp;</td>
      <td WIDTH="105" align="right" height="19" bgcolor="#E6E6E6">&nbsp;</td>
      <td WIDTH="112" align="right" height="19" bgcolor="#E6E6E6">&nbsp;</td>
    </tr>
    <tr>
      <td WIDTH="544" height="19" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
      respectively) (See also Note 11 Related Party Transactions)</font></td>
      <td WIDTH="121" align="right" height="19" bgcolor="#E6E6E6">&nbsp;</td>
      <td WIDTH="111" align="right" height="19" bgcolor="#E6E6E6">&nbsp;</td>
      <td WIDTH="105" align="right" height="19" bgcolor="#E6E6E6">&nbsp;</td>
      <td WIDTH="112" align="right" height="19" bgcolor="#E6E6E6">&nbsp;</td>
    </tr>
    <tr>
      <td WIDTH="544" height="15"><font FACE="Times New Roman PSMT" SIZE="2">
      General and administrative (including non-cash stock</font></td>
      <td WIDTH="121" align="right" height="15">
      <font FACE="Times New Roman PSMT" SIZE="2">17,321,614</font></td>
      <td WIDTH="111" align="right" height="15">
      <font FACE="Times New Roman PSMT" SIZE="2">7,038,923</font></td>
      <td WIDTH="105" align="right" height="15">
      <font FACE="Times New Roman PSMT" SIZE="2">2,683,534</font></td>
      <td WIDTH="112" align="right" height="15">
      <font FACE="Times New Roman PSMT" SIZE="2">74,877,136</font></td>
    </tr>
    <tr>
      <td WIDTH="544" height="19"><font FACE="Times New Roman PSMT" SIZE="2">
      related charges of $7,398,455, $2,994,111, $748,840 and</font></td>
      <td WIDTH="121" align="right" height="19">&nbsp;</td>
      <td WIDTH="111" align="right" height="19">&nbsp;</td>
      <td WIDTH="105" align="right" height="19">&nbsp;</td>
      <td WIDTH="112" align="right" height="19">&nbsp;</td>
    </tr>
    <tr>
      <td WIDTH="544" height="19"><font FACE="Times New Roman PSMT" SIZE="2">
      $46,090,349, respectively)(See also Note 11 Related Party</font></td>
      <td WIDTH="121" align="right" height="19">&nbsp;</td>
      <td WIDTH="111" align="right" height="19">&nbsp;</td>
      <td WIDTH="105" align="right" height="19">&nbsp;</td>
      <td WIDTH="112" align="right" height="19">&nbsp;</td>
    </tr>
    <tr>
      <td WIDTH="544" height="19"><font FACE="Times New Roman PSMT" SIZE="2">
      Transactions)</font></td>
      <td WIDTH="121" align="right" height="19">&nbsp;</td>
      <td WIDTH="111" align="right" height="19">&nbsp;</td>
      <td WIDTH="105" align="right" height="19">&nbsp;</td>
      <td WIDTH="112" align="right" height="19">&nbsp;</td>
    </tr>
    <tr>
      <td WIDTH="544" height="15" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
      Depreciation and amortization</font></td>
      <td WIDTH="121" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">660,372</font></td>
      <td WIDTH="111" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">670,183</font></td>
      <td WIDTH="105" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">515,417</font></td>
      <td WIDTH="112" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">2,767,029</font></td>
    </tr>
    <tr>
      <td WIDTH="544" height="15"><font FACE="Times New Roman PSMT" SIZE="2">
      Total costs and expenses</font></td>
      <td WIDTH="121" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3">
      <font FACE="Times New Roman PSMT" SIZE="2">34,566,229</font></td>
      <td WIDTH="111" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3">
      <font FACE="Times New Roman PSMT" SIZE="2">13,943,818</font></td>
      <td WIDTH="105" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3">
      <font FACE="Times New Roman PSMT" SIZE="2">8,230,650</font></td>
      <td WIDTH="112" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3">
      <font FACE="Times New Roman PSMT" SIZE="2">121,836,196</font></td>
    </tr>
    <tr>
      <td WIDTH="544" height="15" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
      Loss from operations</font></td>
      <td WIDTH="121" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">(24,042,095)</font></td>
      <td WIDTH="111" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">(11,361,372)</font></td>
      <td WIDTH="105" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">(6,649,011)</font></td>
      <td WIDTH="112" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">(106,868,501)</font></td>
    </tr>
    <tr>
      <td WIDTH="544" height="19">&nbsp;</td>
      <td WIDTH="121" align="right" height="19">&nbsp;</td>
      <td WIDTH="111" align="right" height="19">&nbsp;</td>
      <td WIDTH="105" align="right" height="19">&nbsp;</td>
      <td WIDTH="112" align="right" height="19">&nbsp;</td>
    </tr>
    <tr>
      <td WIDTH="544" height="19" bgcolor="#E6E6E6"><font FACE="Times New Roman PS" SIZE="2"><b>
      OTHER INCOME (EXPENSE):</b></font></td>
      <td WIDTH="121" align="right" height="19" bgcolor="#E6E6E6">&nbsp;</td>
      <td WIDTH="111" align="right" height="19" bgcolor="#E6E6E6">&nbsp;</td>
      <td WIDTH="105" align="right" height="19" bgcolor="#E6E6E6">&nbsp;</td>
      <td WIDTH="112" align="right" height="19" bgcolor="#E6E6E6">&nbsp;</td>
    </tr>
    <tr>
      <td WIDTH="544" height="15"><font FACE="Times New Roman PSMT" SIZE="2">
      Gain on extinguishments</font></td>
      <td WIDTH="121" align="right" height="15">
      <font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
      <td WIDTH="111" align="right" height="15">
      <font FACE="Times New Roman PSMT" SIZE="2">142,236</font></td>
      <td WIDTH="105" align="right" height="15">
      <font FACE="Times New Roman PSMT" SIZE="2">61,226</font></td>
      <td WIDTH="112" align="right" height="15">
      <font FACE="Times New Roman PSMT" SIZE="2">203,462</font></td>
    </tr>
    <tr>
      <td WIDTH="544" height="15" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
      Minority interest loss in consolidated subsidiary</font></td>
      <td WIDTH="121" align="right" height="15" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
      <td WIDTH="111" align="right" height="15" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
      <td WIDTH="105" align="right" height="15" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
      <td WIDTH="112" align="right" height="15" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">20,000</font></td>
    </tr>
    <tr>
      <td WIDTH="544" height="15"><font FACE="Times New Roman PSMT" SIZE="2">
      Loss from unconsolidated subsidiary</font></td>
      <td WIDTH="121" align="right" height="15">
      <font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
      <td WIDTH="111" align="right" height="15">
      <font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
      <td WIDTH="105" align="right" height="15">
      <font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
      <td WIDTH="112" align="right" height="15">
      <font FACE="Times New Roman PSMT" SIZE="2">(1,466,467)</font></td>
    </tr>
    <tr>
      <td WIDTH="544" height="15" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
      Loss on sale of securities</font></td>
      <td WIDTH="121" align="right" height="15" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
      <td WIDTH="111" align="right" height="15" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
      <td WIDTH="105" align="right" height="15" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">(11,258)</font></td>
      <td WIDTH="112" align="right" height="15" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">(11,258)</font></td>
    </tr>
    <tr>
      <td WIDTH="544" height="15"><font FACE="Times New Roman PSMT" SIZE="2">
      Interest income (expense), net</font></td>
      <td WIDTH="121" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3">
      <font FACE="Times New Roman PSMT" SIZE="2">43,361</font></td>
      <td WIDTH="111" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3">
      <font FACE="Times New Roman PSMT" SIZE="2">(26,225)</font></td>
      <td WIDTH="105" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3">
      <font FACE="Times New Roman PSMT" SIZE="2">(51,168)</font></td>
      <td WIDTH="112" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3">
      <font FACE="Times New Roman PSMT" SIZE="2">106,267</font></td>
    </tr>
    <tr>
      <td WIDTH="544" height="15" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
      Total other income (expense)</font></td>
      <td WIDTH="121" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">43,361</font></td>
      <td WIDTH="111" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">116,011</font></td>
      <td WIDTH="105" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">(1,200)</font></td>
      <td WIDTH="112" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">(1,147,966)</font></td>
    </tr>
    <tr>
      <td WIDTH="544" height="15"><font FACE="Times New Roman PSMT" SIZE="2">NET
      LOSS</font></td>
      <td WIDTH="121" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3">
      <font FACE="Times New Roman PSMT" SIZE="2">$(23,998,734)</font></td>
      <td WIDTH="111" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3">
      <font FACE="Times New Roman PSMT" SIZE="2">$(11,245,361)</font></td>
      <td WIDTH="105" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3">
      <font FACE="Times New Roman PSMT" SIZE="2">$(6,650,211)</font></td>
      <td WIDTH="112" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3">
      <font FACE="Times New Roman PSMT" SIZE="2">$(108,016,497)</font></td>
    </tr>
    <tr>
      <td WIDTH="544" height="15" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
      Unrealized holding (loss) gain on securities</font></td>
      <td WIDTH="121" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
      <td WIDTH="111" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">(4,026)</font></td>
      <td WIDTH="105" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">4,026</font></td>
      <td WIDTH="112" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    </tr>
    <tr>
      <td WIDTH="544" height="15"><font FACE="Times New Roman PS" SIZE="2"><b>
      COMPREHENSIVE LOSS</b></font></td>
      <td WIDTH="121" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3">
      <font FACE="Times New Roman PSMT" SIZE="2">$(23,998,734)</font></td>
      <td WIDTH="111" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3">
      <font FACE="Times New Roman PSMT" SIZE="2">$(11,249,387)</font></td>
      <td WIDTH="105" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3">
      <font FACE="Times New Roman PSMT" SIZE="2">$(6,646,185)</font></td>
      <td WIDTH="112" align="right" height="15" style="border-bottom-style: double; border-bottom-width: 3">
      <font FACE="Times New Roman PSMT" SIZE="2">$(108,016,497)</font></td>
    </tr>
    <tr>
      <td WIDTH="544" height="19" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
      LOSS PER COMMON SHARE, basic and diluted</font></td>
      <td WIDTH="121" align="right" height="19" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">$(0.72)</font></td>
      <td WIDTH="111" align="right" height="19" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">$(.23)</font></td>
      <td WIDTH="105" align="right" height="19" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">$(.10)</font></td>
      <td WIDTH="112" align="right" height="19" style="border-bottom-style: none; border-bottom-width: medium" bgcolor="#FFFFFF">&nbsp;</td>
    </tr>
    <tr>
      <td WIDTH="544" height="19"><font FACE="Times New Roman PSMT" SIZE="2">
      WEIGHTED AVERAGE COMMON SHARES</font></td>
      <td WIDTH="121" align="right" height="19">&nbsp;</td>
      <td WIDTH="111" align="right" height="19">&nbsp;</td>
      <td WIDTH="105" align="right" height="19">&nbsp;</td>
      <td WIDTH="112" align="right" height="19" style="border-top-style: none; border-top-width: medium" bgcolor="#FFFFFF">&nbsp;</td>
    </tr>
    <tr>
      <td WIDTH="544" height="19" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
      OUTSTANDING, basic and diluted</font></td>
      <td WIDTH="121" align="right" height="19" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">33,436,641</font></td>
      <td WIDTH="111" align="right" height="19" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">49,617,280</font></td>
      <td WIDTH="105" align="right" height="19" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
      <font FACE="Times New Roman PSMT" SIZE="2">65,217,088</font></td>
      <td WIDTH="112" align="right" height="19" bgcolor="#FFFFFF">&nbsp;</td>
    </tr>
  </table>
  </center>
</div>
<p>&nbsp;</p>
<hr><p Style='page-break-before:always'>
<div align="center">
  <center>
<table CELLSPACING="0" BORDER="0" WIDTH="80%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="991" colspan="4" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>mPHASE
    TECHNOLOGIES, INC.</b></font></td>
  </tr>
  <tr>
    <td WIDTH="991" colspan="4" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>(A DEVELOPMENT
    STAGE COMPANY)</b></font></td>
  </tr>
  <tr>
    <td WIDTH="991" colspan="4" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>CONSOLIDATED
    STATEMENTS OF OPERATIONS</b></font></td>
  </tr>
  <tr>
    <td WIDTH="991" colspan="4" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>(Unaudited)</b></font></td>
  </tr>
  <tr>
    <td WIDTH="719">&nbsp;</td>
    <td WIDTH="178" COLSPAN="2" align="right">&nbsp;</td>
    <td WIDTH="94" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="719">&nbsp;</td>
    <td WIDTH="178" COLSPAN="2" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Six Months Ended</font></td>
    <td WIDTH="94" align="center"><font FACE="Times New Roman PSMT" SIZE="2">October 2,</font></td>
  </tr>
  <tr>
    <td WIDTH="719">&nbsp;</td>
    <td WIDTH="178" COLSPAN="2" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    December 31,</font></td>
    <td WIDTH="94" align="center"><font FACE="Times New Roman PSMT" SIZE="2">1996</font></td>
  </tr>
  <tr>
    <td WIDTH="719">&nbsp;</td>
    <td WIDTH="88" align="center">&nbsp;</td>
    <td WIDTH="90" align="center">&nbsp;</td>
    <td WIDTH="94" align="center"><font FACE="Times New Roman PSMT" SIZE="2">(Date
    of</font></td>
  </tr>
  <tr>
    <td WIDTH="719">&nbsp;</td>
    <td WIDTH="88" align="center">&nbsp;</td>
    <td WIDTH="90" align="center">&nbsp;</td>
    <td WIDTH="94" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Inception) to</font></td>
  </tr>
  <tr>
    <td WIDTH="719">&nbsp;</td>
    <td WIDTH="88" align="center">&nbsp;</td>
    <td WIDTH="90" align="center">&nbsp;</td>
    <td WIDTH="94" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    December 31,</font></td>
  </tr>
  <tr>
    <td WIDTH="719">&nbsp;</td>
    <td WIDTH="88" align="center"><font FACE="Times New Roman PSMT" SIZE="2">2002</font></td>
    <td WIDTH="90" align="center"><font FACE="Times New Roman PSMT" SIZE="2">2003</font></td>
    <td WIDTH="94" align="center"><font FACE="Times New Roman PSMT" SIZE="2">2003</font></td>
  </tr>
  <tr>
    <td WIDTH="719">&nbsp;</td>
    <td WIDTH="88" align="right">&nbsp;</td>
    <td WIDTH="90" align="right">&nbsp;</td>
    <td WIDTH="94" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="719" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">REVENUES</font></td>
    <td WIDTH="88" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$771,837</font></td>
    <td WIDTH="90" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$3,780,137</font></td>
    <td WIDTH="94" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $18,747,831</font></td>
  </tr>
  <tr>
    <td WIDTH="719"><font FACE="Times New Roman PS" SIZE="2"><b>COSTS AND
    EXPENSES</b></font></td>
    <td WIDTH="88" align="right">&nbsp;</td>
    <td WIDTH="90" align="right">&nbsp;</td>
    <td WIDTH="94" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="719" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Cost of Sales</font></td>
    <td WIDTH="88" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">744,030</font></td>
    <td WIDTH="90" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">3,289,937</font></td>
    <td WIDTH="94" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    13,134,889</font></td>
  </tr>
  <tr>
    <td WIDTH="719"><font FACE="Times New Roman PSMT" SIZE="2">Research and
    development</font></td>
    <td WIDTH="88" align="right">&nbsp;</td>
    <td WIDTH="90" align="right">&nbsp;</td>
    <td WIDTH="94" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="719"><font FACE="Times New Roman PSMT" SIZE="2">including
    non-cash stock related charges of $262,500, $0 and</font></td>
    <td WIDTH="88" align="right"><font FACE="Times New Roman PSMT" SIZE="2">1,556,142</font></td>
    <td WIDTH="90" align="right"><font FACE="Times New Roman PSMT" SIZE="2">1,454,899</font></td>
    <td WIDTH="94" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    35,801,977</font></td>
  </tr>
  <tr>
    <td WIDTH="719"><font FACE="Times New Roman PSMT" SIZE="2">$2,045,669,
    respectively)</font></td>
    <td WIDTH="88" align="right">&nbsp;</td>
    <td WIDTH="90" align="right">&nbsp;</td>
    <td WIDTH="94" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="719" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">General and
    Administrative</font></td>
    <td WIDTH="88" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="90" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="94" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="719" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(including
    non-cash stock related charges of $484,358, $307,245 and</font></td>
    <td WIDTH="88" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">1,624,178</font></td>
    <td WIDTH="90" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">1,518,411</font></td>
    <td WIDTH="94" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    76,395,547</font></td>
  </tr>
  <tr>
    <td WIDTH="719" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$46,172,894,
    respectively)</font></td>
    <td WIDTH="88" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="90" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="94" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="719"><font FACE="Times New Roman PSMT" SIZE="2">Depreciation and
    amortization</font></td>
    <td WIDTH="88" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">259,381</font></td>
    <td WIDTH="90" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">74,082</font></td>
    <td WIDTH="94" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    2,841,111</font></td>
  </tr>
  <tr>
    <td WIDTH="719" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">TOTAL COSTS AND
    EXPENSES</font></td>
    <td WIDTH="88" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">4,183,731</font></td>
    <td WIDTH="90" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">6,337,329</font></td>
    <td WIDTH="94" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    128,173,524</font></td>
  </tr>
  <tr>
    <td WIDTH="719"><font FACE="Times New Roman PSMT" SIZE="2">LOSS FROM
    OPERATIONS</font></td>
    <td WIDTH="88" align="right"><font FACE="Times New Roman PSMT" SIZE="2">(3,411,894)</font></td>
    <td WIDTH="90" align="right"><font FACE="Times New Roman PSMT" SIZE="2">(2,557,192)</font></td>
    <td WIDTH="94" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    (109,425,693)</font></td>
  </tr>
  <tr>
    <td WIDTH="719" bgcolor="#E6E6E6"><font FACE="Times New Roman PS" SIZE="2"><b>OTHER INCOME
    (EXPENSE)</b></font></td>
    <td WIDTH="88" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="90" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="94" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="719"><font FACE="Times New Roman PSMT" SIZE="2">Gain on
    extinguishments</font></td>
    <td WIDTH="88" align="right"><font FACE="Times New Roman PSMT" SIZE="2">40,724</font></td>
    <td WIDTH="90" align="right"><font FACE="Times New Roman PSMT" SIZE="2">23,087</font></td>
    <td WIDTH="94" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    226,549</font></td>
  </tr>
  <tr>
    <td WIDTH="719" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Minority interest
    loss in consolidated subsidiary</font></td>
    <td WIDTH="88" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="90" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="94" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    20,000</font></td>
  </tr>
  <tr>
    <td WIDTH="719"><font FACE="Times New Roman PSMT" SIZE="2">Capital losses</font></td>
    <td WIDTH="88" align="right"><font FACE="Times New Roman PSMT" SIZE="2">(16,077)</font></td>
    <td WIDTH="90" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="94" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    (1,466,467)</font></td>
  </tr>
  <tr>
    <td WIDTH="719" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Loss from
    unconsolidated subsidiary</font></td>
    <td WIDTH="88" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="90" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="94" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    (11,258)</font></td>
  </tr>
  <tr>
    <td WIDTH="719"><font FACE="Times New Roman PSMT" SIZE="2">Interest Income
    (expense), net</font></td>
    <td WIDTH="88" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">(34,149)</font></td>
    <td WIDTH="90" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">(31,272)</font></td>
    <td WIDTH="94" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    74,995</font></td>
  </tr>
  <tr>
    <td WIDTH="719" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">TOTAL OTHER
    INCOME (EXPENSE)</font></td>
    <td WIDTH="88" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(9,502)</font></td>
    <td WIDTH="90" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(8,185)</font></td>
    <td WIDTH="94" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    (1,156,181)</font></td>
  </tr>
  <tr>
    <td WIDTH="719"><font FACE="Times New Roman PSMT" SIZE="2">NET LOSS</font></td>
    <td WIDTH="88" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">$(3,421,396)</font></td>
    <td WIDTH="90" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">$(2,565,377)</font></td>
    <td WIDTH="94" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    $(110,581,874)</font></td>
  </tr>
  <tr>
    <td WIDTH="719" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">LOSS PER COMMON
    SHARE, basic and diluted</font></td>
    <td WIDTH="88" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$(.06)</font></td>
    <td WIDTH="90" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$(.04))</font></td>
    <td WIDTH="94" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="719"><font FACE="Times New Roman PSMT" SIZE="2">WEIGHTED AVERAGE
    COMMON</font></td>
    <td WIDTH="88" align="right">&nbsp;</td>
    <td WIDTH="90" align="right">&nbsp;</td>
    <td WIDTH="94" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="719" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">SHARES
    OUTSTANDING, basic and diluted</font></td>
    <td WIDTH="88" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">63,397,799</font></td>
    <td WIDTH="90" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">72,251,251</font></td>
    <td WIDTH="94" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="719">&nbsp;</td>
    <td WIDTH="88" align="right">&nbsp;</td>
    <td WIDTH="90" align="right">&nbsp;</td>
    <td WIDTH="94" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="897" COLSPAN="3"><font FACE="Times New Roman PSMT" SIZE="2">The
    accompanying notes are an integral part of these consolidated financial
    statements.</font></td>
    <td WIDTH="94">&nbsp;</td>
  </tr>
  </table>
  </center>
</div>
<hr><p Style='page-break-before:always'>
<div align="center">
  <center>
<table CELLSPACING="0" BORDER="0" WIDTH="80%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="993" colspan="8" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>
    mPHASE TECHNOLOGIES, INC.</b></font></td>
  </tr>
  <tr>
    <td WIDTH="993" colspan="8" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>(A
    DEVELOPMENT STAGE COMPANY)</b></font></td>
  </tr>
  <tr>
    <td WIDTH="993" colspan="8" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>
    CONSOLIDATED STATEMENTS OF CHANGES IN</b></font></td>
  </tr>
  <tr>
    <td WIDTH="993" colspan="8" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>
    STOCKHOLDERS' EQUITY (DEFICIT)</b></font></td>
  </tr>
  <tr>
    <td WIDTH="993" colspan="8" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>FOR
    THE PERIOD FROM INCEPTION (OCTOBER 2, 1996)</b></font></td>
  </tr>
  <tr>
    <td WIDTH="993" colspan="8" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>TO JUNE 30,
    1997 AND FOR EACH OF THE SIX YEARS</b></font></td>
  </tr>
  <tr>
    <td WIDTH="993" colspan="8" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>IN
    THE PERIOD ENDED JUNE 30, 2003</b></font></td>
  </tr>
  <tr>
    <td WIDTH="253">&nbsp;</td>
    <td WIDTH="111" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="105" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="253">&nbsp;</td>
    <td WIDTH="212" align="right" colspan="2" style="border-bottom-style: none; border-bottom-width: medium">
    <p align="left"><u><font FACE="Times New Roman PSMT" SIZE="2">
    Common Stock</font></u></td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="105" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">
    <p align="center"><font FACE="Times New Roman PSMT" SIZE="2">TOTAL</font></td>
  </tr>
  <tr>
    <td WIDTH="253">&nbsp;</td>
    <td WIDTH="111" align="center" style="border-top-style: none; border-top-width: medium">&nbsp;</td>
    <td WIDTH="101" align="center" style="border-top-style: none; border-top-width: medium"><font FACE="Times New Roman PSMT" SIZE="2">$ .01</font></td>
    <td WIDTH="98" align="center">&nbsp;</td>
    <td WIDTH="105" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Additional</font></td>
    <td WIDTH="100" align="center">&nbsp;</td>
    <td WIDTH="100" align="center">&nbsp;</td>
    <td WIDTH="125" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    STOCKHOLDERS'</font></td>
  </tr>
  <tr>
    <td WIDTH="253">&nbsp;</td>
    <td WIDTH="111" align="center">&nbsp;</td>
    <td WIDTH="101" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Stated</font></td>
    <td WIDTH="98" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Treasury</font></td>
    <td WIDTH="105" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Paid-In</font></td>
    <td WIDTH="100" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Deferred</font></td>
    <td WIDTH="100" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Accumulated</font></td>
    <td WIDTH="125" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    EQUITY</font></td>
  </tr>
  <tr>
    <td WIDTH="253">&nbsp;</td>
    <td WIDTH="111" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">Shares</font></td>
    <td WIDTH="101" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">Value</font></td>
    <td WIDTH="98" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">Stock</font></td>
    <td WIDTH="105" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">Capital</font></td>
    <td WIDTH="100" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">
    Compensation</font></td>
    <td WIDTH="100" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">Deficit</font></td>
    <td WIDTH="125" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">
    (DEFICIT)</font></td>
  </tr>
  <tr>
    <td WIDTH="253">&nbsp;</td>
    <td WIDTH="111" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="101" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="98" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="105" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="100" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="100" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="125" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="253" bgcolor="#E6E6E6"><font FACE="Times New Roman PS" SIZE="2"><b>BALANCE,</b></font></td>
    <td WIDTH="111" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">1,140,427</font></td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$11,404</font></td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $-</font></td>
    <td WIDTH="105" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$459,753</font></td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $-</font></td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$(537,707)</font></td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $(66,550)</font></td>
  </tr>
  <tr>
    <td WIDTH="253" bgcolor="#E6E6E6"><font FACE="Times New Roman PS" SIZE="2"><b>OCTOBER 2, 1996</b></font></td>
    <td WIDTH="111" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="105" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="253" bgcolor="#E6E6E6"><font FACE="Times New Roman PS" SIZE="2"><b>(date of
    inception)</b></font></td>
    <td WIDTH="111" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="105" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="253"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of
    common</font></td>
    <td WIDTH="111" align="right"><font FACE="Times New Roman PSMT" SIZE="2">6,600,000</font></td>
    <td WIDTH="101" align="right"><font FACE="Times New Roman PSMT" SIZE="2">66,000</font></td>
    <td WIDTH="98" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="105" align="right"><font FACE="Times New Roman PSMT" SIZE="2">(537,157)</font></td>
    <td WIDTH="100" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="100" align="right"><font FACE="Times New Roman PSMT" SIZE="2">537,707</font></td>
    <td WIDTH="125" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    66,550</font></td>
  </tr>
  <tr>
    <td WIDTH="253"><font FACE="Times New Roman PSMT" SIZE="2">stock of Tecma</font></td>
    <td WIDTH="111" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="105" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
</table>
  </center>
</div>
<div align="center">
  <center>
<table CELLSPACING="0" BORDER="0" WIDTH="80%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">Laboratories,
    Inc.,</font></td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="99" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">for 100% of the</font></td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="99" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">Company</font></td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="99" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of
    common</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">594,270</font></td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">5,943</font></td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">752,531</font></td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="99" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    758,474</font></td>
  </tr>
  <tr>
    <td WIDTH="252" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">stock, in private</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="99" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">placement, net of</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="99" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">offering costs of</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="99" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$138,931</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="99" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">Net loss</font></td>
    <td WIDTH="112" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="98" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="106" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="99" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">(781,246)</font></td>
    <td WIDTH="125" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    (781,246)</font></td>
  </tr>
  <tr>
    <td WIDTH="252" bgcolor="#E6E6E6"><font FACE="Times New Roman PS" SIZE="2"><b>BALANCE, JUNE</b></font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">8,334,697</font></td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$83,347</font></td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $-</font></td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$675,127</font></td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $-</font></td>
    <td WIDTH="99" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$(781,246)</font></td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $(22,772)</font></td>
  </tr>
  <tr>
    <td WIDTH="252" bgcolor="#E6E6E6"><font FACE="Times New Roman PS" SIZE="2"><b>30, 1997</b></font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="99" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of
    common</font></td>
    <td WIDTH="112" align="right"><font FACE="Times New Roman PSMT" SIZE="2">999,502</font></td>
    <td WIDTH="101" align="right"><font FACE="Times New Roman PSMT" SIZE="2">9,995</font></td>
    <td WIDTH="98" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="106" align="right"><font FACE="Times New Roman PSMT" SIZE="2">791,874</font></td>
    <td WIDTH="100" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="99" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="125" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    801,869</font></td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">stock with
    warrants,</font></td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="99" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">in private
    placement,</font></td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="99" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">net of offering
    costs</font></td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="99" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">of $84,065</font></td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="99" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of
    common</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">300,000</font></td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">3,000</font></td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">147,000</font></td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="99" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    150,000</font></td>
  </tr>
  <tr>
    <td WIDTH="252" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">stock for
    services</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="99" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of
    common</font></td>
    <td WIDTH="112" align="right"><font FACE="Times New Roman PSMT" SIZE="2">250,000</font></td>
    <td WIDTH="101" align="right"><font FACE="Times New Roman PSMT" SIZE="2">2,500</font></td>
    <td WIDTH="98" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="106" align="right"><font FACE="Times New Roman PSMT" SIZE="2">122,500</font></td>
    <td WIDTH="100" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="99" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="125" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    125,000</font></td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">stock in
    connection</font></td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="99" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">with investment
    in</font></td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="99" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">unconsolidated</font></td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="99" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">subsidiary</font></td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="99" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Repurchase of</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(7,973)</font></td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="99" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    (7,973)</font></td>
  </tr>
  <tr>
    <td WIDTH="252" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">13,750 shares of</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="99" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">common stock</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="99" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of
    common</font></td>
    <td WIDTH="112" align="right"><font FACE="Times New Roman PSMT" SIZE="2">1,095,512</font></td>
    <td WIDTH="101" align="right"><font FACE="Times New Roman PSMT" SIZE="2">10,955</font></td>
    <td WIDTH="98" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="106" align="right"><font FACE="Times New Roman PSMT" SIZE="2">659,191</font></td>
    <td WIDTH="100" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="99" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="125" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    670,146</font></td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">stock with
    warrants</font></td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="99" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">in private
    placement,</font></td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="99" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">net of offering
    costs</font></td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="99" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">of $121,138</font></td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="99" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of
    common</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">100,000</font></td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">1,000</font></td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(1,000)</font></td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="99" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
  </tr>
  <tr>
    <td WIDTH="252" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">stock for
    financing</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="99" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">services</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="99" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of
    common</font></td>
    <td WIDTH="112" align="right"><font FACE="Times New Roman PSMT" SIZE="2">2,500,000</font></td>
    <td WIDTH="101" align="right"><font FACE="Times New Roman PSMT" SIZE="2">25,000</font></td>
    <td WIDTH="98" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="106" align="right"><font FACE="Times New Roman PSMT" SIZE="2">1,685,000</font></td>
    <td WIDTH="100" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="99" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="125" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    1,710,000</font></td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">stock in</font></td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="99" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">consideration for</font></td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="99" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">100% of the
    common</font></td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="99" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">stock of
    Microphase</font></td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="99" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">
    Telecommunications,</font></td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="99" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">Inc.</font></td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="99" align="right">&nbsp;</td>
    <td WIDTH="125" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252" style="border-bottom-style: none; border-bottom-width: medium" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Net loss</font></td>
    <td WIDTH="112" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="98" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="106" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="99" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(4,341,059)</font></td>
    <td WIDTH="125" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    (4,341,059)</font></td>
  </tr>
  <tr>
    <td WIDTH="252" style="border-top-style: none; border-top-width: medium"><font FACE="Times New Roman PS" SIZE="2"><b>BALANCE, JUNE 30, 1998</b></font></td>
    <td WIDTH="112" align="right" style="border-top-style: solid; border-top-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">13,579,711</font></td>
    <td WIDTH="101" align="right" style="border-top-style: solid; border-top-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">$135,797</font></td>
    <td WIDTH="98" align="right" style="border-top-style: solid; border-top-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">$(7,973)</font></td>
    <td WIDTH="106" align="right" style="border-top-style: solid; border-top-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">$4,079,692</font></td>
    <td WIDTH="100" align="right" style="border-top-style: solid; border-top-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">
    $-</font></td>
    <td WIDTH="99" align="right" style="border-top-style: solid; border-top-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">$(5,122,305)</font></td>
    <td WIDTH="125" align="right" style="border-top-style: solid; border-top-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">
    $(914,789)</font></td>
  </tr>
  <tr>
    <td WIDTH="252" style="border-bottom-style: none; border-bottom-width: medium">&nbsp;</td>
    <td WIDTH="112" align="right" style="border-bottom-style: double; border-bottom-width: 3">&nbsp;</td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3">&nbsp;</td>
    <td WIDTH="98" align="right" style="border-bottom-style: double; border-bottom-width: 3">&nbsp;</td>
    <td WIDTH="106" align="right" style="border-bottom-style: double; border-bottom-width: 3">&nbsp;</td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3">&nbsp;</td>
    <td WIDTH="99" align="right" style="border-bottom-style: double; border-bottom-width: 3">&nbsp;</td>
    <td WIDTH="125" align="right" style="border-bottom-style: double; border-bottom-width: 3">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="868" COLSPAN="7"><font FACE="Times New Roman PSMT" SIZE="2">The
    accompanying notes are an integral part of these consolidated financial
    statements.</font></td>
    <td WIDTH="125">&nbsp;</td>
  </tr>
  </table>
  </center>
</div>
<hr><p Style='page-break-before:always'>
<div align="center">
  <center>
<table CELLSPACING="0" BORDER="0" WIDTH="80%" style="border-collapse: collapse" bordercolor="#111111" cellpadding="0">
  <tr>
    <td WIDTH="993" colspan="9" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>mPHASE
    TECHNOLOGIES, INC.</b></font></td>
  </tr>
  <tr>
    <td WIDTH="993" colspan="9" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>(A DEVELOPMENT
    STAGE COMPANY)</b></font></td>
  </tr>
  <tr>
    <td WIDTH="993" colspan="9" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>CONSOLIDATED
    STATEMENTS OF CHANGES IN</b></font></td>
  </tr>
  <tr>
    <td WIDTH="993" colspan="9" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>STOCKHOLDERS'
    EQUITY (DEFICIT)</b></font></td>
  </tr>
  <tr>
    <td WIDTH="993" colspan="9" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>FOR THE PERIOD
    FROM INCEPTION (OCTOBER 2, 1996)</b></font></td>
  </tr>
  <tr>
    <td WIDTH="993" colspan="9" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>TO
    JUNE 30, 1997 AND FOR EACH OF THE SIX YEARS</b></font></td>
  </tr>
  <tr>
    <td WIDTH="993" colspan="9" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>IN THE PERIOD
    ENDED JUNE 30, 2003</b></font></td>
  </tr>
  <tr>
    <td WIDTH="251">&nbsp;</td>
    <td WIDTH="113" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="126" COLSPAN="2" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="251">&nbsp;</td>
    <td WIDTH="213" align="right" colspan="2">
    <p align="left"><font FACE="Times New Roman PSMT" SIZE="2">
    <u>Common Stock</u></font></td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="126" COLSPAN="2" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    <p align="center">TOTAL</font></td>
  </tr>
  <tr>
    <td WIDTH="251">&nbsp;</td>
    <td WIDTH="111" align="center" style="border-top-style: none; border-top-width: medium">&nbsp;</td>
    <td WIDTH="101" align="center" style="border-top-style: none; border-top-width: medium"><font FACE="Times New Roman PSMT" SIZE="2">$ .01</font></td>
    <td WIDTH="98" align="center">&nbsp;</td>
    <td WIDTH="105" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Additional</font></td>
    <td WIDTH="100" align="center">&nbsp;</td>
    <td WIDTH="100" align="center">&nbsp;</td>
    <td WIDTH="125" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    STOCKHOLDERS'</font></td>
  </tr>
  <tr>
    <td WIDTH="251">&nbsp;</td>
    <td WIDTH="111" align="center">&nbsp;</td>
    <td WIDTH="101" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Stated</font></td>
    <td WIDTH="98" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Treasury</font></td>
    <td WIDTH="105" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Paid-In</font></td>
    <td WIDTH="100" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Deferred</font></td>
    <td WIDTH="100" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Accumulated</font></td>
    <td WIDTH="125" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    EQUITY</font></td>
  </tr>
  <tr>
    <td WIDTH="251">&nbsp;</td>
    <td WIDTH="111" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">Shares</font></td>
    <td WIDTH="101" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">Value</font></td>
    <td WIDTH="98" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">Stock</font></td>
    <td WIDTH="105" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">Capital</font></td>
    <td WIDTH="100" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">
    Compensation</font></td>
    <td WIDTH="100" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">Deficit</font></td>
    <td WIDTH="125" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">
    (DEFICIT)</font></td>
  </tr>
  <tr>
    <td WIDTH="251">&nbsp;</td>
    <td WIDTH="113" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="126" COLSPAN="2" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="251" bgcolor="#E6E6E6"><font FACE="Times New Roman PS" SIZE="2"><b>BALANCE,</b></font></td>
    <td WIDTH="113" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">13,579,711</font></td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$135,797</font></td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$(7,973)</font></td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$4,079,692</font></td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $-</font></td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$(5,122,305)</font></td>
    <td WIDTH="126" COLSPAN="2" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $(914,789)</font></td>
  </tr>
  <tr>
    <td WIDTH="251" bgcolor="#E6E6E6"><font FACE="Times New Roman PS" SIZE="2"><b>JUNE 30, 1998</b></font></td>
    <td WIDTH="113" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="126" COLSPAN="2" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="251"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of</font></td>
    <td WIDTH="113" align="right"><font FACE="Times New Roman PSMT" SIZE="2">3,120,000</font></td>
    <td WIDTH="100" align="right"><font FACE="Times New Roman PSMT" SIZE="2">31,200</font></td>
    <td WIDTH="98" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="106" align="right"><font FACE="Times New Roman PSMT" SIZE="2">2,981,800</font></td>
    <td WIDTH="101" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="98" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="126" COLSPAN="2" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    3,013,000</font></td>
  </tr>
  <tr>
    <td WIDTH="251"><font FACE="Times New Roman PSMT" SIZE="2">common stock with</font></td>
    <td WIDTH="113" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="126" COLSPAN="2" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="251"><font FACE="Times New Roman PSMT" SIZE="2">warrants in
    private</font></td>
    <td WIDTH="113" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="126" COLSPAN="2" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="251"><font FACE="Times New Roman PSMT" SIZE="2">placements, net
    of</font></td>
    <td WIDTH="113" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="126" COLSPAN="2" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="251"><font FACE="Times New Roman PSMT" SIZE="2">offering costs of</font></td>
    <td WIDTH="113" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="126" COLSPAN="2" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="251"><font FACE="Times New Roman PSMT" SIZE="2">$107,000</font></td>
    <td WIDTH="113" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="126" COLSPAN="2" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="251" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of</font></td>
    <td WIDTH="113" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">1,599,332</font></td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">15,993</font></td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">8,744,873</font></td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="126" COLSPAN="2" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    8,760,866</font></td>
  </tr>
  <tr>
    <td WIDTH="251" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">common stock for</font></td>
    <td WIDTH="113" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="126" COLSPAN="2" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="251" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">services</font></td>
    <td WIDTH="113" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="126" COLSPAN="2" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="251"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of</font></td>
    <td WIDTH="113" align="right"><font FACE="Times New Roman PSMT" SIZE="2">642,000</font></td>
    <td WIDTH="100" align="right"><font FACE="Times New Roman PSMT" SIZE="2">6,420</font></td>
    <td WIDTH="98" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="106" align="right"><font FACE="Times New Roman PSMT" SIZE="2">1,553,227</font></td>
    <td WIDTH="101" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="98" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="126" COLSPAN="2" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    1,559,647</font></td>
  </tr>
  <tr>
    <td WIDTH="251"><font FACE="Times New Roman PSMT" SIZE="2">common stock with</font></td>
    <td WIDTH="113" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="126" COLSPAN="2" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="251"><font FACE="Times New Roman PSMT" SIZE="2">warrants in
    private</font></td>
    <td WIDTH="113" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="126" COLSPAN="2" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="251"><font FACE="Times New Roman PSMT" SIZE="2">placement, net of</font></td>
    <td WIDTH="113" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="126" COLSPAN="2" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="251"><font FACE="Times New Roman PSMT" SIZE="2">offering costs of</font></td>
    <td WIDTH="113" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="126" COLSPAN="2" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="251"><font FACE="Times New Roman PSMT" SIZE="2">$45,353</font></td>
    <td WIDTH="113" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="126" COLSPAN="2" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="251" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of</font></td>
    <td WIDTH="113" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">4,426,698</font></td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">44,267</font></td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">10,343,167</font></td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="126" COLSPAN="2" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    10,387,434</font></td>
  </tr>
  <tr>
    <td WIDTH="251" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">common stock in</font></td>
    <td WIDTH="113" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="126" COLSPAN="2" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="251" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">private
    placement,</font></td>
    <td WIDTH="113" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="126" COLSPAN="2" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="251" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">net of offering</font></td>
    <td WIDTH="113" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="126" COLSPAN="2" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="251" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">costs of $679,311</font></td>
    <td WIDTH="113" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="126" COLSPAN="2" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="251"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of stock</font></td>
    <td WIDTH="113" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="100" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="98" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="106" align="right"><font FACE="Times New Roman PSMT" SIZE="2">7,129,890</font></td>
    <td WIDTH="101" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="98" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="126" COLSPAN="2" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    7,129,890</font></td>
  </tr>
  <tr>
    <td WIDTH="251"><font FACE="Times New Roman PSMT" SIZE="2">options for
    services</font></td>
    <td WIDTH="113" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="126" COLSPAN="2" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="251" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of</font></td>
    <td WIDTH="113" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">16,302</font></td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="126" COLSPAN="2" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    16,302</font></td>
  </tr>
  <tr>
    <td WIDTH="251" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">warrants for</font></td>
    <td WIDTH="113" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="126" COLSPAN="2" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="251" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">services</font></td>
    <td WIDTH="113" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="126" COLSPAN="2" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="251"><font FACE="Times New Roman PSMT" SIZE="2">Deferred employee</font></td>
    <td WIDTH="113" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="100" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="98" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="106" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="101" align="right"><font FACE="Times New Roman PSMT" SIZE="2">(140,000)</font></td>
    <td WIDTH="98" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="126" COLSPAN="2" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    (140,000)</font></td>
  </tr>
  <tr>
    <td WIDTH="251"><font FACE="Times New Roman PSMT" SIZE="2">stock option</font></td>
    <td WIDTH="113" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="126" COLSPAN="2" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="251"><font FACE="Times New Roman PSMT" SIZE="2">compensation</font></td>
    <td WIDTH="113" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="126" COLSPAN="2" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="251" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Net loss</font></td>
    <td WIDTH="113" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="98" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="106" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="98" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(22,838,344)</font></td>
    <td WIDTH="126" COLSPAN="2" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    (22,838,344)</font></td>
  </tr>
  <tr>
    <td WIDTH="251"><font FACE="Times New Roman PS" SIZE="2"><b>BALANCE,</b></font></td>
    <td WIDTH="113" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">23,367,741</font></td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">$233,677</font></td>
    <td WIDTH="98" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">$(7,973)</font></td>
    <td WIDTH="106" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">$34,848,951</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">$(140,000)</font></td>
    <td WIDTH="98" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">$(27,960,649)</font></td>
    <td WIDTH="126" COLSPAN="2" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    $6,974,006</font></td>
  </tr>
  <tr>
    <td WIDTH="251"><font FACE="Times New Roman PS" SIZE="2"><b>JUNE 30, 1999</b></font></td>
    <td WIDTH="113" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="126" COLSPAN="2" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="251">&nbsp;</td>
    <td WIDTH="113" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="126" COLSPAN="2" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="867" COLSPAN="7"><font FACE="Times New Roman PSMT" SIZE="2">The
    accompanying notes are an integral part of these consolidated financial
    statements.</font></td>
    <td WIDTH="126" COLSPAN="2">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="867" COLSPAN="7">&nbsp;</td>
    <td WIDTH="125"></td>
    <td width="1"></td>
  </tr>
</table>
  </center>
</div>
<hr><p Style='page-break-before:always'>
<div align="center">
  <center>
<table CELLSPACING="0" BORDER="0" WIDTH="80%" style="border-collapse: collapse" bordercolor="#111111" cellpadding="0">
  <tr>
    <td WIDTH="993" colspan="8" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>mPHASE
    TECHNOLOGIES, INC.</b></font></td>
  </tr>
  <tr>
    <td WIDTH="993" colspan="8" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>(A DEVELOPMENT
    STAGE COMPANY)</b></font></td>
  </tr>
  <tr>
    <td WIDTH="993" colspan="8" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>CONSOLIDATED
    STATEMENTS OF CHANGES IN</b></font></td>
  </tr>
  <tr>
    <td WIDTH="993" colspan="8" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>STOCKHOLDERS'
    EQUITY (DEFICIT)</b></font></td>
  </tr>
  <tr>
    <td WIDTH="993" colspan="8" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>FOR THE PERIOD
    FROM INCEPTION (OCTOBER 2, 1996)</b></font></td>
  </tr>
  <tr>
    <td WIDTH="993" colspan="8" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>TO
    JUNE 30, 1997 AND FOR EACH OF THE SIX YEARS</b></font></td>
  </tr>
  <tr>
    <td WIDTH="993" colspan="8" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>IN THE PERIOD
    ENDED JUNE 30, 2003</b></font></td>
  </tr>
  <tr>
    <td WIDTH="251">&nbsp;</td>
    <td WIDTH="113" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="126" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="251">&nbsp;</td>
    <td WIDTH="213" align="right" colspan="2">
    <p align="left"><font FACE="Times New Roman PSMT" SIZE="2">
    <u>Common Stock</u></font></td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="126" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    <p align="center">TOTAL</font></td>
  </tr>
  <tr>
    <td WIDTH="251">&nbsp;</td>
    <td WIDTH="111" align="center" style="border-top-style: none; border-top-width: medium">&nbsp;</td>
    <td WIDTH="101" align="center" style="border-top-style: none; border-top-width: medium"><font FACE="Times New Roman PSMT" SIZE="2">$ .01</font></td>
    <td WIDTH="98" align="center">&nbsp;</td>
    <td WIDTH="105" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Additional</font></td>
    <td WIDTH="100" align="center">&nbsp;</td>
    <td WIDTH="100" align="center">&nbsp;</td>
    <td WIDTH="125" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    STOCKHOLDERS'</font></td>
  </tr>
  <tr>
    <td WIDTH="251">&nbsp;</td>
    <td WIDTH="111" align="center">&nbsp;</td>
    <td WIDTH="101" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Stated</font></td>
    <td WIDTH="98" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Treasury</font></td>
    <td WIDTH="105" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Paid-In</font></td>
    <td WIDTH="100" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Deferred</font></td>
    <td WIDTH="100" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Accumulated</font></td>
    <td WIDTH="125" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    EQUITY</font></td>
  </tr>
  <tr>
    <td WIDTH="251">&nbsp;</td>
    <td WIDTH="111" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">Shares</font></td>
    <td WIDTH="101" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">Value</font></td>
    <td WIDTH="98" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">Stock</font></td>
    <td WIDTH="105" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">Capital</font></td>
    <td WIDTH="100" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">
    Compensation</font></td>
    <td WIDTH="100" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">Deficit</font></td>
    <td WIDTH="125" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">
    (DEFICIT)</font></td>
  </tr>
  <tr>
    <td WIDTH="251">&nbsp;</td>
    <td WIDTH="113" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="126" align="right">&nbsp;</td>
  </tr>
</table>
  </center>
</div>
<div align="center">
  <center>
<table CELLSPACING="0" BORDER="0" WIDTH="80%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="248" bgcolor="#E6E6E6"><font FACE="Times New Roman PS" SIZE="2"><b>BALANCE,</b></font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">23,367,741</font></td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$233,677</font></td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$(7,973)</font></td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$34,848,951</font></td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$(140,000)</font></td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$(27,960,649)</font></td>
    <td WIDTH="126" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $6,974,006</font></td>
  </tr>
  <tr>
    <td WIDTH="248" bgcolor="#E6E6E6"><font FACE="Times New Roman PS" SIZE="2"><b>JUNE 30, 1999</b></font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="126" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="248"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of</font></td>
    <td WIDTH="112" align="right"><font FACE="Times New Roman PSMT" SIZE="2">75,000</font></td>
    <td WIDTH="101" align="right"><font FACE="Times New Roman PSMT" SIZE="2">750</font></td>
    <td WIDTH="98" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="106" align="right"><font FACE="Times New Roman PSMT" SIZE="2">971,711</font></td>
    <td WIDTH="102" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="100" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="126" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    972,461</font></td>
  </tr>
  <tr>
    <td WIDTH="248"><font FACE="Times New Roman PSMT" SIZE="2">common stock and</font></td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="126" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="248"><font FACE="Times New Roman PSMT" SIZE="2">options in</font></td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="126" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="248"><font FACE="Times New Roman PSMT" SIZE="2">settlement</font></td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="126" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="248" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">4,632,084</font></td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">46,321</font></td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">5,406,938</font></td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="126" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    5,453,259</font></td>
  </tr>
  <tr>
    <td WIDTH="248" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">common stock</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="126" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="248" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">upon exercise of</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="126" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="248" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">warrants and</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="126" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="248" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">options</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="126" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="248"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of</font></td>
    <td WIDTH="112" align="right"><font FACE="Times New Roman PSMT" SIZE="2">1,000,000</font></td>
    <td WIDTH="101" align="right"><font FACE="Times New Roman PSMT" SIZE="2">10,000</font></td>
    <td WIDTH="98" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="106" align="right"><font FACE="Times New Roman PSMT" SIZE="2">3,790,000</font></td>
    <td WIDTH="102" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="100" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="126" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    3,800,000</font></td>
  </tr>
  <tr>
    <td WIDTH="248"><font FACE="Times New Roman PSMT" SIZE="2">common stock in</font></td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="126" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="248"><font FACE="Times New Roman PSMT" SIZE="2">private
    placement,</font></td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="126" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="248"><font FACE="Times New Roman PSMT" SIZE="2">net of cash
    offering</font></td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="126" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="248"><font FACE="Times New Roman PSMT" SIZE="2">costs of $200,000</font></td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="126" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="248" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">1,165,500</font></td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">11,655</font></td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">9,654,951</font></td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="126" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    9,666,606</font></td>
  </tr>
  <tr>
    <td WIDTH="248" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">common stock in</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="126" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="248" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">private
    placement,</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="126" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="248" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">net of cash
    offering</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="126" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="248" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">costs of $466,480</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="126" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="248"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of</font></td>
    <td WIDTH="112" align="right"><font FACE="Times New Roman PSMT" SIZE="2">1,164,215</font></td>
    <td WIDTH="101" align="right"><font FACE="Times New Roman PSMT" SIZE="2">11,642</font></td>
    <td WIDTH="98" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="106" align="right"><font FACE="Times New Roman PSMT" SIZE="2">8,612,265</font></td>
    <td WIDTH="102" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="100" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="126" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    8,623,907</font></td>
  </tr>
  <tr>
    <td WIDTH="248"><font FACE="Times New Roman PSMT" SIZE="2">common stock for</font></td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="126" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="248"><font FACE="Times New Roman PSMT" SIZE="2">services</font></td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="126" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="248" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of
    options</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">9,448,100</font></td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="126" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    9,448,100</font></td>
  </tr>
  <tr>
    <td WIDTH="248" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">for services</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="126" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="248"><font FACE="Times New Roman PSMT" SIZE="2">Deferred employee</font></td>
    <td WIDTH="112" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="101" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="98" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="106" align="right"><font FACE="Times New Roman PSMT" SIZE="2">1,637,375</font></td>
    <td WIDTH="102" align="right"><font FACE="Times New Roman PSMT" SIZE="2">(1,637,375)</font></td>
    <td WIDTH="100" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="126" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
  </tr>
  <tr>
    <td WIDTH="248"><font FACE="Times New Roman PSMT" SIZE="2">stock option</font></td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="126" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="248"><font FACE="Times New Roman PSMT" SIZE="2">compensation</font></td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="126" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="248" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Amortization of</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">551,707</font></td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="126" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    551,707</font></td>
  </tr>
  <tr>
    <td WIDTH="248" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">deferred employee</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="126" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="248" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">stock option</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="126" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="248" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">compensation</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="126" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="248"><font FACE="Times New Roman PSMT" SIZE="2">Net loss</font></td>
    <td WIDTH="112" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="98" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="106" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">(38,161,542)</font></td>
    <td WIDTH="126" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    (38,161,542)</font></td>
  </tr>
  <tr>
    <td WIDTH="248" bgcolor="#E6E6E6"><font FACE="Times New Roman PS" SIZE="2"><b>BALANCE, JUNE
    30, 2000</b></font></td>
    <td WIDTH="112" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">31,404,540</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$314,045</font></td>
    <td WIDTH="98" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$(7,973)</font></td>
    <td WIDTH="106" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$74,370,291)</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$(1,225,668)</font></td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$(66,122,191)</font></td>
    <td WIDTH="126" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $7,328,504</font></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="993" COLSPAN="8"><font FACE="Times New Roman PSMT" SIZE="2">The
    accompanying notes are an integral part of these consolidated financial
    statements.</font></td>
  </tr>
  </table>
  </center>
</div>
<hr><p Style='page-break-before:always'>
<div align="center">
  <center>
<table CELLSPACING="0" BORDER="0" WIDTH="80%" style="border-collapse: collapse" bordercolor="#111111" cellpadding="0">
  <tr>
    <td WIDTH="993" colspan="8" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>mPHASE
    TECHNOLOGIES, INC.</b></font></td>
  </tr>
  <tr>
    <td WIDTH="993" colspan="8" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>(A DEVELOPMENT
    STAGE COMPANY)</b></font></td>
  </tr>
  <tr>
    <td WIDTH="993" colspan="8" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>CONSOLIDATED
    STATEMENTS OF CHANGES IN</b></font></td>
  </tr>
  <tr>
    <td WIDTH="993" colspan="8" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>STOCKHOLDERS'
    EQUITY (DEFICIT)</b></font></td>
  </tr>
  <tr>
    <td WIDTH="993" colspan="8" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>FOR THE PERIOD
    FROM INCEPTION (OCTOBER 2, 1996)</b></font></td>
  </tr>
  <tr>
    <td WIDTH="993" colspan="8" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>TO
    JUNE 30, 1997 AND FOR EACH OF THE SIX YEARS</b></font></td>
  </tr>
  <tr>
    <td WIDTH="993" colspan="8" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>IN THE PERIOD
    ENDED JUNE 30, 2003</b></font></td>
  </tr>
  <tr>
    <td WIDTH="246">&nbsp;</td>
    <td WIDTH="113" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="127" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="246">&nbsp;</td>
    <td WIDTH="214" align="right" colspan="2">
    <p align="left"><font FACE="Times New Roman PSMT" SIZE="2">
    <u>Common Stock</u></font></td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="127" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    <p align="center">TOTAL</font></td>
  </tr>
  <tr>
    <td WIDTH="246">&nbsp;</td>
    <td WIDTH="113" align="center" style="border-top-style: none; border-top-width: medium">&nbsp;</td>
    <td WIDTH="101" align="center" style="border-top-style: none; border-top-width: medium"><font FACE="Times New Roman PSMT" SIZE="2">$ .01</font></td>
    <td WIDTH="98" align="center">&nbsp;</td>
    <td WIDTH="106" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Additional</font></td>
    <td WIDTH="102" align="center">&nbsp;</td>
    <td WIDTH="100" align="center">&nbsp;</td>
    <td WIDTH="127" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    STOCKHOLDERS'</font></td>
  </tr>
  <tr>
    <td WIDTH="246">&nbsp;</td>
    <td WIDTH="113" align="center">&nbsp;</td>
    <td WIDTH="101" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Stated</font></td>
    <td WIDTH="98" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Treasury</font></td>
    <td WIDTH="106" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Paid-In</font></td>
    <td WIDTH="102" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Deferred</font></td>
    <td WIDTH="100" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Accumulated</font></td>
    <td WIDTH="127" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    EQUITY</font></td>
  </tr>
  <tr>
    <td WIDTH="246">&nbsp;</td>
    <td WIDTH="113" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">Shares</font></td>
    <td WIDTH="101" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">Value</font></td>
    <td WIDTH="98" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">Stock</font></td>
    <td WIDTH="106" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">Capital</font></td>
    <td WIDTH="102" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">
    Compensation</font></td>
    <td WIDTH="100" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">Deficit</font></td>
    <td WIDTH="127" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">
    (DEFICIT)</font></td>
  </tr>
  <tr>
    <td WIDTH="246">&nbsp;</td>
    <td WIDTH="113" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="127" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="246" bgcolor="#E6E6E6"><font FACE="Times New Roman PS" SIZE="2"><b>BALANCE,</b></font></td>
    <td WIDTH="113" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">31,404,540</font></td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$314,045</font></td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$(7,973)</font></td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$74,370,291)</font></td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$(1,225,668)</font></td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$(66,122,191)</font></td>
    <td WIDTH="127" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $7,328,504</font></td>
  </tr>
  <tr>
    <td WIDTH="246" bgcolor="#E6E6E6"><font FACE="Times New Roman PS" SIZE="2"><b>JUNE 30, 2000</b></font></td>
    <td WIDTH="113" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="127" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="246"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of</font></td>
    <td WIDTH="113" align="right"><font FACE="Times New Roman PSMT" SIZE="2">320,000</font></td>
    <td WIDTH="101" align="right"><font FACE="Times New Roman PSMT" SIZE="2">3,200</font></td>
    <td WIDTH="98" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="106" align="right"><font FACE="Times New Roman PSMT" SIZE="2">324,300</font></td>
    <td WIDTH="102" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="100" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="127" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    327,500</font></td>
  </tr>
  <tr>
    <td WIDTH="246"><font FACE="Times New Roman PSMT" SIZE="2">common stock</font></td>
    <td WIDTH="113" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="127" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="246"><font FACE="Times New Roman PSMT" SIZE="2">upon exercise of</font></td>
    <td WIDTH="113" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="127" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="246"><font FACE="Times New Roman PSMT" SIZE="2">options</font></td>
    <td WIDTH="113" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="98" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="127" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="246" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of</font></td>
    <td WIDTH="113" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">4,329,850</font></td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">43,298</font></td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">7,766,547</font></td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="127" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    7,809,845</font></td>
  </tr>
  <tr>
    <td WIDTH="246" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">common stock with</font></td>
    <td WIDTH="113" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="127" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="246" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">warrants in
    private</font></td>
    <td WIDTH="113" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="127" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
</table>
  </center>
</div>
<div align="center">
  <center>
<table CELLSPACING="0" BORDER="0" WIDTH="80%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="245" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">placements, net
    of</font></td>
    <td WIDTH="114" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="97" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="107" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="127" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="245" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">cash offering
    costs</font></td>
    <td WIDTH="114" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="97" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="107" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="127" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="245" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">of $512,195</font></td>
    <td WIDTH="114" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="97" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="107" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="127" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="245"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of</font></td>
    <td WIDTH="114" align="right"><font FACE="Times New Roman PSMT" SIZE="2">450,000</font></td>
    <td WIDTH="101" align="right"><font FACE="Times New Roman PSMT" SIZE="2">4,500</font></td>
    <td WIDTH="97" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="107" align="right"><font FACE="Times New Roman PSMT" SIZE="2">1,003,125</font></td>
    <td WIDTH="102" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="100" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="127" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    1,007,625</font></td>
  </tr>
  <tr>
    <td WIDTH="245"><font FACE="Times New Roman PSMT" SIZE="2">common stock for</font></td>
    <td WIDTH="114" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="97" align="right">&nbsp;</td>
    <td WIDTH="107" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="127" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="245"><font FACE="Times New Roman PSMT" SIZE="2">services</font></td>
    <td WIDTH="114" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="97" align="right">&nbsp;</td>
    <td WIDTH="107" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="127" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="245" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of
    options</font></td>
    <td WIDTH="114" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="97" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="107" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">5,849,585</font></td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="127" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    5,849,585</font></td>
  </tr>
  <tr>
    <td WIDTH="245" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">and warrants for</font></td>
    <td WIDTH="114" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="97" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="107" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="127" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="245" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">services</font></td>
    <td WIDTH="114" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="97" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="107" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="127" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="245"><font FACE="Times New Roman PSMT" SIZE="2">Deferred employee</font></td>
    <td WIDTH="114" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="101" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="97" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="107" align="right"><font FACE="Times New Roman PSMT" SIZE="2">607,885</font></td>
    <td WIDTH="102" align="right"><font FACE="Times New Roman PSMT" SIZE="2">(607,885)</font></td>
    <td WIDTH="100" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="127" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
  </tr>
  <tr>
    <td WIDTH="245"><font FACE="Times New Roman PSMT" SIZE="2">stock option</font></td>
    <td WIDTH="114" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="97" align="right">&nbsp;</td>
    <td WIDTH="107" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="127" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="245"><font FACE="Times New Roman PSMT" SIZE="2">compensation</font></td>
    <td WIDTH="114" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="97" align="right">&nbsp;</td>
    <td WIDTH="107" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="127" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="245" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Amortization of</font></td>
    <td WIDTH="114" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="97" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="107" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">1,120,278</font></td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="127" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    1,120,278</font></td>
  </tr>
  <tr>
    <td WIDTH="245" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">deferred employee</font></td>
    <td WIDTH="114" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="97" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="107" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="127" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="245" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">stock option</font></td>
    <td WIDTH="114" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="97" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="107" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="127" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="245" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">compensation</font></td>
    <td WIDTH="114" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="97" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="107" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="127" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="245"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of</font></td>
    <td WIDTH="114" align="right"><font FACE="Times New Roman PSMT" SIZE="2">4,840,077</font></td>
    <td WIDTH="101" align="right"><font FACE="Times New Roman PSMT" SIZE="2">48,402</font></td>
    <td WIDTH="97" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="107" align="right"><font FACE="Times New Roman PSMT" SIZE="2">2,371,637</font></td>
    <td WIDTH="102" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="100" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="127" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    2,420,039</font></td>
  </tr>
  <tr>
    <td WIDTH="245"><font FACE="Times New Roman PSMT" SIZE="2">common stock in</font></td>
    <td WIDTH="114" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="97" align="right">&nbsp;</td>
    <td WIDTH="107" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="127" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="245"><font FACE="Times New Roman PSMT" SIZE="2">settlement of
    debt</font></td>
    <td WIDTH="114" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="97" align="right">&nbsp;</td>
    <td WIDTH="107" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="127" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="245"><font FACE="Times New Roman PSMT" SIZE="2">to directors and</font></td>
    <td WIDTH="114" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="97" align="right">&nbsp;</td>
    <td WIDTH="107" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="127" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="245"><font FACE="Times New Roman PSMT" SIZE="2">related parties</font></td>
    <td WIDTH="114" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="97" align="right">&nbsp;</td>
    <td WIDTH="107" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="127" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="245" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Net Loss</font></td>
    <td WIDTH="114" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="97" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="107" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(23,998,734)</font></td>
    <td WIDTH="127" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    (23,998,734)</font></td>
  </tr>
  <tr>
    <td WIDTH="245"><font FACE="Times New Roman PS" SIZE="2"><b>BALANCE,</b></font></td>
    <td WIDTH="114" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">41,344,467</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">$413,445</font></td>
    <td WIDTH="97" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">$(7,973)</font></td>
    <td WIDTH="107" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">$92,293,370</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">$(713,275)</font></td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">$(90,120,925)</font></td>
    <td WIDTH="127" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    $1,864,642</font></td>
  </tr>
  <tr>
    <td WIDTH="245"><font FACE="Times New Roman PS" SIZE="2"><b>JUNE 30, 2001</b></font></td>
    <td WIDTH="114" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="97" align="right">&nbsp;</td>
    <td WIDTH="107" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="127" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="245">&nbsp;</td>
    <td WIDTH="114" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="97" align="right">&nbsp;</td>
    <td WIDTH="107" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="127" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="993" COLSPAN="8"><font FACE="Times New Roman PSMT" SIZE="2">The
    accompanying notes are an integral part of these consolidated financial
    statements.</font></td>
  </tr>
  </table>
  </center>
</div>
<hr><p Style='page-break-before:always'>
<div align="center">
  <center>
<table CELLSPACING="0" BORDER="0" WIDTH="85%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td colspan="9" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    <font FACE="Times New Roman PS" SIZE="4"><b>mPHASE TECHNOLOGIES, INC.</b></font></font></td>
  </tr>
  <tr>
    <td colspan="9" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    <font FACE="Times New Roman PS" SIZE="4"><b>(A DEVELOPMENT STAGE COMPANY)</b></font></font></td>
  </tr>
  <tr>
    <td colspan="9" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    <font FACE="Times New Roman PS" SIZE="4"><b>CONSOLIDATED STATEMENTS OF
    CHANGES IN</b></font></font></td>
  </tr>
  <tr>
    <td colspan="9" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    <font FACE="Times New Roman PS" SIZE="4"><b>STOCKHOLDERS' EQUITY (DEFICIT)</b></font></font></td>
  </tr>
  <tr>
    <td colspan="9" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    <font FACE="Times New Roman PS" SIZE="4"><b>FOR THE PERIOD FROM INCEPTION
    (OCTOBER 2, 1996)</b></font></font></td>
  </tr>
  <tr>
    <td colspan="9" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    <font FACE="Times New Roman PS" SIZE="4"><b>TO JUNE 30, 1997 AND FOR EACH OF
    THE SIX YEARS</b></font></font></td>
  </tr>
  <tr>
    <td colspan="9" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    <font FACE="Times New Roman PS" SIZE="4"><b>IN THE PERIOD ENDED JUNE 30,
    2003</b></font></font></td>
  </tr>
  <tr>
    <td WIDTH="237" align="center">&nbsp;</td>
    <td WIDTH="91" align="center">&nbsp;</td>
    <td WIDTH="101" align="center">&nbsp;</td>
    <td WIDTH="106" align="center">&nbsp;</td>
    <td WIDTH="115" align="center">&nbsp;</td>
    <td WIDTH="118" align="center">&nbsp;</td>
    <td WIDTH="110" align="center">&nbsp;</td>
    <td WIDTH="112" align="center">&nbsp;</td>
    <td WIDTH="122" align="center">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="237">&nbsp;</td>
    <td WIDTH="91" align="center">&nbsp;</td>
    <td WIDTH="101" align="center">&nbsp;</td>
    <td WIDTH="106" align="center">&nbsp;</td>
    <td WIDTH="115" align="center">&nbsp;</td>
    <td WIDTH="118" align="center">&nbsp;</td>
    <td WIDTH="110" align="center">&nbsp;</td>
    <td WIDTH="112" align="center">&nbsp;</td>
    <td WIDTH="122" align="center">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="237">&nbsp;</td>
    <td WIDTH="91" align="center">&nbsp;</td>
    <td WIDTH="101" align="center">&nbsp;</td>
    <td WIDTH="106" align="center">&nbsp;</td>
    <td WIDTH="115" align="center">&nbsp;</td>
    <td WIDTH="118" align="center">&nbsp;</td>
    <td WIDTH="110" align="center">&nbsp;</td>
    <td WIDTH="112" align="center">&nbsp;</td>
    <td WIDTH="122" align="center"><font FACE="Times New Roman PSMT" SIZE="2">TOTAL</font></td>
  </tr>
  <tr>
    <td WIDTH="237">&nbsp;</td>
    <td WIDTH="91" align="center">&nbsp;</td>
    <td WIDTH="101" align="center"><font FACE="Times New Roman PSMT" SIZE="2">$ .01</font></td>
    <td WIDTH="106" align="center">&nbsp;</td>
    <td WIDTH="115" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Additional</font></td>
    <td WIDTH="118" align="center">&nbsp;</td>
    <td WIDTH="110" align="center">&nbsp;</td>
    <td WIDTH="112" align="center">&nbsp;</td>
    <td WIDTH="122" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    STOCKHOLDERS'</font></td>
  </tr>
  <tr>
    <td WIDTH="237">&nbsp;</td>
    <td WIDTH="91" align="center">&nbsp;</td>
    <td WIDTH="101" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Stated</font></td>
    <td WIDTH="106" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Treasury</font></td>
    <td WIDTH="115" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Paid-In</font></td>
    <td WIDTH="118" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Deferred</font></td>
    <td WIDTH="110" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Accumulated</font></td>
    <td WIDTH="112" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Comprehensive</font></td>
    <td WIDTH="122" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    EQUITY</font></td>
  </tr>
  <tr>
    <td WIDTH="237">&nbsp;</td>
    <td WIDTH="91" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">Shares</font></td>
    <td WIDTH="101" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">Value</font></td>
    <td WIDTH="106" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">Stock</font></td>
    <td WIDTH="115" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">Capital</font></td>
    <td WIDTH="118" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">Compensation</font></td>
    <td WIDTH="110" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">Deficit</font></td>
    <td WIDTH="112" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">Loss</font></td>
    <td WIDTH="122" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">
    (DEFICIT)</font></td>
  </tr>
  <tr>
    <td WIDTH="237" bgcolor="#E6E6E6"><font FACE="Times New Roman PS" SIZE="2"><b>BALANCE</b></font></td>
    <td WIDTH="91" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">41,344,467</font></td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$413,445</font></td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$(7,973)</font></td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$92,293,370</font></td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$(713,275)</font></td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$(90,120,925)</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $-</font></td>
    <td WIDTH="122" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $1,864,642</font></td>
  </tr>
  <tr>
    <td WIDTH="237" bgcolor="#E6E6E6"><font FACE="Times New Roman PS" SIZE="2"><b>JUNE 30, 2001</b></font></td>
    <td WIDTH="91" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="122" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="237"><font FACE="Times New Roman PSMT" SIZE="2">Sale of Common</font></td>
    <td WIDTH="91" align="right"><font FACE="Times New Roman PSMT" SIZE="2">6,980,643</font></td>
    <td WIDTH="101" align="right"><font FACE="Times New Roman PSMT" SIZE="2">69,807</font></td>
    <td WIDTH="106" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="115" align="right"><font FACE="Times New Roman PSMT" SIZE="2">1,903,943</font></td>
    <td WIDTH="118" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="110" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="112" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="122" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    1,973,750</font></td>
  </tr>
  <tr>
    <td WIDTH="237"><font FACE="Times New Roman PSMT" SIZE="2">stock with</font></td>
    <td WIDTH="91" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="118" align="right">&nbsp;</td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="122" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="237"><font FACE="Times New Roman PSMT" SIZE="2">warrants in</font></td>
    <td WIDTH="91" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="118" align="right">&nbsp;</td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="122" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="237"><font FACE="Times New Roman PSMT" SIZE="2">private</font></td>
    <td WIDTH="91" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="118" align="right">&nbsp;</td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="122" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="237"><font FACE="Times New Roman PSMT" SIZE="2">placement</font></td>
    <td WIDTH="91" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="118" align="right">&nbsp;</td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="122" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="237" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of</font></td>
    <td WIDTH="91" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">2,976,068</font></td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">29,760</font></td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">1,169,241</font></td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="122" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    1,199,001</font></td>
  </tr>
  <tr>
    <td WIDTH="237" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Common stock</font></td>
    <td WIDTH="91" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="122" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="237" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">for services</font></td>
    <td WIDTH="91" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="122" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="237"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of</font></td>
    <td WIDTH="91" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="101" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="106" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="115" align="right"><font FACE="Times New Roman PSMT" SIZE="2">1,877,937</font></td>
    <td WIDTH="118" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="110" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="112" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="122" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    1,877,937</font></td>
  </tr>
  <tr>
    <td WIDTH="237"><font FACE="Times New Roman PSMT" SIZE="2">options and</font></td>
    <td WIDTH="91" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="118" align="right">&nbsp;</td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="122" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="237"><font FACE="Times New Roman PSMT" SIZE="2">warrants for</font></td>
    <td WIDTH="91" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="118" align="right">&nbsp;</td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="122" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="237"><font FACE="Times New Roman PSMT" SIZE="2">services</font></td>
    <td WIDTH="91" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="118" align="right">&nbsp;</td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="122" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="237" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Cancellation of</font></td>
    <td WIDTH="91" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(140,802)</font></td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">140,802</font></td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="122" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
  </tr>
  <tr>
    <td WIDTH="237" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">unearned options</font></td>
    <td WIDTH="91" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="122" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="237" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">to former</font></td>
    <td WIDTH="91" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="122" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="237" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">employees</font></td>
    <td WIDTH="91" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="122" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="237"><font FACE="Times New Roman PSMT" SIZE="2">Amortization of</font></td>
    <td WIDTH="91" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="101" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="106" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="115" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="118" align="right"><font FACE="Times New Roman PSMT" SIZE="2">548,550</font></td>
    <td WIDTH="110" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="112" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="122" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    548,550</font></td>
  </tr>
  <tr>
    <td WIDTH="237"><font FACE="Times New Roman PSMT" SIZE="2">deferred</font></td>
    <td WIDTH="91" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="118" align="right">&nbsp;</td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="122" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="237"><font FACE="Times New Roman PSMT" SIZE="2">employee stock</font></td>
    <td WIDTH="91" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="118" align="right">&nbsp;</td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="122" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="237"><font FACE="Times New Roman PSMT" SIZE="2">option</font></td>
    <td WIDTH="91" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="118" align="right">&nbsp;</td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="122" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="237"><font FACE="Times New Roman PSMT" SIZE="2">compensation</font></td>
    <td WIDTH="91" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="118" align="right">&nbsp;</td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="122" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="237" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of</font></td>
    <td WIDTH="91" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">7,492,996</font></td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">74,930</font></td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">2,663,728</font></td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="122" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    2,738,658</font></td>
  </tr>
  <tr>
    <td WIDTH="237" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">common stock</font></td>
    <td WIDTH="91" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="122" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="237" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">and warrants in</font></td>
    <td WIDTH="91" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="122" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="237" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">settlement of</font></td>
    <td WIDTH="91" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="106" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="115" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="118" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="110" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="112" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="122" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  </table>
  </center>
</div>
<div align="center">
  <center>
<table CELLSPACING="0" BORDER="0" WIDTH="85%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="217" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">debt to related</font></td>
    <td WIDTH="86" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="94" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="99" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="109" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="105" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="120" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="217" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">parties and</font></td>
    <td WIDTH="86" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="94" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="99" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="109" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="105" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="120" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="217" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">strategic vendors</font></td>
    <td WIDTH="86" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="94" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="99" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="109" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="105" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="120" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="217"><font FACE="Times New Roman PSMT" SIZE="2">Sale of Common</font></td>
    <td WIDTH="86" align="right"><font FACE="Times New Roman PSMT" SIZE="2">2,000,000</font></td>
    <td WIDTH="94" align="right"><font FACE="Times New Roman PSMT" SIZE="2">20,000</font></td>
    <td WIDTH="99" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="109" align="right"><font FACE="Times New Roman PSMT" SIZE="2">980,000</font></td>
    <td WIDTH="115" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="105" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="110" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="120" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    1,000,000</font></td>
  </tr>
  <tr>
    <td WIDTH="217"><font FACE="Times New Roman PSMT" SIZE="2">stock to certain</font></td>
    <td WIDTH="86" align="right">&nbsp;</td>
    <td WIDTH="94" align="right">&nbsp;</td>
    <td WIDTH="99" align="right">&nbsp;</td>
    <td WIDTH="109" align="right">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="105" align="right">&nbsp;</td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="120" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="217"><font FACE="Times New Roman PSMT" SIZE="2">Officers and</font></td>
    <td WIDTH="86" align="right">&nbsp;</td>
    <td WIDTH="94" align="right">&nbsp;</td>
    <td WIDTH="99" align="right">&nbsp;</td>
    <td WIDTH="109" align="right">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="105" align="right">&nbsp;</td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="120" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="217"><font FACE="Times New Roman PSMT" SIZE="2">Directors in</font></td>
    <td WIDTH="86" align="right">&nbsp;</td>
    <td WIDTH="94" align="right">&nbsp;</td>
    <td WIDTH="99" align="right">&nbsp;</td>
    <td WIDTH="109" align="right">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="105" align="right">&nbsp;</td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="120" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="217"><font FACE="Times New Roman PSMT" SIZE="2">private</font></td>
    <td WIDTH="86" align="right">&nbsp;</td>
    <td WIDTH="94" align="right">&nbsp;</td>
    <td WIDTH="99" align="right">&nbsp;</td>
    <td WIDTH="109" align="right">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="105" align="right">&nbsp;</td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="120" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="217"><font FACE="Times New Roman PSMT" SIZE="2">placement</font></td>
    <td WIDTH="86" align="right">&nbsp;</td>
    <td WIDTH="94" align="right">&nbsp;</td>
    <td WIDTH="99" align="right">&nbsp;</td>
    <td WIDTH="109" align="right">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="105" align="right">&nbsp;</td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="120" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="217" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of</font></td>
    <td WIDTH="86" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">13,334</font></td>
    <td WIDTH="94" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">133</font></td>
    <td WIDTH="99" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="109" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">3,867</font></td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="105" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="120" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">4,000</font></td>
  </tr>
  <tr>
    <td WIDTH="217" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Common stock</font></td>
    <td WIDTH="86" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="94" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="99" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="109" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="105" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="120" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="217" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">upon exercise of</font></td>
    <td WIDTH="86" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="94" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="99" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="109" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="105" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="120" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="217" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">options</font></td>
    <td WIDTH="86" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="94" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="99" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="109" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="105" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="120" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="217"><font FACE="Times New Roman PSMT" SIZE="2">Net Loss</font></td>
    <td WIDTH="86" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="94" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="99" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="109" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="115" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="105" align="right"><font FACE="Times New Roman PSMT" SIZE="2">(11,245,361)</font></td>
    <td WIDTH="110" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="120" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    (11,245,361)</font></td>
  </tr>
  <tr>
    <td WIDTH="217" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Other</font></td>
    <td WIDTH="86" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="94" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="99" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="109" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="105" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(4,026)</font></td>
    <td WIDTH="120" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    (4,026)</font></td>
  </tr>
  <tr>
    <td WIDTH="217" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">comprehensive</font></td>
    <td WIDTH="86" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="94" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="99" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="109" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="105" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="110" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="120" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="217" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">loss</font></td>
    <td WIDTH="86" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="94" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="99" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="109" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="115" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="105" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="110" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="120" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="217"><font FACE="Times New Roman PS" SIZE="2"><b>BALANCE,</b></font></td>
    <td WIDTH="86" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">60,807,508</font></td>
    <td WIDTH="94" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">$608,075</font></td>
    <td WIDTH="99" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">$(7,973)</font></td>
    <td WIDTH="109" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">$100,751,284</font></td>
    <td WIDTH="115" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">$(23,923)</font></td>
    <td WIDTH="105" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">$(101,366,286)</font></td>
    <td WIDTH="110" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">$(4,026)</font></td>
    <td WIDTH="120" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">
    $(42,849)</font></td>
  </tr>
  <tr>
    <td WIDTH="217"><font FACE="Times New Roman PS" SIZE="2"><b>JUNE 30, 2002</b></font></td>
    <td WIDTH="86" align="right">&nbsp;</td>
    <td WIDTH="94" align="right">&nbsp;</td>
    <td WIDTH="99" align="right">&nbsp;</td>
    <td WIDTH="109" align="right">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="105" align="right">&nbsp;</td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="120" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="217">&nbsp;</td>
    <td WIDTH="86" align="right">&nbsp;</td>
    <td WIDTH="94" align="right">&nbsp;</td>
    <td WIDTH="99" align="right">&nbsp;</td>
    <td WIDTH="109" align="right">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="105" align="right">&nbsp;</td>
    <td WIDTH="110" align="right">&nbsp;</td>
    <td WIDTH="120" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td COLSPAN="9" width="1055"><font FACE="Times New Roman PSMT" SIZE="2">The accompanying
    notes are an integral part of these consolidated financial statements.</font></td>
  </tr>
  </table>
  <hr><p Style='page-break-before:always'></center>
</div>
<div align="center">
  <center>
<table CELLSPACING="0" BORDER="0" WIDTH="85%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="1055" colspan="9" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    <font FACE="Times New Roman PS" SIZE="4"><b>
    mPHASE TECHNOLOGIES, INC.</b></font></font></td>
  </tr>
  <tr>
    <td WIDTH="1055" colspan="9" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    <font FACE="Times New Roman PS" SIZE="4"><b>
    CONSOLIDATED STATEMENTS OF CHANGES IN</b></font></font></td>
  </tr>
  <tr>
    <td WIDTH="1055" colspan="9" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    <font FACE="Times New Roman PS" SIZE="4"><b>
    STOCKHOLDERS' EQUITY (DEFICIT)</b></font></font></td>
  </tr>
  <tr>
    <td WIDTH="1055" colspan="9" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    <font FACE="Times New Roman PS" SIZE="4"><b>FOR
    THE PERIOD FROM INCEPTION (OCTOBER 2, 1996)</b></font></font></td>
  </tr>
  <tr>
    <td WIDTH="1055" colspan="9" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    <font FACE="Times New Roman PS" SIZE="4"><b>TO
    JUNE 30, 1997 AND FOR EACH OF THE SIX YEARS</b></font></font></td>
  </tr>
  <tr>
    <td WIDTH="1055" colspan="9" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    <font FACE="Times New Roman PS" SIZE="4"><b>IN
    THE PERIOD ENDED JUNE 30, 2003</b></font></font></td>
  </tr>
  <tr>
    <td WIDTH="215">&nbsp;</td>
    <td WIDTH="87">&nbsp;</td>
    <td WIDTH="93">&nbsp;</td>
    <td WIDTH="100">&nbsp;</td>
    <td WIDTH="109">&nbsp;</td>
    <td WIDTH="115">&nbsp;</td>
    <td WIDTH="104">&nbsp;</td>
    <td WIDTH="111">&nbsp;</td>
    <td WIDTH="121">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="215">&nbsp;</td>
    <td WIDTH="87" align="right">&nbsp;</td>
    <td WIDTH="93" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="109" align="right">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="111" align="right">&nbsp;</td>
    <td WIDTH="121" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="215">&nbsp;</td>
    <td WIDTH="87" align="center">&nbsp;</td>
    <td WIDTH="93" align="center">&nbsp;</td>
    <td WIDTH="100" align="center">&nbsp;</td>
    <td WIDTH="109" align="center">&nbsp;</td>
    <td WIDTH="115" align="center">&nbsp;</td>
    <td WIDTH="104" align="center">&nbsp;</td>
    <td WIDTH="111" align="center">&nbsp;</td>
    <td WIDTH="121" align="center"><font FACE="Times New Roman PSMT" SIZE="2">TOTAL</font></td>
  </tr>
  <tr>
    <td WIDTH="215">&nbsp;</td>
    <td WIDTH="87" align="center">&nbsp;</td>
    <td WIDTH="93" align="center">&nbsp;</td>
    <td WIDTH="100" align="center">&nbsp;</td>
    <td WIDTH="109" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Additional</font></td>
    <td WIDTH="115" align="center">&nbsp;</td>
    <td WIDTH="104" align="center">&nbsp;</td>
    <td WIDTH="111" align="center">&nbsp;</td>
    <td WIDTH="121" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    STOCKHOLDERS'</font></td>
  </tr>
  <tr>
    <td WIDTH="215">&nbsp;</td>
    <td WIDTH="87" align="center">&nbsp;</td>
    <td WIDTH="93" align="center"><font FACE="Times New Roman PSMT" SIZE="2">$ .01</font></td>
    <td WIDTH="100" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Treasury</font></td>
    <td WIDTH="109" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Paid-In</font></td>
    <td WIDTH="115" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Deferred</font></td>
    <td WIDTH="104" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Accumulated</font></td>
    <td WIDTH="111" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Comprehensive</font></td>
    <td WIDTH="121" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    EQUITY</font></td>
  </tr>
  <tr>
    <td WIDTH="215">&nbsp;</td>
    <td WIDTH="87" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">Shares</font></td>
    <td WIDTH="93" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">Stated Value</font></td>
    <td WIDTH="100" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">Stock</font></td>
    <td WIDTH="109" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">Capital</font></td>
    <td WIDTH="115" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">Compensation</font></td>
    <td WIDTH="104" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">Deficit</font></td>
    <td WIDTH="111" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">
    Loss</font></td>
    <td WIDTH="121" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">
    (DEFICIT)</font></td>
  </tr>
  <tr>
    <td WIDTH="215">&nbsp;</td>
    <td WIDTH="87" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="93" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="100" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="109" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="115" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="104" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="111" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="121" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="215" bgcolor="#E6E6E6"><font FACE="Times New Roman PS" SIZE="2"><b>BALANCE JUNE 30, 2002</b></font></td>
    <td WIDTH="87" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">60,807,508</font></td>
    <td WIDTH="93" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$608,075</font></td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$(7,973)</font></td>
    <td WIDTH="109" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$100,751,284</font></td>
    <td WIDTH="115" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$(23,923)</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$(101,366,286)</font></td>
    <td WIDTH="111" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$(4,026)</font></td>
    <td WIDTH="121" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">
    $(42,849)</font></td>
  </tr>
  <tr>
    <td WIDTH="215"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of
    common</font></td>
    <td WIDTH="87" align="right"><font FACE="Times New Roman PSMT" SIZE="2">4,296,680</font></td>
    <td WIDTH="93" align="right"><font FACE="Times New Roman PSMT" SIZE="2">42,967</font></td>
    <td WIDTH="100" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="109" align="right"><font FACE="Times New Roman PSMT" SIZE="2">1,121,351</font></td>
    <td WIDTH="115" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="104" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="111" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="121" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    1,164,318</font></td>
  </tr>
  <tr>
    <td WIDTH="215"><font FACE="Times New Roman PSMT" SIZE="2">stock with
    warrants</font></td>
    <td WIDTH="87" align="right">&nbsp;</td>
    <td WIDTH="93" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="109" align="right">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="111" align="right">&nbsp;</td>
    <td WIDTH="121" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="215"><font FACE="Times New Roman PSMT" SIZE="2">in private
    placement</font></td>
    <td WIDTH="87" align="right">&nbsp;</td>
    <td WIDTH="93" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="109" align="right">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="111" align="right">&nbsp;</td>
    <td WIDTH="121" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="215" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of
    common</font></td>
    <td WIDTH="87" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">426,000</font></td>
    <td WIDTH="93" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">4,260</font></td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="109" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">107,985</font></td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="104" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="111" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="121" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    112,245</font></td>
  </tr>
  <tr>
    <td WIDTH="215" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">stock for
    services</font></td>
    <td WIDTH="87" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="93" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="109" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="104" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="111" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="121" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="215"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of
    options</font></td>
    <td WIDTH="87" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="93" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="100" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="109" align="right"><font FACE="Times New Roman PSMT" SIZE="2">274,100</font></td>
    <td WIDTH="115" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="104" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="111" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="121" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    274,100</font></td>
  </tr>
  <tr>
    <td WIDTH="215"><font FACE="Times New Roman PSMT" SIZE="2">and warrants for</font></td>
    <td WIDTH="87" align="right">&nbsp;</td>
    <td WIDTH="93" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="109" align="right">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="111" align="right">&nbsp;</td>
    <td WIDTH="121" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="215"><font FACE="Times New Roman PSMT" SIZE="2">services</font></td>
    <td WIDTH="87" align="right">&nbsp;</td>
    <td WIDTH="93" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="109" align="right">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="111" align="right">&nbsp;</td>
    <td WIDTH="121" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="215" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Amortization of</font></td>
    <td WIDTH="87" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="93" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="109" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">23,923</font></td>
    <td WIDTH="104" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="111" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="121" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    23,923</font></td>
  </tr>
  <tr>
    <td WIDTH="215" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">deferred employee</font></td>
    <td WIDTH="87" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="93" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="109" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="104" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="111" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="121" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="215" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">stock option</font></td>
    <td WIDTH="87" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="93" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="109" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="104" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="111" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="121" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="215" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">compensation</font></td>
    <td WIDTH="87" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="93" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="109" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="104" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="111" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="121" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="215"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of
    common</font></td>
    <td WIDTH="87" align="right"><font FACE="Times New Roman PSMT" SIZE="2">5,923,333</font></td>
    <td WIDTH="93" align="right"><font FACE="Times New Roman PSMT" SIZE="2">59,233</font></td>
    <td WIDTH="100" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="109" align="right"><font FACE="Times New Roman PSMT" SIZE="2">1,826,329</font></td>
    <td WIDTH="115" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="104" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="111" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="121" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    1,885,562</font></td>
  </tr>
  <tr>
    <td WIDTH="215"><font FACE="Times New Roman PSMT" SIZE="2">stock and
    warrants</font></td>
    <td WIDTH="87" align="right">&nbsp;</td>
    <td WIDTH="93" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="109" align="right">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="111" align="right">&nbsp;</td>
    <td WIDTH="121" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="215"><font FACE="Times New Roman PSMT" SIZE="2">in settlement of
    debt</font></td>
    <td WIDTH="87" align="right">&nbsp;</td>
    <td WIDTH="93" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="109" align="right">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="111" align="right">&nbsp;</td>
    <td WIDTH="121" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="215"><font FACE="Times New Roman PSMT" SIZE="2">to related
    parties and</font></td>
    <td WIDTH="87" align="right">&nbsp;</td>
    <td WIDTH="93" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="109" align="right">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="111" align="right">&nbsp;</td>
    <td WIDTH="121" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="215"><font FACE="Times New Roman PSMT" SIZE="2">strategic vendors</font></td>
    <td WIDTH="87" align="right">&nbsp;</td>
    <td WIDTH="93" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="109" align="right">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="111" align="right">&nbsp;</td>
    <td WIDTH="121" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="215" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Net loss</font></td>
    <td WIDTH="87" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="93" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="109" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="104" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(6,650,211)</font></td>
    <td WIDTH="111" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="121" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    (6,650,211)</font></td>
  </tr>
  <tr>
    <td WIDTH="215"><font FACE="Times New Roman PSMT" SIZE="2">Other</font></td>
    <td WIDTH="87" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="93" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="100" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="109" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="115" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="104" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="111" align="right"><font FACE="Times New Roman PSMT" SIZE="2">4,026</font></td>
    <td WIDTH="121" align="right"><font FACE="Times New Roman PSMT" SIZE="2">4,026</font></td>
  </tr>
  <tr>
    <td WIDTH="215"><font FACE="Times New Roman PSMT" SIZE="2">comprehensive</font></td>
    <td WIDTH="87" align="right">&nbsp;</td>
    <td WIDTH="93" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="109" align="right">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="111" align="right">&nbsp;</td>
    <td WIDTH="121" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="215"><font FACE="Times New Roman PSMT" SIZE="2">income</font></td>
    <td WIDTH="87" align="right" style="border-bottom-style: double; border-bottom-width: 3">&nbsp;</td>
    <td WIDTH="93" align="right" style="border-bottom-style: double; border-bottom-width: 3">&nbsp;</td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3">&nbsp;</td>
    <td WIDTH="109" align="right" style="border-bottom-style: double; border-bottom-width: 3">&nbsp;</td>
    <td WIDTH="115" align="right" style="border-bottom-style: double; border-bottom-width: 3">&nbsp;</td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3">&nbsp;</td>
    <td WIDTH="111" align="right" style="border-bottom-style: double; border-bottom-width: 3">&nbsp;</td>
    <td WIDTH="121" align="right" style="border-bottom-style: double; border-bottom-width: 3">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="215" bgcolor="#E6E6E6"><font FACE="Times New Roman PS" SIZE="2"><b>BALANCE, JUNE</b></font></td>
    <td WIDTH="87" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">71,453,521</font></td>
    <td WIDTH="93" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$714,535</font></td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$(7,973)</font></td>
    <td WIDTH="109" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$104,081,049</font></td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $-</font></td>
    <td WIDTH="104" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$(108,016,497)</font></td>
    <td WIDTH="111" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $-</font></td>
    <td WIDTH="121" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $(3,228,886)</font></td>
  </tr>
  <tr>
    <td WIDTH="215" bgcolor="#E6E6E6"><font FACE="Times New Roman PS" SIZE="2"><b>30, 2003</b></font></td>
    <td WIDTH="87" align="right" style="border-top-style: double; border-top-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="93" align="right" style="border-top-style: double; border-top-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="100" align="right" style="border-top-style: double; border-top-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="109" align="right" style="border-top-style: double; border-top-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="115" align="right" style="border-top-style: double; border-top-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="104" align="right" style="border-top-style: double; border-top-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="111" align="right" style="border-top-style: double; border-top-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="121" align="right" style="border-top-style: double; border-top-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="215">&nbsp;</td>
    <td WIDTH="87" align="right">&nbsp;</td>
    <td WIDTH="93" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="109" align="right">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="111" align="right">&nbsp;</td>
    <td WIDTH="121" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="934" COLSPAN="8"><font FACE="Times New Roman PSMT" SIZE="2">The
    accompanying notes are an integral part of these consolidated financial
    statements.</font></td>
    <td WIDTH="121">&nbsp;</td>
  </tr>
  </table>
  </center>
</div>
<hr><p Style='page-break-before:always'>
<div align="center">
  <center>
<table CELLSPACING="0" BORDER="0" WIDTH="80%" style="border-collapse: collapse" bordercolor="#111111" cellpadding="0">
  <tr>
    <td WIDTH="990" colspan="7" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>mPHASE
    TECHNOLOGIES, INC.</b></font></td>
  </tr>
  <tr>
    <td WIDTH="990" colspan="7" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>(A DEVELOPMENT
    STAGE COMPANY)</b></font></td>
  </tr>
  <tr>
    <td WIDTH="990" colspan="7" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>
    CONSOLIDATED STATEMENT OF CHANGES IN</b></font></td>
  </tr>
  <tr>
    <td WIDTH="990" colspan="7" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>SHAREHOLDERS'
    DEFICIT (UNAUDITED)</b></font></td>
  </tr>
  <tr>
    <td WIDTH="252">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="118" align="right">&nbsp;</td>
    <td WIDTH="116" align="right">&nbsp;</td>
    <td WIDTH="130" align="right">&nbsp;</td>
    <td WIDTH="127" align="right">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="118" align="right">&nbsp;</td>
    <td WIDTH="116" align="right">&nbsp;</td>
    <td WIDTH="130" align="right">&nbsp;</td>
    <td WIDTH="127" align="right">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252">&nbsp;</td>
    <td WIDTH="115" align="center">&nbsp;</td>
    <td WIDTH="118" align="center">&nbsp;</td>
    <td WIDTH="116" align="center">&nbsp;</td>
    <td WIDTH="130" align="center">&nbsp;</td>
    <td WIDTH="127" align="center">&nbsp;</td>
    <td WIDTH="132" align="center"><font size="2">Total</font></td>
  </tr>
  <tr>
    <td WIDTH="252">&nbsp;</td>
    <td WIDTH="115" align="center">&nbsp;</td>
    <td WIDTH="118" align="center">&nbsp;</td>
    <td WIDTH="116" align="center">&nbsp;</td>
    <td WIDTH="130" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Additional </font></td>
    <td WIDTH="127" align="center">&nbsp;</td>
    <td WIDTH="132" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Shareholders</font></td>
  </tr>
  <tr>
    <td WIDTH="252">&nbsp;</td>
    <td WIDTH="115" align="center">&nbsp;</td>
    <td WIDTH="118" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    $.01 Stated</font></td>
    <td WIDTH="116" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Treasury</font></td>
    <td WIDTH="130" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Paid-in</font></td>
    <td WIDTH="127" align="center"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;Accumulated</font></td>
    <td WIDTH="132" align="center"><font FACE="Times New Roman PSMT" SIZE="2">(Deficit)</font></td>
  </tr>
  <tr>
    <td WIDTH="252">&nbsp;</td>
    <td WIDTH="115" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font size="2">Shares</font></td>
    <td WIDTH="118" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">
    Value</font></td>
    <td WIDTH="116" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">
    Stock</font></td>
    <td WIDTH="130" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">Capital</font></td>
    <td WIDTH="127" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">
    Deficit</font></td>
    <td WIDTH="132" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">Equity</font></td>
  </tr>
  <tr>
    <td WIDTH="252">&nbsp;</td>
    <td WIDTH="115" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="118" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="116" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="130" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="127" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="132" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Balance June 30,</font></td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">71,453,521</font></td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$714,535</font></td>
    <td WIDTH="116" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$(7,973)</font></td>
    <td WIDTH="130" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$104,081,049</font></td>
    <td WIDTH="127" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$(108,016,497)</font></td>
    <td WIDTH="132" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$(3,228,886)</font></td>
  </tr>
  <tr>
    <td WIDTH="252" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">2003</font></td>
    <td WIDTH="115" align="right" style="border-top-style: double; border-top-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="118" align="right" style="border-top-style: double; border-top-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="116" align="right" style="border-top-style: double; border-top-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="130" align="right" style="border-top-style: double; border-top-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="127" align="right" style="border-top-style: double; border-top-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="132" align="right" style="border-top-style: double; border-top-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of</font></td>
    <td WIDTH="115" align="right"><font FACE="Times New Roman PSMT" SIZE="2">1,983,337</font></td>
    <td WIDTH="118" align="right"><font FACE="Times New Roman PSMT" SIZE="2">19,834</font></td>
    <td WIDTH="116" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="130" align="right"><font FACE="Times New Roman PSMT" SIZE="2">611,194</font></td>
    <td WIDTH="127" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="132" align="right"><font FACE="Times New Roman PSMT" SIZE="2">631,028</font></td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">common stock with</font></td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="118" align="right">&nbsp;</td>
    <td WIDTH="116" align="right">&nbsp;</td>
    <td WIDTH="130" align="right">&nbsp;</td>
    <td WIDTH="127" align="right">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">warrants in
    private</font></td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="118" align="right">&nbsp;</td>
    <td WIDTH="116" align="right">&nbsp;</td>
    <td WIDTH="130" align="right">&nbsp;</td>
    <td WIDTH="127" align="right">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">placements</font></td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="118" align="right">&nbsp;</td>
    <td WIDTH="116" align="right">&nbsp;</td>
    <td WIDTH="130" align="right">&nbsp;</td>
    <td WIDTH="127" align="right">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of</font></td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">924,667</font></td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">9,246</font></td>
    <td WIDTH="116" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="130" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">238,154</font></td>
    <td WIDTH="127" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="132" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">247,400</font></td>
  </tr>
  <tr>
    <td WIDTH="252" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">common stock for</font></td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="116" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="130" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="127" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="132" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">services</font></td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="116" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="130" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="127" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="132" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of</font></td>
    <td WIDTH="115" align="right"><font FACE="Times New Roman PSMT" SIZE="2">500,000</font></td>
    <td WIDTH="118" align="right"><font FACE="Times New Roman PSMT" SIZE="2">5,000</font></td>
    <td WIDTH="116" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="130" align="right"><font FACE="Times New Roman PSMT" SIZE="2">145,000</font></td>
    <td WIDTH="127" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="132" align="right"><font FACE="Times New Roman PSMT" SIZE="2">150,000</font></td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">common stock</font></td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="118" align="right">&nbsp;</td>
    <td WIDTH="116" align="right">&nbsp;</td>
    <td WIDTH="130" align="right">&nbsp;</td>
    <td WIDTH="127" align="right">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">pursuant to</font></td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="118" align="right">&nbsp;</td>
    <td WIDTH="116" align="right">&nbsp;</td>
    <td WIDTH="130" align="right">&nbsp;</td>
    <td WIDTH="127" align="right">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">exercise of</font></td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="118" align="right">&nbsp;</td>
    <td WIDTH="116" align="right">&nbsp;</td>
    <td WIDTH="130" align="right">&nbsp;</td>
    <td WIDTH="127" align="right">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">warrants</font></td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="118" align="right">&nbsp;</td>
    <td WIDTH="116" align="right">&nbsp;</td>
    <td WIDTH="130" align="right">&nbsp;</td>
    <td WIDTH="127" align="right">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Issuance of</font></td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="116" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="130" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">59,843</font></td>
    <td WIDTH="127" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="132" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">59,843</font></td>
  </tr>
  <tr>
    <td WIDTH="252" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">warrants to</font></td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="116" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="130" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="127" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="132" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">purchase common</font></td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="116" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="130" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="127" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="132" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">stock for
    services</font></td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="116" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="130" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="127" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="132" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252"><font FACE="Times New Roman PSMT" SIZE="2">Net loss</font></td>
    <td WIDTH="115" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="118" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="116" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="130" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="127" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">(2,565,377)</font></td>
    <td WIDTH="132" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">(2,565,377)</font></td>
  </tr>
  <tr>
    <td WIDTH="252" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Balance, December</font></td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">74,861,525</font></td>
    <td WIDTH="118" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$748,615</font></td>
    <td WIDTH="116" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$(7,973)</font></td>
    <td WIDTH="130" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$105,135,240</font></td>
    <td WIDTH="127" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$(110,581,874)</font></td>
    <td WIDTH="132" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$(4,705,992)</font></td>
  </tr>
  <tr>
    <td WIDTH="252" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">31, 2003</font></td>
    <td WIDTH="115" align="right" style="border-top-style: double; border-top-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="118" align="right" style="border-top-style: double; border-top-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="116" align="right" style="border-top-style: double; border-top-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="130" align="right" style="border-top-style: double; border-top-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="127" align="right" style="border-top-style: double; border-top-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="132" align="right" style="border-top-style: double; border-top-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="252">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="118" align="right">&nbsp;</td>
    <td WIDTH="116" align="right">&nbsp;</td>
    <td WIDTH="130" align="right">&nbsp;</td>
    <td WIDTH="127" align="right">&nbsp;</td>
    <td WIDTH="132" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="990" COLSPAN="7"><font FACE="Times New Roman PSMT" SIZE="2">The
    accompanying notes are an integral part of these consolidated financial
    statements.</font></td>
  </tr>
  </table>
  </center>
</div>
<hr><p Style='page-break-before:always'>
<div align="center">
  <center>
<table CELLSPACING="0" BORDER="0" WIDTH="80%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="100%" COLSPAN="5" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>
    mPHASE TECHNOLOGIES, INC.</b></font></td>
  </tr>
  <tr>
    <td WIDTH="100%" COLSPAN="5" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>(A
    DEVELOPMENT STAGE COMPANY)</b></font></td>
  </tr>
  <tr>
    <td WIDTH="100%" COLSPAN="5" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>
    CONSOLIDATED STATEMENTS OF CASH FLOWS</b></font></td>
  </tr>
  <tr>
    <td WIDTH="48%">&nbsp;</td>
    <td WIDTH="12%" align="center">&nbsp;</td>
    <td WIDTH="13%" align="center">&nbsp;</td>
    <td WIDTH="13%" align="center">&nbsp;</td>
    <td WIDTH="14%" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Inception</font></td>
  </tr>
  <tr>
    <td WIDTH="48%">&nbsp;</td>
    <td WIDTH="38%" COLSPAN="3" align="center">&nbsp;</td>
    <td WIDTH="14%" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    (October</font></td>
  </tr>
  <tr>
    <td WIDTH="48%">&nbsp;</td>
    <td WIDTH="38%" align="center" colspan="3"><font FACE="Times New Roman PSMT" SIZE="2">
    For
    the Years Ended June 30,</font></td>
    <td WIDTH="14%" align="center"><font FACE="Times New Roman PSMT" SIZE="2">2,
    1996)</font></td>
  </tr>
  <tr>
    <td WIDTH="48%">&nbsp;</td>
    <td WIDTH="12%" align="center">&nbsp;</td>
    <td WIDTH="13%" align="center">&nbsp;</td>
    <td WIDTH="13%" align="center">&nbsp;</td>
    <td WIDTH="14%" align="center"><font FACE="Times New Roman PSMT" SIZE="2">to
    June 30,</font></td>
  </tr>
  <tr>
    <td WIDTH="48%">&nbsp;</td>
    <td WIDTH="12%" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">2001</font></td>
    <td WIDTH="13%" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">2002</font></td>
    <td WIDTH="13%" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">2003</font></td>
    <td WIDTH="14%" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">2003</font></td>
  </tr>
  <tr>
    <td WIDTH="48%">&nbsp;</td>
    <td WIDTH="12%" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="13%" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="13%" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="14%" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="48%"><font FACE="Times New Roman PSMT" SIZE="2">CASH FLOWS FROM
    OPERATING ACTIVITIES:</font></td>
    <td WIDTH="12%" align="right">&nbsp;</td>
    <td WIDTH="13%" align="right">&nbsp;</td>
    <td WIDTH="13%" align="right">&nbsp;</td>
    <td WIDTH="14%" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="48%" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Net loss</font></td>
    <td WIDTH="12%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$(23,998,734)</font></td>
    <td WIDTH="13%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$(11,245,361)</font></td>
    <td WIDTH="13%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$(6,650,211)</font></td>
    <td WIDTH="14%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $(108,016,497)</font></td>
  </tr>
  <tr>
    <td WIDTH="48%">&nbsp;</td>
    <td WIDTH="12%" align="right">&nbsp;</td>
    <td WIDTH="13%" align="right">&nbsp;</td>
    <td WIDTH="13%" align="right">&nbsp;</td>
    <td WIDTH="14%" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="48%" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Adjustments to
    reconcile net loss to net cash used in</font></td>
    <td WIDTH="12%" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="13%" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="13%" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="14%" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="48%" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">operating
    activities:</font></td>
    <td WIDTH="12%" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="13%" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="13%" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="14%" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="48%"><font FACE="Times New Roman PSMT" SIZE="2">Depreciation and
    amortization</font></td>
    <td WIDTH="12%" align="right"><font FACE="Times New Roman PSMT" SIZE="2">1,235,213</font></td>
    <td WIDTH="13%" align="right"><font FACE="Times New Roman PSMT" SIZE="2">1,653,346</font></td>
    <td WIDTH="13%" align="right"><font FACE="Times New Roman PSMT" SIZE="2">1,425,952</font></td>
    <td WIDTH="14%" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    5,594,140</font></td>
  </tr>
  <tr>
    <td WIDTH="48%" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Book value of
    fixed assets disposed</font></td>
    <td WIDTH="12%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">61,414</font></td>
    <td WIDTH="13%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="13%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="14%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    74,272</font></td>
  </tr>
  <tr>
    <td WIDTH="48%"><font FACE="Times New Roman PSMT" SIZE="2">Loss on
    unconsolidated subsidiary</font></td>
    <td WIDTH="12%" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="13%" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="13%" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="14%" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    1,466,467</font></td>
  </tr>
  <tr>
    <td WIDTH="48%" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Provision for
    doubtful accounts</font></td>
    <td WIDTH="12%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">29,218</font></td>
    <td WIDTH="13%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">2,906</font></td>
    <td WIDTH="13%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="14%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    32,124</font></td>
  </tr>
  <tr>
    <td WIDTH="48%"><font FACE="Times New Roman PSMT" SIZE="2">Impairment of
    note receivable</font></td>
    <td WIDTH="12%" align="right"><font FACE="Times New Roman PSMT" SIZE="2">212,500</font></td>
    <td WIDTH="13%" align="right"><font FACE="Times New Roman PSMT" SIZE="2">20,250</font></td>
    <td WIDTH="13%" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="14%" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    232,750</font></td>
  </tr>
  <tr>
    <td WIDTH="48%" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Loss on
    securities</font></td>
    <td WIDTH="12%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="13%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="13%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">11,258</font></td>
    <td WIDTH="14%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    11,258</font></td>
  </tr>
  <tr>
    <td WIDTH="48%"><font FACE="Times New Roman PSMT" SIZE="2">Gain on
    Extinguishments</font></td>
    <td WIDTH="12%" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="13%" align="right"><font FACE="Times New Roman PSMT" SIZE="2">(142,236)</font></td>
    <td WIDTH="13%" align="right"><font FACE="Times New Roman PSMT" SIZE="2">(61,226)</font></td>
    <td WIDTH="14%" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    (203,462)</font></td>
  </tr>
  <tr>
    <td WIDTH="48%" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Non-cash common
    stock, common stock option and warrant expense</font></td>
    <td WIDTH="12%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">7,398,455</font></td>
    <td WIDTH="13%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">3,261,449</font></td>
    <td WIDTH="13%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">1,134,335</font></td>
    <td WIDTH="14%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    48,144,097</font></td>
  </tr>
  <tr>
    <td WIDTH="48%"><font FACE="Times New Roman PSMT" SIZE="2">Changes in
    operating assets and liabilities:</font></td>
    <td WIDTH="12%" align="right">&nbsp;</td>
    <td WIDTH="13%" align="right">&nbsp;</td>
    <td WIDTH="13%" align="right">&nbsp;</td>
    <td WIDTH="14%" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="48%" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Accounts
    receivable</font></td>
    <td WIDTH="12%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(170,466)</font></td>
    <td WIDTH="13%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">15,748</font></td>
    <td WIDTH="13%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(13,355)</font></td>
    <td WIDTH="14%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    (319,259)</font></td>
  </tr>
  <tr>
    <td WIDTH="48%"><font FACE="Times New Roman PSMT" SIZE="2">Inventory</font></td>
    <td WIDTH="12%" align="right"><font FACE="Times New Roman PSMT" SIZE="2">(4,303,895)</font></td>
    <td WIDTH="13%" align="right"><font FACE="Times New Roman PSMT" SIZE="2">961,179</font></td>
    <td WIDTH="13%" align="right"><font FACE="Times New Roman PSMT" SIZE="2">1,449,628</font></td>
    <td WIDTH="14%" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    (1,893,088)</font></td>
  </tr>
  <tr>
    <td WIDTH="48%" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Prepaid expenses
    and other current assets</font></td>
    <td WIDTH="12%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">88,280</font></td>
    <td WIDTH="13%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">173,649</font></td>
    <td WIDTH="13%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(29,652)</font></td>
    <td WIDTH="14%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    (596,449)</font></td>
  </tr>
  <tr>
    <td WIDTH="48%"><font FACE="Times New Roman PSMT" SIZE="2">Production
    advances-related parties</font></td>
    <td WIDTH="12%" align="right"><font FACE="Times New Roman PSMT" SIZE="2">1,109,641</font></td>
    <td WIDTH="13%" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="13%" align="right">&nbsp;</td>
    <td WIDTH="14%" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="48%" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Other assets</font></td>
    <td WIDTH="12%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(150,000)</font></td>
    <td WIDTH="13%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">146,420</font></td>
    <td WIDTH="13%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">3,580</font></td>
    <td WIDTH="14%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
  </tr>
  <tr>
    <td WIDTH="48%"><font FACE="Times New Roman PSMT" SIZE="2">Receivables from
    subsidiary</font></td>
    <td WIDTH="12%" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="13%" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="13%" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="14%" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    (150,000)</font></td>
  </tr>
  </table>
  </center>
</div>
<div align="center">
  <center>
<table CELLSPACING="0" BORDER="0" WIDTH="80%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="475" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Due from officer</font></td>
    <td WIDTH="120" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(100,000)</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">100,000</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="140" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
  </tr>
  <tr>
    <td WIDTH="475"><font FACE="Times New Roman PSMT" SIZE="2">Accounts payable</font></td>
    <td WIDTH="120" align="right"><font FACE="Times New Roman PSMT" SIZE="2">2,802,008</font></td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">(340,057)</font></td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">174,939</font></td>
    <td WIDTH="140" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    4,157,395</font></td>
  </tr>
  <tr>
    <td WIDTH="475" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Accrued expenses</font></td>
    <td WIDTH="120" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(5,394)</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">332,819</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">273,986</font></td>
    <td WIDTH="140" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    1,812,571</font></td>
  </tr>
  <tr>
    <td WIDTH="475"><font FACE="Times New Roman PSMT" SIZE="2">Deferred revenue</font></td>
    <td WIDTH="120" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">214,180</font></td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="140" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    214,180</font></td>
  </tr>
  <tr>
    <td WIDTH="475" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Due to related
    parties:</font></td>
    <td WIDTH="120" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="140" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="475"><font FACE="Times New Roman PSMT" SIZE="2">Microphase</font></td>
    <td WIDTH="120" align="right"><font FACE="Times New Roman PSMT" SIZE="2">709,832</font></td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">864,555</font></td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">721,544</font></td>
    <td WIDTH="140" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    2,295,949</font></td>
  </tr>
  <tr>
    <td WIDTH="475" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Janifast</font></td>
    <td WIDTH="120" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">1,272,709</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">907,450</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">99,841</font></td>
    <td WIDTH="140" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    2,280,000</font></td>
  </tr>
  <tr>
    <td WIDTH="475"><font FACE="Times New Roman PSMT" SIZE="2">Officers</font></td>
    <td WIDTH="120" align="right"><font FACE="Times New Roman PSMT" SIZE="2">(412,400)</font></td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">312,504</font></td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">246,835</font></td>
    <td WIDTH="140" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    559,339</font></td>
  </tr>
  <tr>
    <td WIDTH="475" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Accrued expense,
    Lintel</font></td>
    <td WIDTH="120" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">477,000</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="140" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    477,000</font></td>
  </tr>
  <tr>
    <td WIDTH="475"><font FACE="Times New Roman PSMT" SIZE="2">Due to Others</font></td>
    <td WIDTH="120" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">59,566</font></td>
    <td WIDTH="129" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">25,794</font></td>
    <td WIDTH="129" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="140" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    211,972</font></td>
  </tr>
  <tr>
    <td WIDTH="475" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Net cash used in
    operating activities</font></td>
    <td WIDTH="120" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(13,685,053)</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(2,735,405)</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(1,212,546)</font></td>
    <td WIDTH="140" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    (43,615,241)</font></td>
  </tr>
  <tr>
    <td WIDTH="475">&nbsp;</td>
    <td WIDTH="120" align="right" style="border-top-style: double; border-top-width: 3">&nbsp;</td>
    <td WIDTH="129" align="right" style="border-top-style: double; border-top-width: 3">&nbsp;</td>
    <td WIDTH="129" align="right" style="border-top-style: double; border-top-width: 3">&nbsp;</td>
    <td WIDTH="140" align="right" style="border-top-style: double; border-top-width: 3">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="475">&nbsp;</td>
    <td WIDTH="120" align="right">&nbsp;</td>
    <td WIDTH="129" align="right">&nbsp;</td>
    <td WIDTH="129" align="right">&nbsp;</td>
    <td WIDTH="140" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="475" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">CASH FLOWS FROM
    INVESTING ACTIVITIES:</font></td>
    <td WIDTH="120" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="140" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="475"><font FACE="Times New Roman PSMT" SIZE="2">Investment in
    patents and licensing rights</font></td>
    <td WIDTH="120" align="right"><font FACE="Times New Roman PSMT" SIZE="2">(148,127)</font></td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">(74,649)</font></td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="140" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    (375,720)</font></td>
  </tr>
  <tr>
    <td WIDTH="475" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Purchase of
    property and equipment</font></td>
    <td WIDTH="120" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(705,577)</font></td>
    <td WIDTH="129" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(31,445)</font></td>
    <td WIDTH="129" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(73,305)</font></td>
    <td WIDTH="140" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    (2,537,105)</font></td>
  </tr>
  <tr>
    <td WIDTH="475"><font FACE="Times New Roman PSMT" SIZE="2">Net cash used in
    investing activities</font></td>
    <td WIDTH="120" align="right"><font FACE="Times New Roman PSMT" SIZE="2">(853,704)</font></td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">(106,094)</font></td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">(73,305)</font></td>
    <td WIDTH="140" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    (2,912,825)</font></td>
  </tr>
  <tr>
    <td WIDTH="475" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="120" align="right" style="border-top-style: double; border-top-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="129" align="right" style="border-top-style: double; border-top-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="129" align="right" style="border-top-style: double; border-top-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="140" align="right" style="border-top-style: double; border-top-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="475"><font FACE="Times New Roman PSMT" SIZE="2">CASH FLOWS FROM
    FINANCING ACTIVITIES:</font></td>
    <td WIDTH="120" align="right">&nbsp;</td>
    <td WIDTH="129" align="right">&nbsp;</td>
    <td WIDTH="129" align="right">&nbsp;</td>
    <td WIDTH="140" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="475" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Net proceeds from
    private placement of common stock and</font></td>
    <td WIDTH="120" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">8,137,345</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">2,977,750</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">1,090,474</font></td>
    <td WIDTH="140" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    46,507,918</font></td>
  </tr>
  <tr>
    <td WIDTH="475" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">exercise of
    options and warrants</font></td>
    <td WIDTH="120" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="140" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="475"><font FACE="Times New Roman PSMT" SIZE="2">Repurchase of
    treasury stock at cost</font></td>
    <td WIDTH="120" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="140" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    (7,973)</font></td>
  </tr>
  <tr>
    <td WIDTH="475" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Advances from
    Microphase</font></td>
    <td WIDTH="120" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">527,840</font></td>
    <td WIDTH="140" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    527,840</font></td>
  </tr>
  <tr>
    <td WIDTH="475"><font FACE="Times New Roman PSMT" SIZE="2">Proceeds from
    notes payable officers</font></td>
    <td WIDTH="120" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">130,000</font></td>
    <td WIDTH="140" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    130,000</font></td>
  </tr>
  <tr>
    <td WIDTH="475" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Repayment of
    notes payable - officers</font></td>
    <td WIDTH="120" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(30,000)</font></td>
    <td WIDTH="140" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    (30,000)</font></td>
  </tr>
  <tr>
    <td WIDTH="475"><font FACE="Times New Roman PSMT" SIZE="2">Repayment of
    notes payable</font></td>
    <td WIDTH="120" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="129" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">(120,191)</font></td>
    <td WIDTH="129" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">(82,668)</font></td>
    <td WIDTH="140" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    (202,859)</font></td>
  </tr>
  <tr>
    <td WIDTH="475" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Net cash provided
    by financing activities</font></td>
    <td WIDTH="120" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">8,137,345</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">2,857,559</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">1,635,646</font></td>
    <td WIDTH="140" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    46,924,926</font></td>
  </tr>
  <tr>
    <td WIDTH="475">&nbsp;</td>
    <td WIDTH="120" align="right" style="border-top-style: double; border-top-width: 3">&nbsp;</td>
    <td WIDTH="129" align="right" style="border-top-style: double; border-top-width: 3">&nbsp;</td>
    <td WIDTH="129" align="right" style="border-top-style: double; border-top-width: 3">&nbsp;</td>
    <td WIDTH="140" align="right" style="border-top-style: double; border-top-width: 3">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="475" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Net increase
    (decrease) in cash</font></td>
    <td WIDTH="120" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(6,401,412)</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">16,060</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">349,795</font></td>
    <td WIDTH="140" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    396,860</font></td>
  </tr>
  <tr>
    <td WIDTH="475"><font FACE="Times New Roman PSMT" SIZE="2">CASH AND CASH
    EQUIVALENTS, beginning of period</font></td>
    <td WIDTH="120" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">6,432,417</font></td>
    <td WIDTH="129" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">31,005</font></td>
    <td WIDTH="129" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">47,065</font></td>
    <td WIDTH="140" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
  </tr>
  <tr>
    <td WIDTH="475" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">CASH AND CASH
    EQUIVALENTS, end of period</font></td>
    <td WIDTH="120" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$31,005</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$47,065</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$396,860</font></td>
    <td WIDTH="140" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $396,860</font></td>
  </tr>
  <tr>
    <td WIDTH="475">&nbsp;</td>
    <td WIDTH="120" align="right" style="border-top-style: double; border-top-width: 3">&nbsp;</td>
    <td WIDTH="129" align="right" style="border-top-style: double; border-top-width: 3">&nbsp;</td>
    <td WIDTH="129" align="right" style="border-top-style: double; border-top-width: 3">&nbsp;</td>
    <td WIDTH="140" align="right" style="border-top-style: double; border-top-width: 3">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="853" COLSPAN="4"><font FACE="Times New Roman PSMT" SIZE="2">The
    accompanying notes are an integral part of these consolidated financial
    statements.</font></td>
    <td WIDTH="140">&nbsp;</td>
  </tr>
  </table>
  </center>
</div>
<hr><p Style='page-break-before:always'>
<div align="center">
  <center>
<table CELLSPACING="0" BORDER="0" WIDTH="80%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="989" COLSPAN="4" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>
    mPHASE TECHNOLOGIES, INC.</b></font></td>
  </tr>
  <tr>
    <td WIDTH="989" COLSPAN="4" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>(A
    DEVELOPMENT STAGE COMPANY)</b></font></td>
  </tr>
  <tr>
    <td WIDTH="989" COLSPAN="4" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>
    CONSOLIDATED STATEMENTS OF CASH FLOWS</b></font></td>
  </tr>
  <tr>
    <td WIDTH="989" colspan="4" align="center">
    <font FACE="Times New Roman PS" SIZE="4"><b>(Unaudited)</b></font></td>
  </tr>
  <tr>
    <td WIDTH="650">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="129" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="650">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    October 2,</font></td>
  </tr>
  <tr>
    <td WIDTH="650">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">1996</font></td>
  </tr>
  <tr>
    <td WIDTH="650">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">(Date
    of</font></td>
  </tr>
  <tr>
    <td WIDTH="650">&nbsp;</td>
    <td WIDTH="210" COLSPAN="2" align="right"><font FACE="Times New Roman PSMT" SIZE="2">Six
    Months Ended</font></td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    Inception) to</font></td>
  </tr>
  <tr>
    <td WIDTH="650">&nbsp;</td>
    <td WIDTH="210" COLSPAN="2" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    December 31,</font></td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    December&nbsp; 31,</font></td>
  </tr>
  <tr>
    <td WIDTH="650">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="129" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="650">&nbsp;</td>
    <td WIDTH="106" align="right"><font FACE="Times New Roman PSMT" SIZE="2">2002</font></td>
    <td WIDTH="104" align="right"><font FACE="Times New Roman PSMT" SIZE="2">2003</font></td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">2003</font></td>
  </tr>
  <tr>
    <td WIDTH="650">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="129" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="650"><font FACE="Times New Roman PSMT" SIZE="2">CASH FLOWS FROM
    OPERATING ACTIVITIES:</font></td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="129" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="650" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Net Loss</font></td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$(3,421,396)</font></td>
    <td WIDTH="104" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$(2,565,377)</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $(110,581,874)</font></td>
  </tr>
  <tr>
    <td WIDTH="650"><font FACE="Times New Roman PSMT" SIZE="2">Adjustments to
    reconcile net loss to net cash used in operating activities:</font></td>
    <td WIDTH="106" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="129" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="650" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Depreciation and
    amortization</font></td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">753,433</font></td>
    <td WIDTH="104" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">402,257</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    5,996,397</font></td>
  </tr>
  <tr>
    <td WIDTH="650"><font FACE="Times New Roman PSMT" SIZE="2">Book Value of
    fixed assets disposed</font></td>
    <td WIDTH="106" align="right"><font FACE="Times New Roman PSMT" SIZE="2">16,077</font></td>
    <td WIDTH="104" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    74,272</font></td>
  </tr>
  <tr>
    <td WIDTH="650" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Provision for
    doubtful accounts</font></td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="104" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    32,124</font></td>
  </tr>
  <tr>
    <td WIDTH="650"><font FACE="Times New Roman PSMT" SIZE="2">Gain on debt
    extinguishments</font></td>
    <td WIDTH="106" align="right"><font FACE="Times New Roman PSMT" SIZE="2">(40,725)</font></td>
    <td WIDTH="104" align="right"><font FACE="Times New Roman PSMT" SIZE="2">(23,087)</font></td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    (226,549)</font></td>
  </tr>
  <tr>
    <td WIDTH="650" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Loss on
    unconsolidated subsidiary</font></td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="104" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    1,466,467</font></td>
  </tr>
  </table>
  </center>
</div>
<div align="center">
  <center>
<table CELLSPACING="0" BORDER="0" WIDTH="80%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="651"><font FACE="Times New Roman PSMT" SIZE="2">Impairment of
    note receivable</font></td>
    <td WIDTH="109" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="104" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    232,750</font></td>
  </tr>
  <tr>
    <td WIDTH="651" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Loss on
    securities</font></td>
    <td WIDTH="109" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="104" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    11,258</font></td>
  </tr>
  <tr>
    <td WIDTH="651"><font FACE="Times New Roman PSMT" SIZE="2">Non-cash charges
    relating to issuance of common stock, common stock</font></td>
    <td WIDTH="109" align="right"><font FACE="Times New Roman PSMT" SIZE="2">790,608</font></td>
    <td WIDTH="104" align="right"><font FACE="Times New Roman PSMT" SIZE="2">307,245</font></td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    48,451,342</font></td>
  </tr>
  <tr>
    <td WIDTH="651"><font FACE="Times New Roman PSMT" SIZE="2">options and
    Warrants</font></td>
    <td WIDTH="109" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="129" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="651" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Changes in assets
    and liabilities:</font></td>
    <td WIDTH="109" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="104" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="651"><font FACE="Times New Roman PSMT" SIZE="2">Accounts
    receivable</font></td>
    <td WIDTH="109" align="right"><font FACE="Times New Roman PSMT" SIZE="2">(68,859)</font></td>
    <td WIDTH="104" align="right"><font FACE="Times New Roman PSMT" SIZE="2">104,999</font></td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    (214,260)</font></td>
  </tr>
  <tr>
    <td WIDTH="651" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Inventories</font></td>
    <td WIDTH="109" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">630,237</font></td>
    <td WIDTH="104" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">614,876</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    (1,278,212)</font></td>
  </tr>
  <tr>
    <td WIDTH="651"><font FACE="Times New Roman PSMT" SIZE="2">Prepaid expenses
    and other current assets</font></td>
    <td WIDTH="109" align="right"><font FACE="Times New Roman PSMT" SIZE="2">69,324</font></td>
    <td WIDTH="104" align="right"><font FACE="Times New Roman PSMT" SIZE="2">30,418</font></td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    (566,203)</font></td>
  </tr>
  <tr>
    <td WIDTH="651" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Other non-current
    assets</font></td>
    <td WIDTH="109" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">2,695</font></td>
    <td WIDTH="104" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
  </tr>
  <tr>
    <td WIDTH="651"><font FACE="Times New Roman PSMT" SIZE="2">Accounts payable</font></td>
    <td WIDTH="109" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="104" align="right"><font FACE="Times New Roman PSMT" SIZE="2">401,394</font></td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    4,558,788</font></td>
  </tr>
  <tr>
    <td WIDTH="651" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Accrued expenses</font></td>
    <td WIDTH="109" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(15,229)</font></td>
    <td WIDTH="104" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(419,559)</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    1,393,184</font></td>
  </tr>
  <tr>
    <td WIDTH="651"><font FACE="Times New Roman PSMT" SIZE="2">Due to/from
    related parties</font></td>
    <td WIDTH="109" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="129" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="651" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Microphase</font></td>
    <td WIDTH="109" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">495,566</font></td>
    <td WIDTH="104" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">313,226</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    2,609,175</font></td>
  </tr>
  <tr>
    <td WIDTH="651"><font FACE="Times New Roman PSMT" SIZE="2">Janifast</font></td>
    <td WIDTH="109" align="right"><font FACE="Times New Roman PSMT" SIZE="2">107,204</font></td>
    <td WIDTH="104" align="right"><font FACE="Times New Roman PSMT" SIZE="2">534,887</font></td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    2,814,888</font></td>
  </tr>
  <tr>
    <td WIDTH="651" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Officers</font></td>
    <td WIDTH="109" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">60,048</font></td>
    <td WIDTH="104" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(450,583)</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    108,756</font></td>
  </tr>
  <tr>
    <td WIDTH="651"><font FACE="Times New Roman PSMT" SIZE="2">Lintel</font></td>
    <td WIDTH="109" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="104" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    477,000</font></td>
  </tr>
  <tr>
    <td WIDTH="651" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Others</font></td>
    <td WIDTH="109" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="104" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    211,972</font></td>
  </tr>
  <tr>
    <td WIDTH="651"><font FACE="Times New Roman PSMT" SIZE="2">Receivables from
    Subsidiary</font></td>
    <td WIDTH="109" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="104" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    (150,000)</font></td>
  </tr>
  <tr>
    <td WIDTH="651" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Deferred revenue</font></td>
    <td WIDTH="109" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="129" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    214,180</font></td>
  </tr>
  <tr>
    <td WIDTH="651"><font FACE="Times New Roman PSMT" SIZE="2">Net cash used in
    operating activities</font></td>
    <td WIDTH="109" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">(621,017)</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">(749,304)</font></td>
    <td WIDTH="129" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    (44,364,545)</font></td>
  </tr>
  <tr>
    <td WIDTH="651" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">CASH FLOW FROM
    INVESTING ACTIVITIES:</font></td>
    <td WIDTH="109" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="104" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="651"><font FACE="Times New Roman PSMT" SIZE="2">Payments related
    to patents and licensing rights</font></td>
    <td WIDTH="109" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="104" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    (375,720)</font></td>
  </tr>
  <tr>
    <td WIDTH="651" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Purchase of fixed
    assets</font></td>
    <td WIDTH="109" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(5,500)</font></td>
    <td WIDTH="129" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    (2,542,605)</font></td>
  </tr>
  <tr>
    <td WIDTH="651"><font FACE="Times New Roman PSMT" SIZE="2">Net Cash
    (used)/provided by investing activities</font></td>
    <td WIDTH="109" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">(5,500)</font></td>
    <td WIDTH="129" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    (2,918,325)</font></td>
  </tr>
  <tr>
    <td WIDTH="651" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">CASH FLOW FROM
    FINANCING ACTIVITIES:</font></td>
    <td WIDTH="109" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="104" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="651"><font FACE="Times New Roman PSMT" SIZE="2">Proceeds from
    issuance of common stock and exercises of options and</font></td>
    <td WIDTH="109" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="104" align="right"><font FACE="Times New Roman PSMT" SIZE="2">679,867</font></td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    47,187,785</font></td>
  </tr>
  <tr>
    <td WIDTH="651"><font FACE="Times New Roman PSMT" SIZE="2">warrants</font></td>
    <td WIDTH="109" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="129" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="651" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Payments of notes
    payable</font></td>
    <td WIDTH="109" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(39,425)</font></td>
    <td WIDTH="104" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(2,000)</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    (204,859)</font></td>
  </tr>
  <tr>
    <td WIDTH="651"><font FACE="Times New Roman PSMT" SIZE="2">Advances from
    related party</font></td>
    <td WIDTH="109" align="right"><font FACE="Times New Roman PSMT" SIZE="2">623,290</font></td>
    <td WIDTH="104" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="129" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    627,840</font></td>
  </tr>
  <tr>
    <td WIDTH="651" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Repurchase of
    treasury stock at cost</font></td>
    <td WIDTH="109" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="129" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    (7,973)</font></td>
  </tr>
  <tr>
    <td WIDTH="651"><font FACE="Times New Roman PSMT" SIZE="2">Net cash provided
    by financing activities</font></td>
    <td WIDTH="109" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">583,865</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">677,867</font></td>
    <td WIDTH="129" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    47,602,793</font></td>
  </tr>
  <tr>
    <td WIDTH="651" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Net increase
    (decrease) in cash</font></td>
    <td WIDTH="109" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(37,152)</font></td>
    <td WIDTH="104" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(76,937)</font></td>
    <td WIDTH="129" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    319,923</font></td>
  </tr>
  <tr>
    <td WIDTH="651"><font FACE="Times New Roman PSMT" SIZE="2">CASH AND CASH
    EQUIVALENTS, beginning of period</font></td>
    <td WIDTH="109" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">47,065</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">396,860</font></td>
    <td WIDTH="129" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
  </tr>
  <tr>
    <td WIDTH="651" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">CASH AND CASH
    EQUIVALENTS, end of period</font></td>
    <td WIDTH="109" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$9,913</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$319,923</font></td>
    <td WIDTH="129" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $319,923</font></td>
  </tr>
  <tr>
    <td WIDTH="651">&nbsp;</td>
    <td WIDTH="109" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="129" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td COLSPAN="4" width="993"><font FACE="Times New Roman PSMT" SIZE="2">The accompanying
    notes are an integral part of these consolidated financial statements.</font></td>
  </tr>
  </table>
  </center>
</div>
<hr><p Style='page-break-before:always'>
              <b><font FACE="Times New Roman PS" SIZE="4">
              <p ALIGN="CENTER">mPHASE TECHNOLOGIES, INC. <br>
              (A Development Stage
              Company) <br>
              Notes to Consolidated Financial Statements<i> <br>
              </i>June 30, 2003 <br>
              (Unaudited for the Periods Ended December 31, 2002 and 2003)</font></b><font FACE="Times New Roman PSMT" SIZE="4"> </p>
</font>
</font>

<font FACE="Times New Roman PSMT">
<p ALIGN="left"><b>1. Organization and Nature of Business</b></font><font FACE="Times New Roman PSMT" SIZE="2"><b><font FACE="Times New Roman PSMT">
</font></b> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp;
mPhase Technologies, Inc. (&quot;mPhase or the &quot;Company&quot;) 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 (&quot;DSL&quot;) technology. The present activities of the Company are
focused on the deployment of its proprietary Traverser&#153 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. </p>
<p>&nbsp;&nbsp;&nbsp; On February 17, 1997, mPhase acquired Tecma Laboratories, Inc., (&quot;Tecma&quot;) in
a transaction accounted for as a reverse merger. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; On June 25, 1998, the Company acquired Microphase
Telecommunications, Inc. (&quot;MicroTel&quot;) 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&#153 Digital Video and Data Deliver System (&quot;Traverser&#153&quot;). </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; On March 2, 2000 the Company acquired a 50% interest in
mPhaseTelevision.Net, Inc., an incorporated joint venture with AlphaStar
International, Inc. (Note 8) for $20,000. The Company acquired an additional
interest in the joint venture of 6.5% in April of 2000 for $20,000. 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The Company is in the development stage and its present
activities are focused on the commercial deployment of its legacy Traverser&#153
DVDDS and TV+ products for delivery of broadcast television over ADSL and
associated DSL component products which include POTS splitters and a line of
intelligent POTS splitter products. Since mPhase is in the development stage,
the accompanying consolidated financial statements should not be regarded as
typical for normal operating periods. </p>
</font>

<font FACE="Times New Roman PSMT">
<p><b>2. Losses During the Development Stage and Management's Plans </b> </p>
</font>

<font FACE="Times New Roman PSMT" SIZE="2">
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Through June 30, 2003, the Company had incurred development
stage losses totaling $108,016,497, and at June 30, 2003 had a stockholders'
deficit of $3,228,886. At June 30, 2003, the Company had $396,860 of cash and
cash equivalents and $287,135 of trade receivables to fund short-term working
capital requirements. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The Company believes that it will be able to complete the
necessary steps in order to meet its cash flow requirements throughout fiscal
2004 and continue its development and commercialization efforts. Management's
plans in this regard include, but are not limited to, the following: </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; During the fiscal year ended June 30, 2003, the Company
converted certain payables and accrued expenses with officers, related parties
and strategic vendors aggregating approximately $1.9 million into 5,923,333
restricted shares of the Company's common stock and 5 year warrants to purchase
an additional 3,706,800 restricted shares of the Company's common stock. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In addition, in October of 2002, GTRC, a Company research and
development vendor, executed a Memorandum of Intention to convert a total of
approximately $1.8 million in payables to promissory notes and equity. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Management estimates that the Company will need additional
minimum capital of $2.0 million by June 30, 2004 to continue its operations
either through revenues from sales, external independent or related party
funding, further expense reductions or some combination thereof. 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.
However, the Company has no definitive agreements to provide funding at this
time. 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The Company is currently negotiating with several
organizations for the commencement of field trials which would lead to
commercial sales of its broadcast television platform products. The Company has
had an upturn in sales of its POTS splitter products since the close of its
fiscal year ended June 30, 2003, including sales to one customer of
approximately $1.6 million through August 21, 2003. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Management believes that actions presently being taken to
complete the Company's development stage through the commercial roll-out of its
broadcast television platforms 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. </p>
</font>

<font FACE="Times New Roman PSMT">
<p><b>3. Summary of Significant Accounting Policies </b> </p>
</font>

<font FACE="Times New Roman PSMT" SIZE="2">
<font FACE="Times New Roman PS" SIZE="2"><b>
<p>Principles of Consolidation</b></font><font FACE="Times New Roman PSMT" SIZE="2">
</p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The consolidated financial statements include the accounts of
mPhase, and its wholly-owned and majority owned subsidiaries. Significant
intercompany accounts and transactions have been eliminated in consolidation.
</p>
</font><font FACE="Times New Roman PS" SIZE="2"><b>
<p>Use of Estimates</b></font><font FACE="Times New Roman PSMT" SIZE="2"> </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. </p>
</font><font FACE="Times New Roman PS" SIZE="2"><b>
<p>Reclassifications</b></font><font FACE="Times New Roman PSMT" SIZE="2"> </p>
<p>&nbsp;&nbsp;&nbsp; Certain reclassifications have been made in the prior period consolidated
financial statements to conform to the current period presentation. </p>
</font><font FACE="Times New Roman PS" SIZE="2"><b>
<p>Cash and Cash Equivalents</b></font><font FACE="Times New Roman PSMT" SIZE="2">
</p>
<p>&nbsp;&nbsp;&nbsp; mPhase considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. </p>
</font><font FACE="Times New Roman PS" SIZE="2"><b>
<p>Stock Based Compensation</b></font><font FACE="Times New Roman PSMT" SIZE="2">
</p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Financial Accounting Statement No. 123, Accounting for Stock
Based Compensation, encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. The Company has
adopted the &quot;disclosure only&quot; 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; During the second quarter of fiscal 2004, the Company adopted
the fair value recognition provisions of FASB Statement No. 123, </font>
<font FACE="Times New Roman PS" SIZE="2"><i>Accounting for Stock-Based
Compensation</i></font><font FACE="Times New Roman PSMT" SIZE="2">, for
stock-based employee compensation, effective as of the beginning of the fiscal
year. Under the modified prospective method of adoption selected by the Company,
stock-based employee compensation cost recognized in 2003 is the same as that
which would have been recognized had the fair value recognition provisions of
Statement 123 been applied to all awards granted after October 1, 1995. The
following table illustrates the effect on net income and earnings per share as
if the fair value based method has been applied to all outstanding and unvested
awards in each period. </p>
</font><hr><p Style='page-break-before:always'>
<table CELLSPACING="0" BORDER="0" WIDTH="75%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="720">&nbsp;</td>
    <td WIDTH="233" colspan="2" align="right" style="border-bottom-style: solid; border-bottom-width: 1">
    <p align="center"><font size="2">Six months ended December 31,</font></td>
  </tr>
  <tr>
    <td WIDTH="720">&nbsp;</td>
    <td WIDTH="114" align="center" style="border-top-style: solid; border-top-width: 1; border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">2003</font></td>
    <td WIDTH="119" align="center" style="border-top-style: solid; border-top-width: 1; border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">2002</font></td>
  </tr>
  <tr>
    <td WIDTH="720">&nbsp;</td>
    <td WIDTH="114" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="119" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="720" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Net loss, as
    reported</font></td>
    <td WIDTH="114" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$(2,565,377)</font></td>
    <td WIDTH="119" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $(3,421,396)</font></td>
  </tr>
  <tr>
    <td WIDTH="720"><font FACE="Times New Roman PSMT" SIZE="2">Add: Stock-based
    employee compensation expense included in reported net income,</font></td>
    <td WIDTH="114" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="119" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    23,923</font></td>
  </tr>
  <tr>
    <td WIDTH="720"><font FACE="Times New Roman PSMT" SIZE="2">net of related
    tax effects</font></td>
    <td WIDTH="114" align="right">&nbsp;</td>
    <td WIDTH="119" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="720" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Deduct: Total
    stock-based employee compensation expense determined under fair</font></td>
    <td WIDTH="114" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="119" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    (204,885)</font></td>
  </tr>
  <tr>
    <td WIDTH="720" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">value based
    method for all awards, net of related tax effects</font></td>
    <td WIDTH="114" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="119" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="720"><font FACE="Times New Roman PSMT" SIZE="2">Pro forma net
    loss</font></td>
    <td WIDTH="114" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">$(2,565,337)</font></td>
    <td WIDTH="119" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    $(3,602,358)</font></td>
  </tr>
  <tr>
    <td WIDTH="720">&nbsp;</td>
    <td WIDTH="114" align="right">&nbsp;</td>
    <td WIDTH="119" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="720" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Loss per share:</font></td>
    <td WIDTH="114" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="119" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="720"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp; Basic and
    diluted-as reported</font></td>
    <td WIDTH="114" align="right"><font FACE="Times New Roman PSMT" SIZE="2">$(.04)</font></td>
    <td WIDTH="119" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    $(.06)</font></td>
  </tr>
  <tr>
    <td WIDTH="720" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp; Basic and
    diluted-pro forma</font></td>
    <td WIDTH="114" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$(.04)</font></td>
    <td WIDTH="119" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $(.06)</font></td>
  </tr>
  </table>
<font FACE="Times New Roman PS" SIZE="2"><b>
<p>Property and Equipment</b></font><font FACE="Times New Roman PSMT" SIZE="2">
</p>
<p>&nbsp;&nbsp;&nbsp; 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. </p>
</font><font FACE="Times New Roman PS" SIZE="2"><b>
<p>Short-term Investments</b></font><font FACE="Times New Roman PSMT" SIZE="2">
</p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. These securities are included in
Prepaid Expenses and Other Current Assets for presentation purposes. 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). </p>
</font><font FACE="Times New Roman PS" SIZE="2"><b>
<p>Revenue Recognition</b></font><font FACE="Times New Roman PSMT" SIZE="2"> </p>
<p>&nbsp;&nbsp;&nbsp; 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; As required, mPhase has adopted the Securities and Exchange
Commission (&quot;SEC&quot;) Staff Accounting Bulletin (&quot;SAB&quot;) No. 101, &quot;Revenue
Recognition in Financial Statements&quot;, 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. </p>
</font><font FACE="Times New Roman PS" SIZE="2"><b>
<p>Shipping and Handling Charges</b></font><font FACE="Times New Roman PSMT" SIZE="2">
</p>
<p>&nbsp;&nbsp;&nbsp; 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. </p>
</font><font FACE="Times New Roman PS" SIZE="2"><b>
<p>Business Concentrations and Credit Risk</b></font><font FACE="Times New Roman PSMT" SIZE="2">
</p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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.
The Company had revenue from two customers of 31% and 25% during the fiscal year
ended June 30, 2003. </p>
</font><font FACE="Times New Roman PS" SIZE="2"><b>
<p>Advertising Costs</b></font><font FACE="Times New Roman PSMT" SIZE="2"> </p>
    <p>&nbsp;&nbsp;&nbsp; Advertising costs are expensed as incurred. </p>
</font><font FACE="Times New Roman PS" SIZE="2"><b>
<p>Comprehensive Income (Loss)</b></font><font FACE="Times New Roman PSMT" SIZE="2">
</p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. Generally items of comprehensive income include
foreign currency exchanges and unrealized gains and losses on investments
classified as available for sale. </p>
</font>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income, which establishes rules for the Reporting of Comprehensive
Income and its components. For the year ended June 30, 2001, there was no
difference between the Company's net income and comprehensive income. For the
years ended June 30, 2002 and 2003 the items of comprehensive income include
unrealized gains and losses on investments the Company had classified as
available for sale. </p>
<font FACE="Times New Roman PS" SIZE="2"><b>
<p>Long-lived Assets</b></font><font FACE="Times New Roman PSMT" SIZE="2"> </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The Company accounted for long-lived assets for the years
ended June 30, 2001 and 2002 in accordance with SFAS No. 121, &quot;Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of,&quot; the Company reviewed 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In August 2001, the FASB issued Statement No. 144 &quot;Accounting
for the Impairment or Disposal of Long-Lived Assets,&quot; (&quot;FAS 144&quot;), which became
effective for the Company July 1, 2002 for the fiscal year ended June 30, 2003.
The Company assesses long-term assets for impairment under SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. Under SFAS No.
144, the Company reviews long-term assets for impairment whenever events or
circumstances indicate that the carrying amount of those assets may not be
recoverable. The Company also assesses these assets for impairment based on
their estimated future cash flows. </p>
</font><font FACE="Times New Roman PS" SIZE="2"><b>
<p>Patents and Licenses</b></font><font FACE="Times New Roman PSMT" SIZE="2">
</p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Amortization expense was $460,121, $471,629 and $468,495 for
the years ended June 30, 2001, 2002, and 2003, and amortization expense (unaudited)
for the six months ended December 31, 2002 and 2003 was $275,385 and $54,934,
respectively. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The impairment test for the Company's patents and license
rights resulted in the Company concluding that no impairment in addition to
amortization previously recorded was necessary during the year ended June 30,
2003. </p>
</font><font FACE="Times New Roman PS" SIZE="2"><b>
<p>Inventories</b></font><font FACE="Times New Roman PSMT" SIZE="2"> </p>
<p>&nbsp;&nbsp;&nbsp; Inventory consists mainly of the Company's POTS Splitter Shelf and Filters.
Inventory is comprised of the following: </p>
</font>
<table CELLSPACING="0" BORDER="0" WIDTH="65%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="491">&nbsp;</td>
    <td WIDTH="212" COLSPAN="2" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">June
    30,</font></td>
    <td WIDTH="99" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    December</font></td>
  </tr>
  <tr>
    <td WIDTH="491">&nbsp;</td>
    <td WIDTH="112" align="center" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="100" align="center" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="99" align="center"><font FACE="Times New Roman PSMT" SIZE="2">21,</font></td>
  </tr>
  <tr>
    <td WIDTH="491">&nbsp;</td>
    <td WIDTH="112" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">2002</font></td>
    <td WIDTH="100" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">2003</font></td>
    <td WIDTH="99" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">2003</font></td>
  </tr>
  <tr>
    <td WIDTH="491">&nbsp;</td>
    <td WIDTH="112" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="100" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="99" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="491">&nbsp;</td>
    <td WIDTH="112" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="99" align="right"><font FACE="Times New Roman PSMT" SIZE="2">(unaudited)</font></td>
  </tr>
  <tr>
    <td WIDTH="491"><font FACE="Times New Roman PSMT" SIZE="2">Raw materials</font></td>
    <td WIDTH="112" align="right"><font FACE="Times New Roman PSMT" SIZE="2">$266,748</font></td>
    <td WIDTH="100" align="right"><font FACE="Times New Roman PSMT" SIZE="2">$131,797</font></td>
    <td WIDTH="99" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    $121,991</font></td>
  </tr>
  <tr>
    <td WIDTH="491" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Work in Progress</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">1,045,679</font></td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">728,537</font></td>
    <td WIDTH="99" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    672,634</font></td>
  </tr>
  <tr>
    <td WIDTH="491"><font FACE="Times New Roman PSMT" SIZE="2">Finished goods</font></td>
    <td WIDTH="112" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">3,273,644</font></td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">1,729,344</font></td>
    <td WIDTH="99" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    1,180,176</font></td>
  </tr>
  <tr>
    <td WIDTH="491" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Total</font></td>
    <td WIDTH="112" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">4,586,071</font></td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">2,589,678</font></td>
    <td WIDTH="99" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    1,974,801</font></td>
  </tr>
  <tr>
    <td WIDTH="491"><font FACE="Times New Roman PSMT" SIZE="2">Less: Reserve for
    obsolescence</font></td>
    <td WIDTH="112" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">(1,243,355)</font></td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">(486,350)</font></td>
    <td WIDTH="99" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    (486,350)</font></td>
  </tr>
  <tr>
    <td WIDTH="491" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="112" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$3,342,716</font></td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$2,103,328</font></td>
    <td WIDTH="99" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $1,488,451</font></td>
  </tr>
  </table>
<font FACE="Times New Roman PS" SIZE="2"><b>
<p>Fair Value of Financial Instruments</b></font><font FACE="Times New Roman PSMT" SIZE="2">
</p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. </p>
<p>&nbsp;&nbsp;&nbsp; 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, and the amounts recorded as other liabilities
</font>and other liabilities-related parties approximate their fair values based on
current rates at which the Company could borrow funds with similar maturities. </p>
<font FACE="Times New Roman PS" SIZE="2"><b>
<p>Loss Per Common Share, Basic and Diluted</b></font><font FACE="Times New Roman PSMT" SIZE="2">
</p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; mPhase accounts for net loss per common share in accordance
with the provisions of SFAS No. 128, &quot;Earnings per Share&quot; (&quot;EPS&quot;). 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 anti-dilutive. </p>
</font><font FACE="Times New Roman PS" SIZE="2"><b>
<p>Warranty Reserve</b></font><font FACE="Times New Roman PSMT" SIZE="2"> </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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, 2003,
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 nominal and through June 30, 2003, an additional amount of $10,000 has been
added to reserve for future warranty costs which the Company estimates aggregate
$40,000 at this time. </p>
</font><font FACE="Times New Roman PS" SIZE="2"><b>
<p>Recent Accounting Pronouncements</b></font><font FACE="Times New Roman PSMT" SIZE="2">
</p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In April 2002, the FASB issued SFAS No. 145 &quot;Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections.&quot; This statement rescinds SFAS No. 4, &quot;Reporting Gains and
Losses from Extinguishment of Debt,&quot; and an amendment of that statement, SFAS
No. 44, &quot;Accounting for Intangible Assets of Motor Carriers,&quot; and SFAS No. 64,
&quot;Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.&quot; This
statement amends SFAS No. 13, &quot;Accounting for Leases,&quot; to eliminate
inconsistencies between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. Also, this statement
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. Provisions of SFAS No. 145 related to the rescission of SFAS No. 4
were effective for the Company on November 1, 2002 and provisions affecting SFAS
No. 13 were effective for transactions occurring after May 15, 2002. The
adoption of SFAS No. 145 did not have a material impact on our financial
statements. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In June 2002, the FASB issued SFAS No. 146, &quot;Accounting for
Costs Associated with Exit or Disposal Activities.&quot; This statement covers
restructuring type activities beginning with plans initiated after December 31,
2002. Activities covered by this standard that are entered into after that date
will be recorded in accordance with the provisions of SFAS No. 146. The adoption
of SFAS No. 146 did not have a significant impact on our consolidated financial
position or results of operations. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In December 2002, the FASB issued SFAS 148, &quot;Accounting for
Stock-Based Compensation- Transition and Disclosure,&quot; which provides alternative
methods of transition for a voluntary change to fair value based method of
accounting for stock-based employee compensation as prescribed in SFAS 123,
&quot;Accounting for Stock-Based Compensation.&quot; Additionally, SFAS 148 required more
prominent and more frequent disclosures in financial statements about the
effects of stock-based compensation. The provisions of this Statement are
effective for fiscal years ending after December 15, 2002, with early
application permitted in certain circumstances. The Company has adopted the
disclosure provisions in our consolidated financial statements as disclosed
above under Stock Based Compensation. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In November 2002, the FASB issued Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others (&quot;FIN 45&quot;). FIN 45 requires a
company, at the time it issues a guarantee, to recognize an initial liability
for the fair value of obligations assumed under the guarantee and elaborates on
existing disclosure requirements related to guarantees and warranties. The
initial recognition requirements of FIN 45 are effective for guarantees issued
or modified after December 31, 2002 and adoption of the disclosure requirements
are effective for the Company during the first quarter ending January 31, 2003.
The adoption of FIN 45 did not have a significant impact on our consolidated
financial position or results of operations. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In January 2003, the FASB issued FASB Interpretation No. 46
(&quot;FIN 46&quot;), &quot;Consolidation of Variable Interest Entities, an Interpretation of
ARB No. 51.&quot; FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity investors in
the entity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
FIN 46 is effective for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual
</font>period beginning after June 15, 2003. The adoption of FIN 46 did not have a
significant impact on our consolidated financial position or results of
operations. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In May 2003, the FASB issued SFAS Statement No. 150,
&quot;Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity&quot;. This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). This statement is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003, except for
mandatorily redeemable financial instruments of nonpublic entities, if
applicable. It is to be implemented by reporting the cumulative effect of a
change in an accounting principle for financial instruments created before the
issuance date of the Statement and still existing at the beginning of the
interim period of adoption. The adoption of this statement is not expected to
have a significant impact on the Company's results of operations or financial
position. </p>
<hr><p Style='page-break-before:always'>
<table CELLSPACING="0" BORDER="0" WIDTH="70%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="474"><font FACE="Times New Roman PS" SIZE="2"><b>Statement of
    Cash Flow Supplemental Information</b></font></td>
    <td WIDTH="91" align="right">&nbsp;</td>
    <td WIDTH="91" align="right">&nbsp;</td>
    <td WIDTH="103" align="right">&nbsp;</td>
    <td WIDTH="103" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="474">&nbsp;</td>
    <td WIDTH="182" COLSPAN="2" align="center"><font FACE="Times New Roman PSMT" SIZE="2">Year
    Ending</font></td>
    <td WIDTH="206" COLSPAN="2" align="center"><font FACE="Times New Roman PSMT" SIZE="2">6
    Months Ending</font></td>
  </tr>
  <tr>
    <td WIDTH="474">&nbsp;</td>
    <td WIDTH="182" COLSPAN="2" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">June
    30,</font></td>
    <td WIDTH="206" COLSPAN="2" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">
    December 31</font></td>
  </tr>
  <tr>
    <td WIDTH="474">&nbsp;</td>
    <td WIDTH="91" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">2002</font></td>
    <td WIDTH="91" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">2003</font></td>
    <td WIDTH="103" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">2002</font></td>
    <td WIDTH="103" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">2003</font></td>
  </tr>
  <tr>
    <td WIDTH="474">&nbsp;</td>
    <td WIDTH="91" align="right">&nbsp;</td>
    <td WIDTH="91" align="right">&nbsp;</td>
    <td WIDTH="206" COLSPAN="2" align="right">
    <p align="center"><font FACE="Times New Roman PSMT" SIZE="2">(unaudited)</font></td>
  </tr>
  <tr>
    <td WIDTH="474" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Interest paid</font></td>
    <td WIDTH="91" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$21,760</font></td>
    <td WIDTH="91" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$14,512</font></td>
    <td WIDTH="103" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$6,684</font></td>
    <td WIDTH="103" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $6,000</font></td>
  </tr>
  <tr>
    <td WIDTH="474"><font FACE="Times New Roman PSMT" SIZE="2">Taxes paid</font></td>
    <td WIDTH="91" align="right"><font FACE="Times New Roman PSMT" SIZE="2">$-</font></td>
    <td WIDTH="91" align="right"><font FACE="Times New Roman PSMT" SIZE="2">$-</font></td>
    <td WIDTH="103" align="right"><font FACE="Times New Roman PSMT" SIZE="2">$-</font></td>
    <td WIDTH="103" align="right"><font FACE="Times New Roman PSMT" SIZE="2">$250</font></td>
  </tr>
  <tr>
    <td WIDTH="474" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Schedule of
    Non-Cash Investing and Financing Activities:</font></td>
    <td WIDTH="91" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="91" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="103" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="103" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="474"><font FACE="Times New Roman PSMT" SIZE="2">Conversion of
    accounts payable and accrued expenses to</font></td>
    <td WIDTH="91" align="right"><font FACE="Times New Roman PSMT" SIZE="2">$2,738,658</font></td>
    <td WIDTH="91" align="right"><font FACE="Times New Roman PSMT" SIZE="2">$1,931,788</font></td>
    <td WIDTH="103" align="right"><font FACE="Times New Roman PSMT" SIZE="2">$1,133,756</font></td>
    <td WIDTH="103" align="right"><font FACE="Times New Roman PSMT" SIZE="2">$-</font></td>
  </tr>
  <tr>
    <td WIDTH="474"><font FACE="Times New Roman PSMT" SIZE="2">equity</font></td>
    <td WIDTH="91" align="right">&nbsp;</td>
    <td WIDTH="91" align="right">&nbsp;</td>
    <td WIDTH="103" align="right">&nbsp;</td>
    <td WIDTH="103" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="474" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Conversion of
    accounts payable and accrued expenses to</font></td>
    <td WIDTH="91" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$1,487,747</font></td>
    <td WIDTH="91" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$360,000</font></td>
    <td WIDTH="103" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $-</font></td>
    <td WIDTH="103" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $-</font></td>
  </tr>
  <tr>
    <td WIDTH="474" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">notes payable</font></td>
    <td WIDTH="91" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="91" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="103" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="103" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="474"><font FACE="Times New Roman PSMT" SIZE="2">Research and
    development fixed assets transferred to work</font></td>
    <td WIDTH="91" align="right"><font FACE="Times New Roman PSMT" SIZE="2">$-</font></td>
    <td WIDTH="91" align="right"><font FACE="Times New Roman PSMT" SIZE="2">$210,239</font></td>
    <td WIDTH="103" align="right"><font FACE="Times New Roman PSMT" SIZE="2">$-</font></td>
    <td WIDTH="103" align="right"><font FACE="Times New Roman PSMT" SIZE="2">$-</font></td>
  </tr>
  <tr>
    <td WIDTH="474"><font FACE="Times New Roman PSMT" SIZE="2">in process
    inventory</font></td>
    <td WIDTH="91" align="right">&nbsp;</td>
    <td WIDTH="91" align="right">&nbsp;</td>
    <td WIDTH="103" align="right">&nbsp;</td>
    <td WIDTH="103" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="474" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Investments in
    Patents and Licenses paid with equity</font></td>
    <td WIDTH="91" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$43,750</font></td>
    <td WIDTH="91" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $-</font></td>
    <td WIDTH="103" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $-</font></td>
    <td WIDTH="103" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $-</font></td>
  </tr>
  </table>
</font>

<font FACE="Times New Roman PSMT">
<p><b>4. Acquisition of Microtel </b> </p>
</font>

<font FACE="Times New Roman PSMT" SIZE="2">
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. (&quot;Microphase&quot;). The transaction was
accounted for as a purchase pursuant to APB Opinion No. 16 &quot;Accounting for
Business Combinations&quot;. 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. </p>
</font>

<font FACE="Times New Roman PSMT">
<p><b>5. Note Receivable </b> </p>
</font>

<font FACE="Times New Roman PSMT" SIZE="2">
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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 &quot;Note&quot;) 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 had included
the $37,500 in long-term assets 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 and has maintained the same balance for the Note throughout the
fiscal year ended June 30, 2003. The Company has included the $17,250 in
long-term assets in the accompanying consolidated balance sheets for the years
ended June 30, 2002 and 2003. </p>
</font>

<font FACE="Times New Roman PSMT">
<p><b>6. Property and Equipment </b> </p>
</font>

<font FACE="Times New Roman PSMT" SIZE="2">
    <p>&nbsp;&nbsp;&nbsp; Property and equipment, at cost, consist of the following: </p>
<table CELLSPACING="0" BORDER="0" WIDTH="70%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="414">&nbsp;</td>
    <td WIDTH="309" align="center" colspan="2" style="border-bottom-style: solid; border-bottom-width: 1">
    <p align="center"><font FACE="Times New Roman PSMT" SIZE="2">June 30,</font></td>
    <td WIDTH="138" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    December</font></td>
  </tr>
  <tr>
    <td WIDTH="414">&nbsp;</td>
    <td WIDTH="166" align="center" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="143" align="center" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="138" align="center"><font FACE="Times New Roman PSMT" SIZE="2">31,</font></td>
  </tr>
  <tr>
    <td WIDTH="414">&nbsp;</td>
    <td WIDTH="166" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">2002</font></td>
    <td WIDTH="143" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">2003</font></td>
    <td WIDTH="138" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">2003</font></td>
  </tr>
  <tr>
    <td WIDTH="414">&nbsp;</td>
    <td WIDTH="166" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="143" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="138" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="414">&nbsp;</td>
    <td WIDTH="166" align="right">&nbsp;</td>
    <td WIDTH="143" align="right">&nbsp;</td>
    <td WIDTH="138" align="right">
    <p align="center"><font FACE="Times New Roman PSMT" SIZE="2">(unaudited)</font></td>
  </tr>
  <tr>
    <td WIDTH="414" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Equipment</font></td>
    <td WIDTH="166" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$3,593,418</font></td>
    <td WIDTH="143" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$2,572,031</font></td>
    <td WIDTH="138" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $2,577,531</font></td>
  </tr>
  <tr>
    <td WIDTH="414"><font FACE="Times New Roman PSMT" SIZE="2">Office and
    marketing equipment</font></td>
    <td WIDTH="166" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">482,464</font></td>
    <td WIDTH="143" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">482,464</font></td>
    <td WIDTH="138" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    482,464</font></td>
  </tr>
  <tr>
    <td WIDTH="414" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="166" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">4,075,882</font></td>
    <td WIDTH="143" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">3,054,495</font></td>
    <td WIDTH="138" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    3,059,995</font></td>
  </tr>
  <tr>
    <td WIDTH="414"><font FACE="Times New Roman PSMT" SIZE="2">Less-Accumulated
    depreciation</font></td>
    <td WIDTH="166" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">(2,333,696)</font></td>
    <td WIDTH="143" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">(2,472,605)</font></td>
    <td WIDTH="138" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    (2,819,928)</font></td>
  </tr>
  <tr>
    <td WIDTH="414" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="166" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$1,742,186</font></td>
    <td WIDTH="143" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$581,890</font></td>
    <td WIDTH="138" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $240,067</font></td>
  </tr>
  </table>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Depreciation expense for the years ended June 30, 2001, 2002,
and 2003, was $775,092, $1,181,717, and $957,457, respectively, of which
$501,676, $983,163 and $442,040, respectively, is included in research and
development expense. Depreciation expense for the six months ended December 30,
2002 and 2003 (unaudited) was $703,640 and $347,323 respectively, of which
$49,052 and $328,175, respectively, is included in research and development
expense. </p>
</font>

<font FACE="Times New Roman PSMT">
<p><b>7. Accrued Expenses </b> </p>
</font>

<font FACE="Times New Roman PSMT" SIZE="2">
    <p>&nbsp;&nbsp;&nbsp; Accrued expenses consist of the following: </p>
<table CELLSPACING="0" BORDER="0" WIDTH="863" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="542">&nbsp;</td>
    <td WIDTH="215" align="center" colspan="2">
    <p align="center"><font FACE="Times New Roman PSMT" SIZE="2">June 30,</font></td>
    <td WIDTH="106" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    December</font></td>
  </tr>
  <tr>
    <td WIDTH="542">&nbsp;</td>
    <td WIDTH="115" align="center">&nbsp;</td>
    <td WIDTH="100" align="center">&nbsp;</td>
    <td WIDTH="106" align="center"><font FACE="Times New Roman PSMT" SIZE="2">31,</font></td>
  </tr>
  <tr>
    <td WIDTH="542">&nbsp;</td>
    <td WIDTH="115" align="center"><font FACE="Times New Roman PSMT" SIZE="2">2002</font></td>
    <td WIDTH="100" align="center"><font FACE="Times New Roman PSMT" SIZE="2">2003</font></td>
    <td WIDTH="106" align="center"><font FACE="Times New Roman PSMT" SIZE="2">2003</font></td>
  </tr>
  <tr>
    <td WIDTH="542">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="542">&nbsp;</td>
    <td WIDTH="115" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
    <td WIDTH="106" align="right">
    <p align="center"><font FACE="Times New Roman PSMT" SIZE="2">(unaudited)</font></td>
  </tr>
  <tr>
    <td WIDTH="542" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Lucent Projects
    (Note 13)</font></td>
    <td WIDTH="115" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$81,250</font></td>
    <td WIDTH="100" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$370,795</font></td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $-</font></td>
  </tr>
  <tr>
    <td WIDTH="542"><font FACE="Times New Roman PSMT" SIZE="2">Other General
    Expenses</font></td>
    <td WIDTH="115" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">591,815</font></td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">514,940</font></td>
    <td WIDTH="106" align="right" style="border-bottom-style: double; border-bottom-width: 3"><font FACE="Times New Roman PSMT" SIZE="2">
    430,016</font></td>
  </tr>
  <tr>
    <td WIDTH="542" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="115" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$673,065</font></td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$885,735</font></td>
    <td WIDTH="106" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $430,016</font></td>
  </tr>
  </table>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Accrued expenses representing accrued general and
administrative expenditures were $430,016 at December 31, 2003. At December 31,
2003 unpaid invoices for expenses for research and development expenses incurred
with Lucent Technologies, Inc. totaling $420,000 were included in accounts
payable. </p>
</font>

<font FACE="Times New Roman PSMT">
<p><b>8. Joint Venture </b> </p>
</font>

<font FACE="Times New Roman PSMT" SIZE="2">
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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 was included in
general and administrative expenses in the accompanying statement of operations
for the 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The agreement stipulated for mPhase's joint venture partner,
AlphaStar International, Inc., (&quot;Alphastar&quot;), 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; As of June 30, 2003 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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 andits affiliates $35,000, which is included in
amounts due to related parties in the accompanying consolidated balance sheet.
</p>
<p>&nbsp;&nbsp;&nbsp; During the fiscal years ended June 30, 2001, 2002 and 2003, the joint venture
was charged $1,009,420, $64,039 and $0, respectively for fees and costs by its
joint venture partner and its affiliates. </p>
</font>

<font FACE="Times New Roman PSMT">
<p><b>9. Long Term Debt </b> </p>
</font>

<font FACE="Times New Roman PSMT" SIZE="2">
    <p>&nbsp;&nbsp;&nbsp; Long-debt is comprised of the following: </p>
    <table CELLSPACING="0" BORDER="0" WIDTH="70%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
      <tr>
        <td WIDTH="587">&nbsp;</td>
        <td WIDTH="183" align="right" colspan="2"><font size="2">June 30,</font></td>
        <td WIDTH="95" align="right"><font size="2">December</font></td>
      </tr>
      <tr>
        <td WIDTH="587">&nbsp;</td>
        <td WIDTH="92" align="right">&nbsp;</td>
        <td WIDTH="91" align="right">&nbsp;</td>
        <td WIDTH="95" align="right"><font size="2">31,</font></td>
      </tr>
      <tr>
        <td WIDTH="587">&nbsp;</td>
        <td WIDTH="92" align="right"><font size="2">2002</font></td>
        <td WIDTH="91" align="right"><font size="2">2003</font></td>
        <td WIDTH="95" align="right"><font size="2">2003</font></td>
      </tr>
      <tr>
        <td WIDTH="587">&nbsp;</td>
        <td WIDTH="92" align="right">&nbsp;</td>
        <td WIDTH="91" align="right">&nbsp;</td>
        <td WIDTH="95" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
        (unaudited)</font></td>
      </tr>
      <tr>
        <td WIDTH="587"><font FACE="Times New Roman PSMT" SIZE="2">Settlement
        Agreements:</font></td>
        <td WIDTH="92" align="right">&nbsp;</td>
        <td WIDTH="91" align="right">&nbsp;</td>
        <td WIDTH="95" align="right">&nbsp;</td>
      </tr>
      <tr>
        <td WIDTH="587" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Accounts
        payable expected to be converted to Note payable to GTRC</font></td>
        <td WIDTH="92" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
        150,000</font></td>
        <td WIDTH="91" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
        150,000</font></td>
        <td WIDTH="95" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
        100,000</font></td>
      </tr>
      <tr>
        <td WIDTH="587" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">bearing 7%
        interest, amortized in equal monthly payments of $4,167 and</font></td>
        <td WIDTH="92" align="right" bgcolor="#E6E6E6">&nbsp;</td>
        <td WIDTH="91" align="right" bgcolor="#E6E6E6">&nbsp;</td>
        <td WIDTH="95" align="right" bgcolor="#E6E6E6">&nbsp;</td>
      </tr>
      <tr>
        <td WIDTH="587" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">a lump sum
        payment of $75,000 due twelve months from issuance (see</font></td>
        <td WIDTH="92" align="right" bgcolor="#E6E6E6">&nbsp;</td>
        <td WIDTH="91" align="right" bgcolor="#E6E6E6">&nbsp;</td>
        <td WIDTH="95" align="right" bgcolor="#E6E6E6">&nbsp;</td>
      </tr>
      <tr>
        <td WIDTH="587" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">also
        - Note
        13-Commitments and Contingencies)</font></td>
        <td WIDTH="92" align="right" bgcolor="#E6E6E6">&nbsp;</td>
        <td WIDTH="91" align="right" bgcolor="#E6E6E6">&nbsp;</td>
        <td WIDTH="95" align="right" bgcolor="#E6E6E6">&nbsp;</td>
      </tr>
      <tr>
        <td WIDTH="587"><font FACE="Times New Roman PSMT" SIZE="2">Accounts
        payable expected to be converted to Note payable to GTRC</font></td>
        <td WIDTH="92" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
        474,235</font></td>
        <td WIDTH="91" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
        474,235</font></td>
        <td WIDTH="95" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
        -</font></td>
      </tr>
      <tr>
        <td WIDTH="587"><font FACE="Times New Roman PSMT" SIZE="2">bearing 7%
        interest, amortized in average monthly payments totaling $0</font></td>
        <td WIDTH="92" align="right">&nbsp;</td>
        <td WIDTH="91" align="right">&nbsp;</td>
        <td WIDTH="95" align="right">&nbsp;</td>
      </tr>
      <tr>
        <td WIDTH="587"><font FACE="Times New Roman PSMT" SIZE="2">in 2004,
        $39,568 in 2005, $56,085 in 2006 $60,140 in 2007, $64,488 in</font></td>
        <td WIDTH="92" align="right">&nbsp;</td>
        <td WIDTH="91" align="right">&nbsp;</td>
        <td WIDTH="95" align="right">&nbsp;</td>
      </tr>
      <tr>
        <td WIDTH="587"><font FACE="Times New Roman PSMT" SIZE="2">2008, and a
        lump sum payment of $253,954 due at maturity in September</font></td>
        <td WIDTH="92" align="right">&nbsp;</td>
        <td WIDTH="91" align="right">&nbsp;</td>
        <td WIDTH="95" align="right">&nbsp;</td>
      </tr>
      <tr>
        <td WIDTH="587"><font FACE="Times New Roman PSMT" SIZE="2">2008 (see
        also - Note 13-Commitments and Contingencies)</font></td>
        <td WIDTH="92" align="right">&nbsp;</td>
        <td WIDTH="91" align="right">&nbsp;</td>
        <td WIDTH="95" align="right">&nbsp;</td>
      </tr>
      <tr>
        <td WIDTH="587" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Note payable
        to law firm bearing 8% interest, monthly installments of</font></td>
        <td WIDTH="92" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
        415,887</font></td>
        <td WIDTH="91" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
        405,022</font></td>
        <td WIDTH="95" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
        405,022</font></td>
      </tr>
      <tr>
        <td WIDTH="587" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$5,000 per
        month commencing in June 2002 and continuing through</font></td>
        <td WIDTH="92" align="right" bgcolor="#E6E6E6">&nbsp;</td>
        <td WIDTH="91" align="right" bgcolor="#E6E6E6">&nbsp;</td>
        <td WIDTH="95" align="right" bgcolor="#E6E6E6">&nbsp;</td>
      </tr>
      <tr>
        <td WIDTH="587" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">December 1,
        2003 with a final payment of principal plus accrued interest</font></td>
        <td WIDTH="92" align="right" bgcolor="#E6E6E6">&nbsp;</td>
        <td WIDTH="91" align="right" bgcolor="#E6E6E6">&nbsp;</td>
        <td WIDTH="95" align="right" bgcolor="#E6E6E6">&nbsp;</td>
      </tr>
      <tr>
        <td WIDTH="587" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">due at
        maturity on December 31, 2003</font></td>
        <td WIDTH="92" align="right" bgcolor="#E6E6E6">&nbsp;</td>
        <td WIDTH="91" align="right" bgcolor="#E6E6E6">&nbsp;</td>
        <td WIDTH="95" align="right" bgcolor="#E6E6E6">&nbsp;</td>
      </tr>
      <tr>
        <td WIDTH="587"><font FACE="Times New Roman PSMT" SIZE="2">Note payable
        to vendor bearing 8% interest due in weekly payments of</font></td>
        <td WIDTH="92" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
        237,169</font></td>
        <td WIDTH="91" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
        210,558</font></td>
        <td WIDTH="95" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
        210,558</font></td>
      </tr>
      <tr>
        <td WIDTH="587"><font FACE="Times New Roman PSMT" SIZE="2">$5,000
        including accrued interest. These payments commenced in</font></td>
        <td WIDTH="92" align="right">&nbsp;</td>
        <td WIDTH="91" align="right">&nbsp;</td>
        <td WIDTH="95" align="right">&nbsp;</td>
      </tr>
      <tr>
        <td WIDTH="587"><font FACE="Times New Roman PSMT" SIZE="2">January 2002
        and continue until June 2004</font></td>
        <td WIDTH="92" align="right">&nbsp;</td>
        <td WIDTH="91" align="right">&nbsp;</td>
        <td WIDTH="95" align="right">&nbsp;</td>
      </tr>
      <tr>
        <td WIDTH="587" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Note payable
        to vendor non interest bearing average monthly payments</font></td>
        <td WIDTH="92" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
        90,266</font></td>
        <td WIDTH="91" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
        79,765</font></td>
        <td WIDTH="95" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
        79,765</font></td>
      </tr>
      <tr>
        <td WIDTH="587" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">of $4,167 in
        2003 and $3,660 in 2004. These payments commenced in</font></td>
        <td WIDTH="92" align="right" bgcolor="#E6E6E6">&nbsp;</td>
        <td WIDTH="91" align="right" bgcolor="#E6E6E6">&nbsp;</td>
        <td WIDTH="95" align="right" bgcolor="#E6E6E6">&nbsp;</td>
      </tr>
      <tr>
        <td WIDTH="587" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">April 2002
        and continue until May 2004</font></td>
        <td WIDTH="92" align="right" bgcolor="#E6E6E6">&nbsp;</td>
        <td WIDTH="91" align="right" bgcolor="#E6E6E6">&nbsp;</td>
        <td WIDTH="95" align="right" bgcolor="#E6E6E6">&nbsp;</td>
      </tr>
      <tr>
        <td WIDTH="587"><font FACE="Times New Roman PSMT" SIZE="2">Note payable,
        vendor, interest at 8%, with average monthly payments of</font></td>
        <td WIDTH="92" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
        -</font></td>
        <td WIDTH="91" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
        29,458</font></td>
        <td WIDTH="95" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
        27,459</font></td>
      </tr>
      <tr>
        <td WIDTH="587"><font FACE="Times New Roman PSMT" SIZE="2">$2,000
        through March, 2004</font></td>
        <td WIDTH="92" align="right" style="border-top-style: double; border-top-width: 3">&nbsp;</td>
        <td WIDTH="91" align="right" style="border-top-style: double; border-top-width: 3">&nbsp;</td>
        <td WIDTH="95" align="right" style="border-top-style: double; border-top-width: 3">&nbsp;</td>
      </tr>
      <tr>
        <td WIDTH="587" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;
        Total</font></td>
        <td WIDTH="92" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
        1,367,557</font></td>
        <td WIDTH="91" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
        1,349,038</font></td>
        <td WIDTH="95" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
        822,804</font></td>
      </tr>
      <tr>
        <td WIDTH="587"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
        Less: Current portion</font></td>
        <td WIDTH="92" align="right" style="border-bottom-style: double; border-bottom-width: 3">
        <font FACE="Times New Roman PSMT" SIZE="2">(353,339)</font></td>
        <td WIDTH="91" align="right" style="border-bottom-style: double; border-bottom-width: 3">
        <font FACE="Times New Roman PSMT" SIZE="2">(762,735)</font></td>
        <td WIDTH="95" align="right" style="border-bottom-style: double; border-bottom-width: 3">
        <font FACE="Times New Roman PSMT" SIZE="2">(822,804)</font></td>
      </tr>
      <tr>
        <td WIDTH="587" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
        Long-term Debt, non-current portion</font></td>
        <td WIDTH="92" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
        <font FACE="Times New Roman PSMT" SIZE="2">$1,014,218</font></td>
        <td WIDTH="91" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
        <font FACE="Times New Roman PSMT" SIZE="2">$586,303</font></td>
        <td WIDTH="95" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
        <font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
      </tr>
      </table>
<p>&nbsp;&nbsp;&nbsp; At June 30, 2003 total maturities of long-term debt are as
follows:</p>
<table CELLSPACING="0" BORDER="0" WIDTH="50%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="28%" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">2004</font></td>
    <td WIDTH="48%" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="24%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $762,735</font></td>
  </tr>
  <tr>
    <td WIDTH="28%"><font FACE="Times New Roman PSMT" SIZE="2">2005</font></td>
    <td WIDTH="48%">&nbsp;</td>
    <td WIDTH="24%" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    151,637</font></td>
  </tr>
  <tr>
    <td WIDTH="28%" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">2006</font></td>
    <td WIDTH="48%" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="24%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    56,085</font></td>
  </tr>
  <tr>
    <td WIDTH="28%"><font FACE="Times New Roman PSMT" SIZE="2">2007</font></td>
    <td WIDTH="48%">&nbsp;</td>
    <td WIDTH="24%" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    60,140</font></td>
  </tr>
  <tr>
    <td WIDTH="28%" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">2008</font></td>
    <td WIDTH="48%" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="24%" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    64,487</font></td>
  </tr>
  <tr>
    <td WIDTH="76%" COLSPAN="2"><font FACE="Times New Roman PSMT" SIZE="2">2009
    and thereafter</font></td>
    <td WIDTH="24%" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">253,954</font></td>
  </tr>
  <tr>
    <td WIDTH="28%" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="48%" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Total</font></td>
    <td WIDTH="24%" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$1,349,038</font></td>
  </tr>
</table>
</font>

<font FACE="Times New Roman PSMT">
<p ALIGN="left"><b>10. Stockholders' Equity </b></p>
</font>

<font FACE="Times New Roman PSMT" SIZE="2">
<p ALIGN="left">&nbsp;&nbsp;&nbsp; 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. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; 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. </p>
<p align="left">&nbsp;&nbsp;&nbsp; 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). </p>
<p align="left">&nbsp;&nbsp;&nbsp; In October 1997, mPhase issued 250,000 shares
of its common stock in connection with its investment in Complete
Telecommunications Inc. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; During the year ended June 30, 1998, mPhase
issued, 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. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; 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 the cumulative loss from inception in the accompanying
consolidated statement of operations. </p>
<p align="left">&nbsp;&nbsp;&nbsp; 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. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; In November 1998, mPhase issued 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. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; 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. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; In April, May and June of 1999, mPhase issued
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. 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. </p>
<p ALIGN="left">In June 1999, mPhase issued 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. </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; In December 1999 and January 2000, mPhase
issued, 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. </p>
<p ALIGN="JUSTIFY">In March 2000, mPhase issued 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
statement of operations for the year ended June 30, 2000. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In February 2001, mPhase issued 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In May and June 2001, mPhase issued
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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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 amounted to $1,007,625 and the balance of
$121,091 was based upon the fair market value of the common stock on the date of
the grant, and was charged to operations for the year ended June 30, 2002. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Effective June 30, 2001 the Company issued
4,840,077 shares of the Company's common stock in settlement of debt totaling
$2,420,039 to directors and related parties, based upon the fair market value of
the common stock issued which approximated the debt settled on the measurement
date of September 6, 2001, such date was determined pursuant to EITF00-1 as to
when all contingent terms of the conversion agreement were met. These shares are
reflected as outstanding as of June 30, 2001, pursuant to AV560 and SFAS128. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In July 2001, the Company issued 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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 in 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. </p>
<p ALIGN="justify">&nbsp;&nbsp;&nbsp; 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. </p>
<p ALIGN="justify">&nbsp;&nbsp;&nbsp; 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 as follows: </p>
<font FACE="Times New Roman PS" SIZE="2"><i>
<p align="justify">&nbsp;&nbsp;&nbsp; Conversions Concurrent with Private
Placements</i></font><font FACE="Times New Roman PSMT" SIZE="2"> </p>
<p ALIGN="justify">&nbsp;&nbsp;&nbsp; Included in this total for the year ended
June 30, 2002, related parties and strategic vendors converted debt aggregating
approximately $1,020,000 and $96,000 respectively into: </p>
<blockquote>
  <ol type="a">
    <li>
    <p ALIGN="justify">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 (2,200,000 units with Microphase for $660,000 and 1,200,000 units with
    Janifast for $360,000); and <br>
&nbsp;</font></li>
    <li>
    <p ALIGN="justify"><font FACE="Times New Roman PSMT" SIZE="2">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, were issued to strategic
    vendors. </li>
  </ol>
</blockquote>
<p ALIGN="justify">&nbsp;&nbsp;&nbsp; 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. </p>
</font><font FACE="Times New Roman PS" SIZE="2"><i>
<p align="justify">&nbsp;&nbsp;&nbsp; Conversions, Settlements and Gain on
Extinguishments</i></font><font FACE="Times New Roman PSMT" SIZE="2"> </p>
<p ALIGN="justify">&nbsp;&nbsp;&nbsp; In addition this total for the year ended
June 30, 2003 includes 4,873,333 shares of common stock and warrants to purchase
2,656,800 shares of the Company's common stock which were issued as follows; </p>
<blockquote>
  <ol type="a">
    <li>
    <p ALIGN="justify">2,750,000 shares of common stock were issued to related
    parties, the value of which was based upon the price of the Company's common
    stock on the measurement date, such date was determined pursuant to EITF00-1
    as to when all contingent terms of conversion agreements were met, in which
    no gain or loss was recognized on the conversion of $440,000 of debt; and
    <br>
&nbsp;</font></li>
    <li>
    <p ALIGN="justify"><font FACE="Times New Roman PSMT" SIZE="2">1,022,996
    shares of common stock were issued to 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, and, two warrants to purchase 2,233,490
    shares of the Company's common stock were 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 $1,182,658 of such liabilities
    which, together with gains from cash settlements of $27,960 resulted in an
    aggregate gain on extinguishments of $142,236. </li>
  </ol>
</blockquote>
<p ALIGN="justify">&nbsp;&nbsp;&nbsp; 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). </p>
<p ALIGN="justify">&nbsp;&nbsp;&nbsp; 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 valued at $504,657 based upon the
fair market value of the Company's common stock on the date of the grant using
the Black-Scholes option premium model. These totalled $1,703,658 and the
Company recorded a charge to operations of $955,668 for the year ended June 30,
2002 and the balance of $747,990 was charged to operations for the year ended
June 30, 2003. </p>
<p ALIGN="justify">&nbsp;&nbsp;&nbsp; During the year ended June 30, 2003, the
Company issued 426,000 valued at 112,245 and warrants, valued at $203,150 based
upon the fair market value of the Company's common stock on the date of the
grant using the Black-Scholes option pricing model. The Company recorded these
changes, totaling $318,395, to operations for the year ended June 30, 2003. </p>
<p ALIGN="justify">&nbsp;&nbsp;&nbsp; During the fiscal year ended June 30,
2003, the Company converted certain payables and accrued expenses with officers,
related parties and strategic vendors aggregating approximately $1.9 million
into 5,923,333 restricted shares of the Company's common stock and 5 year
warrants to purchase an additional 3,706,800 restricted shares of the Company's
common stock, of which 5,533,333 shares of common stock and 3,491,800 warrants
were issued in settlement of $1,748,756 of debt to related parties as follows:
</p>
</font><font FACE="Times New Roman PS" SIZE="2"><i>
<p align="justify">&nbsp;&nbsp;&nbsp; Conversions Concurrent with Private
Placements</i></font><font FACE="Times New Roman PSMT" SIZE="2"> </p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; Included in this total for the year ended
June 30, 2003, related parties and strategic vendors converted debt aggregating
approximately $300,000 and $15,000 respectively into: </p>
<blockquote>
  <ol type="a">
    <li>
    <p ALIGN="left">1,000,000 shares and 5 year warrants to purchase at $.30 a
    share 1,000,000 shares of mPhase common stock by Microphase, a related
    party, which converted $300,000 of <br>
&nbsp;</font></li>
    <li>
    <p ALIGN="left"><font FACE="Times New Roman PSMT" SIZE="2">50,000 shares and
    5 year warrants to purchase at $.30 a share 50,000 shares of mPhase common
    stock by a strategic vendor which converted $15,000 of Such conversions were
    upon the same terms of a concurrent private placement of common stock by the
    Company and no gain or loss was recognized in connection with these
    conversions. </li>
  </ol>
</blockquote>
</font><font FACE="Times New Roman PS" SIZE="2"><i>
<p>&nbsp;&nbsp;&nbsp; Conversions, Settlements and Gain on Extinguishments</i></font><font FACE="Times New Roman PSMT" SIZE="2">
</p>
<p ALIGN="left">&nbsp;&nbsp;&nbsp; In addition, this total for the year ended
June 30, 2003 includes 4,873,333 shares of common stock and warrants to purchase
2,656,800 shares of the Company's common stock which were issued as follows; </p>
<blockquote>
  <ol type="a">
    <li>
    <p ALIGN="left">During the year ended June 30, 2003, these included
    transactions with related parties whereby the Company and the counter
    parties respective board of director's approved, entering 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
    accounts payable through September 30, 2002. Such approval was received by
    the respective boards of directors authorizing conversions of such payables
    effective September 30, 2002 resulting in the conversion of $620,000 on and
    $360,000 on of liabilities due to Microphase corporation, and Janifast Ltd
    into 3,033,000 shares and 1,500,000 shares of stock, respectively. The value
    attributable to the shares was based upon the market price of the Company's
    common stock on the measurement date, such date was determined pursuant to
    EITF00-1, as to when all the contingent terms of the conversion agreements
    were met, in which no gain or loss was recognized on the conversion of
    $980,000 of debt, and <br>
&nbsp;</font></li>
    <li>
    <p ALIGN="left"><font FACE="Times New Roman PSMT" SIZE="2">Also included in
    such conversions during the year ended June, 30 2003, were transactions
    whereby the Company converted $525,967 of liabilities due to the Company's
    president, vice president and a sales manager who are also concurrently
    employed by Microphase, for unpaid management compensation and sales
    commissions due from mPhase into warrants to purchase up to a total of
    2,656,500 shares of the Company's common stock. The aggregate value of such
    warrants was estimated using the Black Scholes options pricing model,
    pursuant to EITF 96-18, having an approximate value of $.21 per share, or
    $538,173. The Company recorded a settlement expense of approximately $12,206
    with respect to these three individuals. <br>
&nbsp;</font></li>
    <li>
    <p ALIGN="left"><font FACE="Times New Roman PSMT" SIZE="2">Strategic vendors
    converted $117,486 of payables into 340,000 shares of the Company's common
    stock on the measurement date the value of which was based upon the price of
    the Company's common stock on the effective date of settlement with each
    party. This resulted in a gain of $37,383, which, when combined with all
    conversions and gains from cash settlements of $36,049 for the fiscal year
    2003, resulted in a net gain on extinguishments in the statements of
    operations of $61,226 for the year ended June 30, 2003. </li>
  </ol>
</blockquote>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; As a result of the preceding, during the
three years ended June 30, 2003, extinguishments, cancellations and conversions
of debt for issuance of the Company's common stock to related parties is
summarized in Note 11 and amounts relating to strategic investors is summarized
as follows: </p>
</font>
<table CELLSPACING="0" BORDER="0" WIDTH="55%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="357" COLSPAN="2"><font FACE="Times New Roman PS" SIZE="2"><i><b>
    Equity Conversions of Debt with Strategic Vendors</b></i></font></td>
    <td WIDTH="99">&nbsp;</td>
    <td WIDTH="103">&nbsp;</td>
    <td WIDTH="80">&nbsp;</td>
    <td WIDTH="44">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="260">&nbsp;</td>
    <td WIDTH="97" align="center">&nbsp;</td>
    <td WIDTH="99" align="center">&nbsp;</td>
    <td WIDTH="103" align="center">&nbsp;</td>
    <td WIDTH="124" COLSPAN="2" align="center">
    <font FACE="Times New Roman PSMT" SIZE="2">For the Six Months</font></td>
  </tr>
  <tr>
    <td WIDTH="260">&nbsp;</td>
    <td WIDTH="97" align="center">&nbsp;</td>
    <td WIDTH="99" align="center">&nbsp;</td>
    <td WIDTH="103" align="center">&nbsp;</td>
    <td WIDTH="124" COLSPAN="2" align="center">
    <font FACE="Times New Roman PSMT" SIZE="2">Ended</font></td>
  </tr>
  <tr>
    <td WIDTH="260">
    <p align="right">&nbsp;</td>
    <td WIDTH="299" colspan="3" align="center" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">
    For the Years Ended June 30,</font></td>
    <td WIDTH="124" COLSPAN="2" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">December 31,</font></td>
  </tr>
  <tr>
    <td WIDTH="260">&nbsp;</td>
    <td WIDTH="97" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">2001</font></td>
    <td WIDTH="99" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">2002</font></td>
    <td WIDTH="103" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">2003</font></td>
    <td WIDTH="80" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">2002</font></td>
    <td WIDTH="44" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">2003</font></td>
  </tr>
  <tr>
    <td WIDTH="260">&nbsp;</td>
    <td WIDTH="97" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="99" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="103" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="80" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="44" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="260">&nbsp;</td>
    <td WIDTH="97" align="right">&nbsp;</td>
    <td WIDTH="99" align="right">&nbsp;</td>
    <td WIDTH="103" align="right">&nbsp;</td>
    <td WIDTH="124" COLSPAN="2" align="right">
    <font FACE="Times New Roman PSMT" SIZE="2">
    <p align="center">(Unaudited)</font></td>
  </tr>
  <tr>
    <td WIDTH="260"><font FACE="Times New Roman PS" SIZE="2"><b>Strategic
    Vendors</b></font></td>
    <td WIDTH="97" align="right">&nbsp;</td>
    <td WIDTH="99" align="right">&nbsp;</td>
    <td WIDTH="103" align="right">&nbsp;</td>
    <td WIDTH="80" align="right">&nbsp;</td>
    <td WIDTH="44" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="260" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;
    Number of shares</font></td>
    <td WIDTH="97" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="99" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">999,662</font></td>
    <td WIDTH="103" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">390,000</font></td>
    <td WIDTH="80" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">340,000</font></td>
    <td WIDTH="44" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="260"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;
    Number of warrants</font></td>
    <td WIDTH="97" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="99" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">870,000</font></td>
    <td WIDTH="103" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">215,000</font></td>
    <td WIDTH="80" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="44" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="260" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;
    Amount converted to equity</font></td>
    <td WIDTH="97" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
    <td WIDTH="99" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$529,503</font></td>
    <td WIDTH="103" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$198,032</font></td>
    <td WIDTH="80" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$117,486</font></td>
    <td WIDTH="44" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
  </tr>
  <tr>
    <td WIDTH="260"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;
    Gain on Extinguishment of Debt</font></td>
    <td WIDTH="97" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
    <td WIDTH="99" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">$142,236</font></td>
    <td WIDTH="103" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">$73,432</font></td>
    <td WIDTH="80" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">$40,125</font></td>
    <td WIDTH="44" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
  </tr>
</table>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. </p>
<font FACE="Times New Roman PS" SIZE="2"><b>
<p align="center">(see also - Note 11 - Related Party Transactions)</b></font><font FACE="Times New Roman PSMT" SIZE="2">
</p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; During the six months ending December 31,
2003, the Company granted 924,667 shares of its common stock and warrants to
purchase 249,667 shares of its common stock to consultants for services
performed valued at $307,243. During the six months ended December 31, 2003, the
Company issued 333,337 shares of its common stock together with a like amount of
5 year warrants, at an exercise price $.30 per share, in a private placement and
500,000 shares of its common stock pursuant to the exercise of warrants
generating net proceeds to Company of $250,000. In December of 2003, the Company
issued 1,550,000 shares of its common stock together with a like amount of 5
year warrants to purchase one share each of the Company's common stock, with an
exercise price of $.35 per share, in a private placement generating net proceeds
of $517,500, $175,000 of which was collected in January, 2004. An advisor of the
Company was issued 100,000 shares for assisting in this transaction. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Additionally, during the six months ending
December 31, 2003, a note payable in the amount of $360,000 to Microphase
Corporation was executed in exchange for the cancellation of a like amount of
accounts payable to Microphase on September 25, 2003 which matures on July 25,
2004. Additionally, a note payable to Martin Smiley, CFO and General Counsel of
mPhase, in the amount of $100,000 was extended from September 25, 2003 to July
24, 2004. Both liabilities carry an interest rate of 12% payable quarterly in
arrears. Each note is convertible into Common Stock of mPhase at the rate of
$.30 per share through July 25, 2004. Upon conversion, each note holder will be
granted warrants to purchase an equivalent amount of mPhase Common Stock at $.30
per share for a period of five years from the date of conversion. </p>
</font><font FACE="Times New Roman PS" SIZE="2"><b>
<p>&nbsp;&nbsp;&nbsp; Stock Incentive Plans</b></font><font FACE="Times New Roman PSMT" SIZE="2">
</p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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 &quot;Plan&quot;), 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; On May 30, 2001, mPhase established the
2001 Stock Incentive Plan (the &quot;2001 Plan&quot;), 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; A summary of the stock option activity for
the years ended June 30, 2001, 2002, 2003 pursuant to the terms of both plans,
which include incentive stock options and non-qualified stock options, is set
forth on the below: </p>
</font>
<table CELLSPACING="0" BORDER="0" WIDTH="55%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="459">&nbsp;</td>
    <td WIDTH="113" align="center">&nbsp;</td>
    <td WIDTH="104" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Weighted</font></td>
  </tr>
  <tr>
    <td WIDTH="459">&nbsp;</td>
    <td WIDTH="113" align="center">&nbsp;</td>
    <td WIDTH="104" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Average</font></td>
  </tr>
  <tr>
    <td WIDTH="459">&nbsp;</td>
    <td WIDTH="113" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Number of</font></td>
    <td WIDTH="104" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Exercise</font></td>
  </tr>
  <tr>
    <td WIDTH="459">&nbsp;</td>
    <td WIDTH="113" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">Options</font></td>
    <td WIDTH="104" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">Price</font></td>
  </tr>
  <tr>
    <td WIDTH="459">&nbsp;</td>
    <td WIDTH="113" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="104" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="459" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Outstanding at
    June 30, 2001</font></td>
    <td WIDTH="113" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    12,580,500</font></td>
    <td WIDTH="104" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $1.94</font></td>
  </tr>
  <tr>
    <td WIDTH="459"><font FACE="Times New Roman PSMT" SIZE="2">Granted</font></td>
    <td WIDTH="113" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    6,570,000</font></td>
    <td WIDTH="104" align="right"><font FACE="Times New Roman PSMT" SIZE="2">.43</font></td>
  </tr>
  <tr>
    <td WIDTH="459" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Exercised</font></td>
    <td WIDTH="113" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="104" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
  </tr>
  <tr>
    <td WIDTH="459"><font FACE="Times New Roman PSMT" SIZE="2">Canceled</font></td>
    <td WIDTH="113" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">(43,500)</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">(4.26)</font></td>
  </tr>
  <tr>
    <td WIDTH="459" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Outstanding at
    June 30, 2002</font></td>
    <td WIDTH="113" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    19,107,000</font></td>
    <td WIDTH="104" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    1.27</font></td>
  </tr>
  <tr>
    <td WIDTH="459"><font FACE="Times New Roman PSMT" SIZE="2">Granted</font></td>
    <td WIDTH="113" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    625,000</font></td>
    <td WIDTH="104" align="right"><font FACE="Times New Roman PSMT" SIZE="2">.30</font></td>
  </tr>
  <tr>
    <td WIDTH="459" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Exercised</font></td>
    <td WIDTH="113" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="104" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
  </tr>
  <tr>
    <td WIDTH="459"><font FACE="Times New Roman PSMT" SIZE="2">Canceled/Expired</font></td>
    <td WIDTH="113" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">(2,565,000)</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">(1.00)</font></td>
  </tr>
  <tr>
    <td WIDTH="459" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Outstanding at
    June 30, 2003</font></td>
    <td WIDTH="113" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">17,167,000</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$1.24</font></td>
  </tr>
  <tr>
    <td WIDTH="459"><font FACE="Times New Roman PSMT" SIZE="2">Exercisable at
    June 30, 2003</font></td>
    <td WIDTH="113" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">17,092,006</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">$1.28</font></td>
  </tr>
  <tr>
    <td WIDTH="459" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;
    Granted (unaudited)</font></td>
    <td WIDTH="113" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
    <td WIDTH="104" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
  </tr>
  <tr>
    <td WIDTH="459"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;
    Exercised (unaudited)</font></td>
    <td WIDTH="113" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
    <td WIDTH="104" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
  </tr>
  <tr>
    <td WIDTH="459" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;
    Cancelled/Expired (unaudited)</font></td>
    <td WIDTH="113" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">(2,726,000)</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$(3.27)</font></td>
  </tr>
  <tr>
    <td WIDTH="459"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;
    Outstanding at December 31, 2003 (unaudited)</font></td>
    <td WIDTH="113" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">14,441,000</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">$.94</font></td>
  </tr>
  <tr>
    <td WIDTH="459" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;
    Exercisable at December 31, 2003 (unaudited)</font></td>
    <td WIDTH="113" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">14,441,000</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$.94</font></td>
  </tr>
</table>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The fair value of options granted in 2001
and 2002 and options and compensatory warrants granted in 2003 was estimated as
of the date of grant using the Black-Scholes stock option pricing model, based
on the following weighted average assumptions: annual expected return of 0%,
annual volatility of 113% in 2001, 125.4% in 2002 and 144.4% in 2003 based upon
a risk-free interest rate ranging from 2.4% to 5.8% and expected option life of
3 years. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The per share weighted average fair value
of stock options granted during 2001, 2002 and 2003 was $1.16, $.26, and $.21,
respectively. The per share weighted average remaining life of the options
outstanding at June 30, 2001, 2002, and 2003 is 3.66, 3.29 and 2.80 years,
respectively. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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 and certain
compensating warrants granted to employees at fair market value. Had
compensation expense for stock options granted under the Plan and certain
warrants granted to employees in 2003, been determined based on fair value at
the grant dates, mPhase's net loss for the years ended June 30, 2001, 2002 and
2003. </p>
<table CELLSPACING="0" BORDER="0" WIDTH="55%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="422">&nbsp;</td>
    <td WIDTH="254" align="center" colspan="3" style="border-bottom-style: solid; border-bottom-width: 1"><font FACE="Times New Roman PSMT" SIZE="2">
    June 30</font></td>
  </tr>
  <tr>
    <td WIDTH="422">&nbsp;</td>
    <td WIDTH="99" align="center" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="74" align="center" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="81" align="center" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="422">&nbsp;</td>
    <td WIDTH="99" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">2001</font></td>
    <td WIDTH="74" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">2002</font></td>
    <td WIDTH="81" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">2003</font></td>
  </tr>
  <tr>
    <td WIDTH="422"><font FACE="Times New Roman PSMT" SIZE="2">Net Loss:</font></td>
    <td WIDTH="99" align="right">&nbsp;</td>
    <td WIDTH="74" align="right">&nbsp;</td>
    <td WIDTH="81" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="422" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">As reported</font></td>
    <td WIDTH="99" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $23,998,734</font></td>
    <td WIDTH="74" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $11,245,361</font></td>
    <td WIDTH="81" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $6,650,211</font></td>
  </tr>
  <tr>
    <td WIDTH="422"><font FACE="Times New Roman PSMT" SIZE="2">Proforma</font></td>
    <td WIDTH="99" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    $25,243,270</font></td>
    <td WIDTH="74" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    $11,673,091</font></td>
    <td WIDTH="81" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    $6,866,271</font></td>
  </tr>
  <tr>
    <td WIDTH="422" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Net Loss Per
    Share:</font></td>
    <td WIDTH="99" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="74" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="81" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="422"><font FACE="Times New Roman PSMT" SIZE="2">As reported</font></td>
    <td WIDTH="99" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">$(.72)</font></td>
    <td WIDTH="74" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">$(.23)</font></td>
    <td WIDTH="81" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">$(.10)</font></td>
  </tr>
  <tr>
    <td WIDTH="422" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Pro forma</font></td>
    <td WIDTH="99" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$(.75)</font></td>
    <td WIDTH="74" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$(.24)</font></td>
    <td WIDTH="81" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$(.11)</font></td>
  </tr>
</table>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; For the year ended June 30, 2001, mPhase
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.
</p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; For the year ended June 30, 2002, the
Company recorded non-cash charges and deferred compensation totaling $927,420
and $0, respectively, in connection the grant of 1,505,000 options and 48,068
shares of its common stock and 48,068 warrants to employees and 5,065,000
options to consultants 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; For the year ended June 30, 2003, the
Company recorded non-cash charges and deferred compensation totaling $70,950 and
$0, respectively, in connection with the grant of 625,000 options to employees
and consultants and the Company recorded non-cash charges of $203,150 in
connection with the grant of 1,690,000 compensating warrants 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 option and warrants issued to
employees and Black-Scholes stock option pricing calculations for options and
warrants issued to consultants. </p>
<p>&nbsp;&nbsp;&nbsp; The following summarizes information about stock options
outstanding at June 30, 2003: </p>
<table CELLSPACING="0" BORDER="0" WIDTH="55%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="280"><font FACE="Times New Roman PSMT" SIZE="2">Range of</font></td>
    <td WIDTH="98" align="center">&nbsp;</td>
    <td WIDTH="72" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Weighted</font></td>
    <td WIDTH="73" align="center">&nbsp;</td>
    <td WIDTH="79" align="center">&nbsp;</td>
    <td WIDTH="77" align="center">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="280"><font FACE="Times New Roman PSMT" SIZE="2">Exercise Price</font></td>
    <td WIDTH="98" align="center">&nbsp;</td>
    <td WIDTH="72" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Average</font></td>
    <td WIDTH="73" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Weighted</font></td>
    <td WIDTH="79" align="center">&nbsp;</td>
    <td WIDTH="77" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Weighted</font></td>
  </tr>
  <tr>
    <td WIDTH="280">&nbsp;</td>
    <td WIDTH="98" align="center">&nbsp;</td>
    <td WIDTH="72" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Remaining</font></td>
    <td WIDTH="73" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Average</font></td>
    <td WIDTH="79" align="center">&nbsp;</td>
    <td WIDTH="77" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Average</font></td>
  </tr>
  <tr>
    <td WIDTH="280">&nbsp;</td>
    <td WIDTH="98" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Number</font></td>
    <td WIDTH="72" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Contractual</font></td>
    <td WIDTH="73" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Exercise</font></td>
    <td WIDTH="79" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Number</font></td>
    <td WIDTH="77" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Exercise</font></td>
  </tr>
  <tr>
    <td WIDTH="280" style="border-bottom-style: none; border-bottom-width: medium">&nbsp;</td>
    <td WIDTH="98" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">Outstanding</font></td>
    <td WIDTH="72" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">Life</font></td>
    <td WIDTH="73" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">Price</font></td>
    <td WIDTH="79" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">Exercisable</font></td>
    <td WIDTH="77" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">Price</font></td>
  </tr>
  <tr>
    <td WIDTH="280" style="border-top-style: none; border-top-width: medium">&nbsp;</td>
    <td WIDTH="98" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="72" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="73" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="79" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="77" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="280" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$0 - $.50</font></td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    6,947,500</font></td>
    <td WIDTH="72" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">3.7</font></td>
    <td WIDTH="73" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$.37</font></td>
    <td WIDTH="79" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    6,872,506</font></td>
    <td WIDTH="77" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$.37</font></td>
  </tr>
  <tr>
    <td WIDTH="280"><font FACE="Times New Roman PSMT" SIZE="2">$.51 - $1.50</font></td>
    <td WIDTH="98" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    6,075,500</font></td>
    <td WIDTH="72" align="right"><font FACE="Times New Roman PSMT" SIZE="2">2.4</font></td>
    <td WIDTH="73" align="right"><font FACE="Times New Roman PSMT" SIZE="2">$.89</font></td>
    <td WIDTH="79" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    6,075,500</font></td>
    <td WIDTH="77" align="right"><font FACE="Times New Roman PSMT" SIZE="2">$.89</font></td>
  </tr>
  <tr>
    <td WIDTH="280" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$1.50 - $16.38</font></td>
    <td WIDTH="98" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    4,144,000</font></td>
    <td WIDTH="72" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">1.9</font></td>
    <td WIDTH="73" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $3.59</font></td>
    <td WIDTH="79" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    4,144,000</font></td>
    <td WIDTH="77" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $3.59</font></td>
  </tr>
</table>
<font FACE="Times New Roman PS" SIZE="2"><b>
<p>Warrants</b></font><font FACE="Times New Roman PSMT" SIZE="2"> </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In June 1999, in connection with the
private placements, mPhase issued warrants to purchase 400,000 shares of common
stock at an exercise price of $1.00 per share. The warrants were to expire five
years from the date of grant. These warrants were exercised during the year
ended June 30, 2000 generating proceeds to the Company of $400,000. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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 were to expire five years from the date of issuance. These warrants
were exercised in February 2000. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. </p>
<p>&nbsp;&nbsp;&nbsp; As of June 30, 2001, 6,816,725 warrants were outstanding
with a weighted average exercise price of $2.93. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. </p>
<p>&nbsp;&nbsp;&nbsp; As of June 30, 2002, 21,965,260 warrants were outstanding
with a weighted average exercise price of $1.05. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; During the year ended June 30, 2003, the
Company issued 4,701,696 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 $.30, for five years, in connection with private
placements. Also, during the year ended June 30, 2003, the Company granted
1,690,000 5 year warrants to employees and consultants for services performed
with an exercise price of $.40 per share of common stock and 3,706,800 warrants
to creditors, including related parties (see Note 11), in connection with the
conversion of outstanding liabilities. </p>
<p>&nbsp;&nbsp;&nbsp; As of June 30, 2003, 31,777,735 warrants remain
outstanding with a weighted average exercise price of $.84. </p>
<p>&nbsp;&nbsp;&nbsp; The following summarizes information about warrants issued
pursuant to various financing transactions and for services through June 30,
2003. </p>
</font>
<table CELLSPACING="0" BORDER="0" WIDTH="55%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="320"><font FACE="Times New Roman PSMT" SIZE="2">Range of Exercise
    Price</font></td>
    <td WIDTH="128" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Number</font></td>
    <td WIDTH="125" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Weighted</font></td>
    <td WIDTH="106" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Weighted</font></td>
  </tr>
  <tr>
    <td WIDTH="320">&nbsp;</td>
    <td WIDTH="128" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Outstanding</font></td>
    <td WIDTH="125" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Average</font></td>
    <td WIDTH="106" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Average</font></td>
  </tr>
  <tr>
    <td WIDTH="320">&nbsp;</td>
    <td WIDTH="128" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    and</font></td>
    <td WIDTH="125" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Remaining</font></td>
    <td WIDTH="106" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Exercise</font></td>
  </tr>
  <tr>
    <td WIDTH="320">&nbsp;</td>
    <td WIDTH="128" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Exercisable</font></td>
    <td WIDTH="125" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Contractual</font></td>
    <td WIDTH="106" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Price</font></td>
  </tr>
  <tr>
    <td WIDTH="320">&nbsp;</td>
    <td WIDTH="128" align="center" style="border-bottom-style: solid; border-bottom-width: 1">&nbsp;</td>
    <td WIDTH="125" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">Life</font></td>
    <td WIDTH="106" align="center" style="border-bottom-style: solid; border-bottom-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="320">&nbsp;</td>
    <td WIDTH="128" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="125" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="106" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="320" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$0 - $.30</font></td>
    <td WIDTH="128" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    22,826,010</font></td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">4.0</font></td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $0.24</font></td>
  </tr>
  <tr>
    <td WIDTH="320"><font FACE="Times New Roman PSMT" SIZE="2">$.40 - $.50</font></td>
    <td WIDTH="128" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    2,060,000</font></td>
    <td WIDTH="125" align="right"><font FACE="Times New Roman PSMT" SIZE="2">4.7</font></td>
    <td WIDTH="106" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    $0.42</font></td>
  </tr>
  <tr>
    <td WIDTH="320" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$1.25 - $2.50</font></td>
    <td WIDTH="128" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    1,244,000</font></td>
    <td WIDTH="125" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">2.0</font></td>
    <td WIDTH="106" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $2.00</font></td>
  </tr>
  <tr>
    <td WIDTH="320"><font FACE="Times New Roman PSMT" SIZE="2">$1.25 - $2.50</font></td>
    <td WIDTH="128" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    5,647,725</font></td>
    <td WIDTH="125" align="right"><font FACE="Times New Roman PSMT" SIZE="2">2.7</font></td>
    <td WIDTH="106" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    $3.14</font></td>
  </tr>
</table>
<font FACE="Times New Roman PS" SIZE="2"><b>
<p>Reserved Shares</b></font><font FACE="Times New Roman PSMT" SIZE="2"> </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The Company has reserved approximately
3,160,000 shares issuable upon provisions of convertible notes to related
parties, which provide for, at the option of the holder's of $460,000 of notes
payable, the conversion of unpaid principal and interest into units valued at
$.30 each, each unit consisting of one share of the Company's common stock and a
one warrant to purchase the Company's common stock at $.30 per share for a
period of 5 years. </p>
</font>
</font>

<font FACE="Times New Roman PSMT">
<p><b>11. Related Party Transactions </b></p>
</font><font FACE="Times New Roman PSMT" SIZE="2">
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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 retransmission
accreditation to proprietary television content that the Company plans to
provide with its flagship product, the Traverser&#153 within its incorporated joint
venture mPhase Television.net, in which the Company owns a 56.5% interest. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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 legacy Traverser&#153 DVDDS television platform. A
member of mPhase's Board of Directors is employed by Lintel, Inc., the parent
corporation of Hart Telephone. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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). </p>
<font FACE="MS" LANG="JA" SIZE="3">
<p></font><font FACE="Times New Roman PS" SIZE="2"><i>&nbsp;&nbsp;&nbsp;
Microphase Corporation</i></font><font FACE="Times New Roman PSMT" SIZE="2"> </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. In July 2001, the agreement was revised to
$11,340 a month. In July, 2002 this was increased to $12,200 per month and as of
January 1, 2003 such rent was reduced to 10,000 per month. Additionally, in July
1998, mPhase entered into an agreement with Microphase, whereby mPhase
reimburses Microphase $40,000 per month for technical research and development
assistance. Such agreement was amended as of January 1, 2002 to reduce such
payment to $20,000 per month. Microphase also charges fees for specific projects
on a project-by-project basis. During the years ended June 30, 2001, 2002, and
2003 and for the period from inception (October 2, 1996) to June 30, 2003,
$2,128,983, $1,212,594, $648,102 and $7,224,526, respectively, have been charged
to expense or inventory under these Agreements and is included in operating
expenses in the accompanying consolidated statements of operations. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; On February 15, 1997, mPhase entered into
a Technology, Patent and Trademark License Agreement (the &quot;Agreement&quot;) 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 had been charged to expense under this Agreement and is included in
licensing fees in the consolidated statement of operations. As of June 25, 1998,
the Company acquired MicroTel and as of that date this Agreement was no longer
in effect. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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 legacy Traverser&#153 Digital Video
and Data Delivery System and its DSL component products. During the years ended
June 30, 2001, 2002 and 2003 mPhase recorded royalties to Microphase totaling
$297,793, $78,762 and $47,304, respectively. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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 and for the year ended June 30,
2002, in consideration for a direct investment of $100,000 and pursuant to debt
conversion agreements canceling $740,000 of liabilities of the Company,
Microphase received 2,900,000 shares of mPhase common stock and 2,200,000
warrants to purchase mPhase common stock, as discussed in Note 10. For the
fiscal year ended June 30, 2003 Microphase received 4,033,333 shares of common
stock, such shares included 3,033,333 shares that the value of which was based
upon the price of the Company's common stock on the effective date of
settlement, plus 1,000,000 shares and 1,000,000 five year warrants to purchase
shares of common stock of mPhase at $.30 per share whereby such conversions were
upon the same terms of a concurrent private placement of common stock by the
Company. No gain or loss was recognized in connection with conversions by
Microphase for fiscal 2003 in exchange for the cancellation of accounts payable
totaling $920,000. As of June 30, 2002 and 2003, the Company had $0 and $61,789
current accounts payable to Microphase, which are included in amounts due to
related parties as current liabilities in the accompanying consolidated balance
sheet. As of June 30, 2002, the Company had $92,405 included in other
liabilities-related parties and as of June 30, 2003 had $360,000 included in
notes payable-related parties as long term liabilities in the accompanying
consolidated balance sheet. Additionally, at June 30, 2003, approximately
$142,000 of undelivered purchase orders remain outstanding with Microphase. </p>
</font><font FACE="MS" LANG="JA" SIZE="3">
<p>&nbsp;&nbsp;&nbsp; </font><font FACE="Times New Roman PS" SIZE="2"><i>
Janifast</i></font><font FACE="Times New Roman PSMT" SIZE="2"> </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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 for that period.
There were no such advances during the years ended June 30, 2002 and 2003.
Pursuant to debt conversion agreements between the Company and Janifast, for the
year ended June 30, 2001 Janifast received 1,200,000 shares of mPhase common
stock canceling liabilities of $600,000, and for the year ended June 30, 2002
Janifast received 3,450,000 shares of mPhase common stock and 1,200,000 warrants
to purchase mPhase common stock for the cancellation of $720,000 of liabilities,
as discussed in Note 10. During the year ended June 30,2003 Janifast was issued
1,500,000 shares of mPhase common stock in connection with the cancellation of
$360,000 of outstanding liabilities of mPhase, the value of which was based upon
the price of the Company's common stock on the effective date of settlement. No
gain or loss was recognized in connection with conversions by Janifast for
fiscal 2003. During the years ended June 30, 2001, 2002 and 2003 and the period
from inception (October 2, 1996) to June 30, 2003 $8,932,378, $1,759,308,
$178,959 and $10,691,686, respectively, of invoices for products and services
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 as long term
liabilities in the accompanying consolidated balance sheet and as of June 30,
2003 no amounts remain payable to Janifast. Additionally, at June 30, 2003,
approximately $1,435,000 of undelivered purchase orders remain outstanding with
Janifast. </p>
</font><font FACE="MS" LANG="JA" SIZE="3">
<p></font><font FACE="Times New Roman PS" SIZE="2"><i>&nbsp;&nbsp;&nbsp; Other
Related Parties</i></font><font FACE="Times New Roman PSMT" SIZE="2"> </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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 was 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&#153. 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 was
included in research and development expenses in the statement of operations for
the year ended June 30, 2000. Mr. J. Lee Barton, the president and chief
executive officer of Lintel Inc., (Lintel is the parent of Hart Telephone
Company), and at that time Mr. Barton was a Director of the Company, received a
$285,000 bonus, a stock award of 140,000 shares and 100,000 options in addition
to the 125,000 granted to Hart for Beta testing services in the year ended June
30, 2000 and 120,000 options for services as a Director for the year ended June
30, 2001. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; A member of mPhase's Board of Directors as
of June 30, 2003 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
years ended June 30, 2002 and 2003 he received 62,500 options and 35,000
warrants, respectively, for services as a director. </p>
</font>
<table CELLSPACING="0" BORDER="0" WIDTH="75%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="421"><font FACE="Times New Roman PS" SIZE="2"><b>Charges and
    Expenses with Related Parties</b></font></td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="103" align="right">&nbsp;</td>
    <td WIDTH="97" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="421">&nbsp;</td>
    <td WIDTH="102" align="center">&nbsp;</td>
    <td WIDTH="101" align="center">&nbsp;</td>
    <td WIDTH="101" align="center">&nbsp;</td>
    <td WIDTH="200" COLSPAN="2" align="center">
    <font FACE="Times New Roman PSMT" SIZE="2">For the Six Months</font></td>
  </tr>
  <tr>
    <td WIDTH="421">&nbsp;</td>
    <td WIDTH="102" align="center">&nbsp;</td>
    <td WIDTH="101" align="center">&nbsp;</td>
    <td WIDTH="101" align="center">&nbsp;</td>
    <td WIDTH="200" COLSPAN="2" align="center">
    <font FACE="Times New Roman PSMT" SIZE="2">Ended December 31,</font></td>
  </tr>
  <tr>
    <td WIDTH="421">&nbsp;</td>
    <td WIDTH="304" COLSPAN="3" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">For the Years Ended June 30,</font></td>
    <td WIDTH="200" COLSPAN="2" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">(Unaudited)</font></td>
  </tr>
  <tr>
    <td WIDTH="421">&nbsp;</td>
    <td WIDTH="102" align="center" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="101" align="center" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="101" align="center" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="103" align="center" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="97" align="center" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="421">&nbsp;</td>
    <td WIDTH="102" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">2001</font></td>
    <td WIDTH="101" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">2002</font></td>
    <td WIDTH="101" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">2003</font></td>
    <td WIDTH="103" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">2002</font></td>
    <td WIDTH="97" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
    <font FACE="Times New Roman PSMT" SIZE="2">2003</font></td>
  </tr>
  <tr>
    <td WIDTH="421">&nbsp;</td>
    <td WIDTH="102" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="101" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="101" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="103" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    <td WIDTH="97" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="421"><font FACE="Times New Roman PSMT" SIZE="2">Charges incurred
    with Janifast</font></td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="103" align="right">&nbsp;</td>
    <td WIDTH="97" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="421"><font FACE="Times New Roman PSMT" SIZE="2">included in:</font></td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="103" align="right">&nbsp;</td>
    <td WIDTH="97" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="421" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Cost of sales and
    ending inventory</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$8,932,378</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$1,759,308</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$178,959</font></td>
    <td WIDTH="103" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$132,465</font></td>
    <td WIDTH="97" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$1,816,019</font></td>
  </tr>
  <tr>
    <td WIDTH="421"><font FACE="Times New Roman PSMT" SIZE="2">Total Janifast</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">$8,932,378</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">$1,759,308</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">$178,959</font></td>
    <td WIDTH="103" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">$132,465</font></td>
    <td WIDTH="97" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">1,816,019</font></td>
  </tr>
  <tr>
    <td WIDTH="421" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Charges incurred
    with Microphase Corp.</font></td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="103" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="97" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="421" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">included in:</font></td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="103" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="97" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="421"><font FACE="Times New Roman PSMT" SIZE="2">Cost of sales and
    ending inventory</font></td>
    <td WIDTH="102" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    $335,777</font></td>
    <td WIDTH="101" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    $200,440</font></td>
    <td WIDTH="101" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    $86,468</font></td>
    <td WIDTH="103" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    $62,319</font></td>
    <td WIDTH="97" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    $22,948</font></td>
  </tr>
  <tr>
    <td WIDTH="421"><font FACE="Times New Roman PSMT" SIZE="2">(Including
    Royalties)</font></td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="103" align="right">&nbsp;</td>
    <td WIDTH="97" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="421" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Research and
    development</font></td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    1,660,606</font></td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    876,074</font></td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    428,434</font></td>
    <td WIDTH="103" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    240,000</font></td>
    <td WIDTH="97" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    54,000</font></td>
  </tr>
  <tr>
    <td WIDTH="421"><font FACE="Times New Roman PSMT" SIZE="2">General and
    administrative</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">132,600</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">136,080</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">133,200</font></td>
    <td WIDTH="103" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">73,200</font></td>
    <td WIDTH="97" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">15,000</font></td>
  </tr>
  <tr>
    <td WIDTH="421" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Total Microphase
    Corp.</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$2,128,983</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$1,212,594</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$648,102</font></td>
    <td WIDTH="103" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$253,980</font></td>
    <td WIDTH="97" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$91,948</font></td>
  </tr>
  <tr>
    <td WIDTH="421"><font FACE="Times New Roman PSMT" SIZE="2">Charges incurred
    with Lintel &amp; Affiliates</font></td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="103" align="right">&nbsp;</td>
    <td WIDTH="97" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="421"><font FACE="Times New Roman PSMT" SIZE="2">included in:</font></td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="103" align="right">&nbsp;</td>
    <td WIDTH="97" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="421" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Research and
    development</font></td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $192,000</font></td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
    <td WIDTH="103" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
    <td WIDTH="97" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
  </tr>
  <tr>
    <td WIDTH="421"><font FACE="Times New Roman PSMT" SIZE="2">General and
    administrative</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">285,000</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="103" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="97" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="421" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Total Lintel &amp;
    Affiliates</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$477,000</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
    <td WIDTH="103" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
    <td WIDTH="97" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
  </tr>
  <tr>
    <td WIDTH="421"><font FACE="Times New Roman PSMT" SIZE="2">Charges incurred
    with Joint Venture</font></td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="101" align="right">&nbsp;</td>
    <td WIDTH="103" align="right">&nbsp;</td>
    <td WIDTH="97" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="421" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Partners &amp;
    Affiliates</font></td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="103" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="97" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="421" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">included in:</font></td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="103" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="97" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="421"><font FACE="Times New Roman PSMT" SIZE="2">Research and
    development</font></td>
    <td WIDTH="102" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    $949,420</font></td>
    <td WIDTH="101" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    $64,039</font></td>
    <td WIDTH="101" align="right"><font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
    <td WIDTH="103" align="right"><font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
    <td WIDTH="97" align="right"><font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
  </tr>
  <tr>
    <td WIDTH="421" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">General and
    administrative</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">60,000</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="103" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="97" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="421"><font FACE="Times New Roman PSMT" SIZE="2">Total Joint
    Venture Partner &amp; Affiliates</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">1,009,420</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">64,039</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="103" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="97" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="421" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Total Charges
    with Related Parties</font></td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="103" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="97" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="421" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">included in:</font></td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="103" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="97" align="right" bgcolor="#E6E6E6">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="421"><font FACE="Times New Roman PSMT" SIZE="2">Cost of sales and
    ending inventory</font></td>
    <td WIDTH="102" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    $9,268,155</font></td>
    <td WIDTH="101" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    $1,959,748</font></td>
    <td WIDTH="101" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    $265,427</font></td>
    <td WIDTH="103" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    $194,784</font></td>
    <td WIDTH="97" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    $1,838,967</font></td>
  </tr>
  <tr>
    <td WIDTH="421" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Research and
    development</font></td>
    <td WIDTH="102" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    2,802,026</font></td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    940,113</font></td>
    <td WIDTH="101" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    428,434</font></td>
    <td WIDTH="103" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    240,000</font></td>
    <td WIDTH="97" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    54,000</font></td>
  </tr>
  <tr>
    <td WIDTH="421"><font FACE="Times New Roman PSMT" SIZE="2">General and
    administrative</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">477,600</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">136,080</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">133,200</font></td>
    <td WIDTH="103" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">73,200</font></td>
    <td WIDTH="97" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">15,000</font></td>
  </tr>
  <tr>
    <td WIDTH="421" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Total Charges
    with Related Parties</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$12,547,781</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$3,035,941</font></td>
    <td WIDTH="101" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$827,061</font></td>
    <td WIDTH="103" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$507,984</font></td>
    <td WIDTH="97" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$1,907,967</font></td>
  </tr>
</table>
<p>&nbsp;&nbsp;&nbsp; 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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, have 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. As of August 11, 2003 the Company has an arrearage of $35,000
with respect to the payments on the promissory note. As of December 5, 2003 the
Company has an arrearage of $50,000 with respect to the payments on the
promissory note. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; During the year ended June, 30 2003, the
Company converted $525,967 of liabilities due for unpaid management compensation
and sales commissions due from mPhase, including $480,967 due to the Company's
president and vice president and $45,000 due to a sales manager who is also
concurrently employed by Microphase, into warrants to purchase up to a total of
2,491,800 shares of the Company's common stock which, pursuant to EITF 96-18,
have an approximate value of $.21 per share. The Company recorded a settlement
expense of approximately $12,206, which is included as a reduction to gain on
settlements in the statements of operations for the year ended June 30, 2003.
</p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In March of 2003, Messrs, Durando, Dotoli
and Smiley participated in a private placement of the company investing $20,000,
$20,000 and $75,000 respectively, receiving common stock of mPhase at $.30 per
share plus 5 year warrants of mPhase to purchase a like amount of common stock
at $.30 per share. In March of 2003, Messrs Durando and Smiley lent to mPhase
$30,000 and $100,000 respectively at 12% interest pursuant to two promissory
notes originally due in September of 2003. In June 2003, Mr. Durando was repaid
and Mr. Smiley agreed to extend his note until July, 2004. Also in June, 2003,
Microphase agreed to convert $360,000 of accounts payable to a note payable,
interest at 12%, due in July, 2004. The notes have provisions for prepayment by
the Company and at the option of the holder, provide for the conversion of
unpaid principal and interest into units valued at $.30 each, each unit
consisting of one share of the Company's common stock and a one warrant to
purchase the Company's common stock at $.30 per share for a period of 5 years.
</p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Generally, as summarized below, the
Company has offered conversion of debts to related parties on substantially the
same terms as concurrent private placements (typically in $.30 units, such units
including both shares of common stock and warrants to purchase a like amount of
common stock) in addition to conversion of debts pursuant to terms of concurrent
private placements financial instruments which, pursuant to EITF 00-19, have
been settled with the Company's common stock as conditioned by benchmarks,
generally coinciding with the Company's negotiations to settle any and all
obligations with Georgia Tech Research and its affiliate (see also Note - 13) as
follows: </p>
<table CELLSPACING="0" BORDER="0" WIDTH="75%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="927" COLSPAN="7"><font FACE="Times New Roman PS" SIZE="2"><b>
    Equity Conversions of Debt and Other Financial Instruments with Related
    Parties</b></font></td>
  </tr>
  <tr>
    <td WIDTH="148">&nbsp;</td>
    <td WIDTH="265">&nbsp;</td>
    <td WIDTH="105" align="center">&nbsp;</td>
    <td WIDTH="102" align="center">&nbsp;</td>
    <td WIDTH="103" align="center">&nbsp;</td>
    <td WIDTH="204" COLSPAN="2" align="center">
    <font FACE="Times New Roman PSMT" SIZE="2">For the Three Months</font></td>
  </tr>
  <tr>
    <td WIDTH="148">&nbsp;</td>
    <td WIDTH="265">&nbsp;</td>
    <td WIDTH="105" align="center">&nbsp;</td>
    <td WIDTH="102" align="center">&nbsp;</td>
    <td WIDTH="103" align="center">&nbsp;</td>
    <td WIDTH="204" COLSPAN="2" align="center">
    <font FACE="Times New Roman PSMT" SIZE="2">Ended December 31,</font></td>
  </tr>
  <tr>
    <td WIDTH="148">&nbsp;</td>
    <td WIDTH="265">&nbsp;</td>
    <td WIDTH="310" COLSPAN="3" align="center">
    <font FACE="Times New Roman PSMT" SIZE="2">For the Years Ended June 30,</font></td>
    <td WIDTH="204" COLSPAN="2" align="center">
    <font FACE="Times New Roman PSMT" SIZE="2">(Unaudited)</font></td>
  </tr>
  <tr>
    <td WIDTH="148">&nbsp;</td>
    <td WIDTH="265">&nbsp;</td>
    <td WIDTH="105" align="center">&nbsp;</td>
    <td WIDTH="102" align="center">&nbsp;</td>
    <td WIDTH="103" align="center">&nbsp;</td>
    <td WIDTH="104" align="center">&nbsp;</td>
    <td WIDTH="100" align="center">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="148">&nbsp;</td>
    <td WIDTH="265">&nbsp;</td>
    <td WIDTH="105" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    2001</font></td>
    <td WIDTH="102" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    2002</font></td>
    <td WIDTH="103" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    2003</font></td>
    <td WIDTH="104" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    2002</font></td>
    <td WIDTH="100" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    2003</font></td>
  </tr>
  <tr>
    <td WIDTH="148">&nbsp;</td>
    <td WIDTH="265">&nbsp;</td>
    <td WIDTH="105" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="103" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="148"><font FACE="Times New Roman PS" SIZE="2"><b>Janifast</b></font></td>
    <td WIDTH="265">&nbsp;</td>
    <td WIDTH="105" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="103" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="413" COLSPAN="2" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;
    Number of shares</font></td>
    <td WIDTH="105" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">2,400,000</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">3,450,000</font></td>
    <td WIDTH="103" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">1,500,000</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">1,500,000</font></td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="413" COLSPAN="2"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;
    Number of warrants</font></td>
    <td WIDTH="105" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">1,200,000</font></td>
    <td WIDTH="103" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="413" COLSPAN="2" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;
    Amount converted to equity</font></td>
    <td WIDTH="105" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$1,200,000</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$720,000</font></td>
    <td WIDTH="103" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$360,000</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$360,000</font></td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
  </tr>
  <tr>
    <td WIDTH="413" COLSPAN="2"><font FACE="Times New Roman PS" SIZE="2"><b>
    Microphase Corporation</b></font></td>
    <td WIDTH="105" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="103" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="413" COLSPAN="2" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;
    Number of shares</font></td>
    <td WIDTH="105" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">1,278,000</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">2,700,000</font></td>
    <td WIDTH="103" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">4,033,333</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">3,033,333</font></td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="413" COLSPAN="2"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;
    Number of warrants</font></td>
    <td WIDTH="105" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">2,200,000</font></td>
    <td WIDTH="103" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">1,000,000</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="413" COLSPAN="2" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;
    Amount converted to equity</font></td>
    <td WIDTH="105" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$639,000</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$740,000</font></td>
    <td WIDTH="103" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$920,000</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$620,000</font></td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
  </tr>
  <tr>
    <td WIDTH="413" COLSPAN="2"><font FACE="Times New Roman PS" SIZE="2"><b>
    Lintel Corporation and Affiliates</b></font></td>
    <td WIDTH="105" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="103" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="413" COLSPAN="2" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;
    Number of shares </font><font FACE="Times New Roman PS" SIZE="2"><b>(A)</b></font></td>
    <td WIDTH="105" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">954,000</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="103" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="413" COLSPAN="2"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;
    Number of warrants</font></td>
    <td WIDTH="105" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="103" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="413" COLSPAN="2" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;
    Amount converted to equity</font></td>
    <td WIDTH="105" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$477,000</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
    <td WIDTH="103" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
  </tr>
  <tr>
    <td WIDTH="148"><font FACE="Times New Roman PS" SIZE="2"><b>Officers</b></font></td>
    <td WIDTH="265">&nbsp;</td>
    <td WIDTH="105" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="103" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="413" COLSPAN="2" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;
    Number of shares</font></td>
    <td WIDTH="105" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">333,334</font></td>
    <td WIDTH="103" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="413" COLSPAN="2"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;
    Number of warrants </font><font FACE="Times New Roman PS" SIZE="2"><b>(B)</b></font></td>
    <td WIDTH="105" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">333,334</font></td>
    <td WIDTH="103" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">2,491,800</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">2,491,800</font></td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="413" COLSPAN="2" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;
    Amount converted to equity</font></td>
    <td WIDTH="105" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$103,000</font></td>
    <td WIDTH="103" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$480,967</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$480,967</font></td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
  </tr>
  <tr>
    <td WIDTH="413" COLSPAN="2"><font FACE="Times New Roman PS" SIZE="2"><b>
    Joint Venture Partner and Affiliates</b></font></td>
    <td WIDTH="105" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="103" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="413" COLSPAN="2" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;
    Number of shares</font></td>
    <td WIDTH="105" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">208,077</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">63,216</font></td>
    <td WIDTH="103" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="413" COLSPAN="2"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;
    Number of warrants</font></td>
    <td WIDTH="105" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="103" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="413" COLSPAN="2" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;
    Amount converted to equity</font></td>
    <td WIDTH="105" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$104,038</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$31,628</font></td>
    <td WIDTH="103" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
  </tr>
  <tr>
    <td WIDTH="413" COLSPAN="2"><font FACE="Times New Roman PS" SIZE="2"><b>
    Total Related Party Conversions</b></font></td>
    <td WIDTH="105" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="103" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="413" COLSPAN="2" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;
    Number of shares</font></td>
    <td WIDTH="105" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">4,840,077</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">6,546,550</font></td>
    <td WIDTH="103" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">5,533,333</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">4,533,333</font></td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="413" COLSPAN="2"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;
    Number of warrants</font></td>
    <td WIDTH="105" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">3,733,334</font></td>
    <td WIDTH="103" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">3,491,800</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">2,491,800</font></td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
  </tr>
  <tr>
    <td WIDTH="413" COLSPAN="2" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">&nbsp;&nbsp;&nbsp;&nbsp;
    Amount converted to equity</font></td>
    <td WIDTH="105" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$2,420,038</font></td>
    <td WIDTH="102" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$1,594,628</font></td>
    <td WIDTH="103" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$1,760,967</font></td>
    <td WIDTH="104" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$1,460,967</font></td>
    <td WIDTH="100" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$0</font></td>
  </tr>
  <tr>
    <td WIDTH="148">&nbsp;</td>
    <td WIDTH="265">&nbsp;</td>
    <td WIDTH="105" align="right">&nbsp;</td>
    <td WIDTH="102" align="right">&nbsp;</td>
    <td WIDTH="103" align="right">&nbsp;</td>
    <td WIDTH="104" align="right">&nbsp;</td>
    <td WIDTH="100" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="927" colspan="7"><font FACE="Times New Roman PSMT" SIZE="2">(A)
    Includes Mr. L. Barton in Fiscal 2001, a former Director of the Company.<p>
    (B) Includes $12,206 settlement expense incurred to the Company's President
    and Vice President in connection with the exchange of warrants to purchase
    the company's common stock to cancel unpaid compensation, which is included
    as a reduction to gain on Settlements in fiscal 2003.</font></td>
  </tr>
</table>
</font>

<font FACE="Times New Roman PSMT">
<p><b>12. Income Taxes </b></p>
</font>

<font FACE="Times New Roman PSMT" SIZE="2">
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; No provision has been made for corporate
income taxes due to cumulative losses incurred. At June 30, 2003, mPhase has
operating loss carryforwards of approximately $61.7 million and $61.2 million to
offset future federal and state income taxes respectively, which expire at
various times from 2016 through 2023. 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. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; At June 30, 2003 the Company has net
deferred income tax assets of approximately $23.6 million comprised principally
of the future tax benefit of net operating loss carryforwards, which represents
an increase of $1.7 million for the fiscal year ended June 30, 2003. A full
valuation reserve has been recorded against such assets due to the uncertainty
as to their future realizability. </p>
</font>

<font FACE="Times New Roman PSMT">
<p><b>13. Commitments and Contingencies </b></p>
</font>

<font FACE="Times New Roman PSMT" SIZE="2">
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; mPhase has entered into various agreements
with Georgia Tech Research (&quot;GTRC&quot;) and its affiliate, Georgia Tech Applied
Research Corporation, (&quot;GTARC&quot;), 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, 2001, 2002, and 2003 totaled $3,814,300, $450,000, and
$100,000 respectively, and $13,524,300 from the period from inception through
June 30, 2003. During the year ended June 30, 2003, the Company and GTRC and its
affiliate, GTARC, on October 14, 2002, entered into a Memorandum of Intention to
exchange warrants and promissory notes for all amounts outstanding and to
exchange mutual Releases. Such agreement is subject to final documentation
approved by the board of directors of both companies. </p>
<p>&nbsp;&nbsp;&nbsp; If and when sales commence utilizing its legacy DVDDS
digital broadcast television platform, mPhase will be obligated to pay to GTRC a
royalty up to 5% of product sales, as defined. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; As of June 30, 2002, mPhase became
obligated to pay Lucent Technologies, Inc. $100,000 per month through and
including the first of each month from July 1, 2003 through and including
November 1, 2003 for the development of its cost-reduced set-top box and TV+
digital broadcast television platform. Additionally, the Company engages Lucent
on a project-by-project basis for research and development of technical product
related enhancements. The amount incurred by the Company with Lucent for
assistance with respect to its research and development activities during the
years ended June 30, 2002, and 2003 totaled $156,250 and $1,112,500,
respectively, and $1,268,500 from the period from inception through June 30,
2003. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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,
nor does it anticipate any actions which would result in liabilities in excess
of amounts recorded in these financial statements. </p>
<hr><p Style='page-break-before:always'><font FACE="Times New Roman PS" SIZE="5"><b>
<p align="center">SCHEDULE II</b></font><font FACE="Times New Roman PSMT" SIZE="5">
</p>
</font>
</font>

<font FACE="Times New Roman PS"><b>
<p>Item 14B. Valuation and Qualifying Accounts</b></font><font FACE="Times New Roman PSMT" SIZE="2"><font FACE="Times New Roman PSMT">
</p>
</font>
<div align="center">
  <center>
  <table CELLSPACING="0" BORDER="0" WIDTH="70%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
    <tr>
      <td WIDTH="865" colspan="6" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
      <font FACE="Times New Roman PS" SIZE="4"><b>mPHASE TECHNOLOGIES, INC.</b></font></font></td>
    </tr>
    <tr>
      <td WIDTH="865" colspan="6" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
      <font FACE="Times New Roman PS" SIZE="4"><b>VALUATION AND QUALIFYING
      ACCOUNTS</b></font></font></td>
    </tr>
    <tr>
      <td WIDTH="865" colspan="6" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
      <font FACE="Times New Roman PS" SIZE="4"><b>Years Ended June 30, 2003,
      2002 and 2001</b></font></font></td>
    </tr>
    <tr>
      <td WIDTH="865" colspan="6" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
      <font FACE="Times New Roman PS" SIZE="4"><b>(In Thousands)</b></font></font></td>
    </tr>
    <tr>
      <td WIDTH="297">&nbsp;</td>
      <td WIDTH="119" align="center">&nbsp;</td>
      <td WIDTH="106" align="center">&nbsp;</td>
      <td WIDTH="107" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
      Additions</font></td>
      <td WIDTH="108" align="center">&nbsp;</td>
      <td WIDTH="128" align="center">&nbsp;</td>
    </tr>
    <tr>
      <td WIDTH="297"><font FACE="Times New Roman PSMT" SIZE="2">Description</font></td>
      <td WIDTH="119" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
      Balance at</font></td>
      <td WIDTH="106" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
      Charged to</font></td>
      <td WIDTH="107" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
      Charged to</font></td>
      <td WIDTH="108" align="center">&nbsp;</td>
      <td WIDTH="128" align="center">&nbsp;</td>
    </tr>
    <tr>
      <td WIDTH="297">&nbsp;</td>
      <td WIDTH="119" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
      beginning</font></td>
      <td WIDTH="106" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
      costs and</font></td>
      <td WIDTH="107" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
      other</font></td>
      <td WIDTH="108" align="center">&nbsp;</td>
      <td WIDTH="128" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
      Balance at</font></td>
    </tr>
    <tr>
      <td WIDTH="297">&nbsp;</td>
      <td WIDTH="119" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
      <font FACE="Times New Roman PSMT" SIZE="2">of year</font></td>
      <td WIDTH="106" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
      <font FACE="Times New Roman PSMT" SIZE="2">expenses</font></td>
      <td WIDTH="107" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
      <font FACE="Times New Roman PSMT" SIZE="2">accounts</font></td>
      <td WIDTH="108" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
      <font FACE="Times New Roman PSMT" SIZE="2">Deductions</font></td>
      <td WIDTH="128" align="center" style="border-bottom-style: solid; border-bottom-width: 1">
      <font FACE="Times New Roman PSMT" SIZE="2">end of year</font></td>
    </tr>
    <tr>
      <td WIDTH="297">&nbsp;</td>
      <td WIDTH="119" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
      <td WIDTH="106" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
      <td WIDTH="107" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
      <td WIDTH="108" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
      <td WIDTH="128" align="right" style="border-top-style: solid; border-top-width: 1">&nbsp;</td>
    </tr>
    <tr>
      <td WIDTH="297" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Year ended June
      30, 2003</font></td>
      <td WIDTH="119" align="right" bgcolor="#E6E6E6">&nbsp;</td>
      <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
      <td WIDTH="107" align="right" bgcolor="#E6E6E6">&nbsp;</td>
      <td WIDTH="108" align="right" bgcolor="#E6E6E6">&nbsp;</td>
      <td WIDTH="128" align="right" bgcolor="#E6E6E6">&nbsp;</td>
    </tr>
    <tr>
      <td WIDTH="297"><font FACE="Times New Roman PSMT" SIZE="2">Allowance for
      doubtful accounts (deducted</font></td>
      <td WIDTH="119" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
      $3</font></td>
      <td WIDTH="106" align="right"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
      <td WIDTH="107" align="right"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
      <td WIDTH="108" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
      (3)</font></td>
      <td WIDTH="128" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
      $0</font></td>
    </tr>
    <tr>
      <td WIDTH="297"><font FACE="Times New Roman PSMT" SIZE="2">from accounts
      receivable)</font></td>
      <td WIDTH="119" align="right">&nbsp;</td>
      <td WIDTH="106" align="right">&nbsp;</td>
      <td WIDTH="107" align="right">&nbsp;</td>
      <td WIDTH="108" align="right">&nbsp;</td>
      <td WIDTH="128" align="right" style="border-bottom-style: double; border-bottom-width: 3">&nbsp;</td>
    </tr>
    <tr>
      <td WIDTH="297" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Allowance for
      obsolescence (deducted from</font></td>
      <td WIDTH="119" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
      $1,243</font></td>
      <td WIDTH="106" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
      302</font></td>
      <td WIDTH="107" align="right" bgcolor="#E6E6E6">&nbsp;</td>
      <td WIDTH="108" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
      (1,059)</font></td>
      <td WIDTH="128" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
      $486</font></td>
    </tr>
    <tr>
      <td WIDTH="297" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">inventory, at
      cost)</font></td>
      <td WIDTH="119" align="right" bgcolor="#E6E6E6">&nbsp;</td>
      <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
      <td WIDTH="107" align="right" bgcolor="#E6E6E6">&nbsp;</td>
      <td WIDTH="108" align="right" bgcolor="#E6E6E6">&nbsp;</td>
      <td WIDTH="128" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
    </tr>
    <tr>
      <td WIDTH="297"><font FACE="Times New Roman PSMT" SIZE="2">Year ended June
      30, 2002</font></td>
      <td WIDTH="119" align="right">&nbsp;</td>
      <td WIDTH="106" align="right">&nbsp;</td>
      <td WIDTH="107" align="right">&nbsp;</td>
      <td WIDTH="108" align="right">&nbsp;</td>
      <td WIDTH="128" align="right">&nbsp;</td>
    </tr>
    <tr>
      <td WIDTH="297" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Allowance for
      doubtful accounts (deducted</font></td>
      <td WIDTH="119" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
      $29</font></td>
      <td WIDTH="106" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">3</font></td>
      <td WIDTH="107" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
      <td WIDTH="108" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
      (29)</font></td>
      <td WIDTH="128" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
      $3</font></td>
    </tr>
    <tr>
      <td WIDTH="297" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">from accounts
      receivable)</font></td>
      <td WIDTH="119" align="right" bgcolor="#E6E6E6">&nbsp;</td>
      <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
      <td WIDTH="107" align="right" bgcolor="#E6E6E6">&nbsp;</td>
      <td WIDTH="108" align="right" bgcolor="#E6E6E6">&nbsp;</td>
      <td WIDTH="128" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
    </tr>
    <tr>
      <td WIDTH="297"><font FACE="Times New Roman PSMT" SIZE="2">Allowance for
      obsolescence (deducted from</font></td>
      <td WIDTH="119" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
      $315</font></td>
      <td WIDTH="106" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
      928</font></td>
      <td WIDTH="107" align="right"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
      <td WIDTH="108" align="right"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
      <td WIDTH="128" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
      $1,243</font></td>
    </tr>
    <tr>
      <td WIDTH="297"><font FACE="Times New Roman PSMT" SIZE="2">inventory, at
      cost)</font></td>
      <td WIDTH="119" align="right">&nbsp;</td>
      <td WIDTH="106" align="right">&nbsp;</td>
      <td WIDTH="107" align="right">&nbsp;</td>
      <td WIDTH="108" align="right">&nbsp;</td>
      <td WIDTH="128" align="right">&nbsp;</td>
    </tr>
    <tr>
      <td WIDTH="297" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Year ended June
      30, 2001</font></td>
      <td WIDTH="119" align="right" bgcolor="#E6E6E6">&nbsp;</td>
      <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
      <td WIDTH="107" align="right" bgcolor="#E6E6E6">&nbsp;</td>
      <td WIDTH="108" align="right" bgcolor="#E6E6E6">&nbsp;</td>
      <td WIDTH="128" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
    </tr>
    <tr>
      <td WIDTH="297"><font FACE="Times New Roman PSMT" SIZE="2">Allowance for
      doubtful accounts (deducted</font></td>
      <td WIDTH="119" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
      $0</font></td>
      <td WIDTH="106" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
      29</font></td>
      <td WIDTH="107" align="right"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
      <td WIDTH="108" align="right"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
      <td WIDTH="128" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
      $29</font></td>
    </tr>
    <tr>
      <td WIDTH="297"><font FACE="Times New Roman PSMT" SIZE="2">from accounts
      receivable)</font></td>
      <td WIDTH="119" align="right">&nbsp;</td>
      <td WIDTH="106" align="right">&nbsp;</td>
      <td WIDTH="107" align="right">&nbsp;</td>
      <td WIDTH="108" align="right">&nbsp;</td>
      <td WIDTH="128" align="right" style="border-bottom-style: double; border-bottom-width: 3">&nbsp;</td>
    </tr>
    <tr>
      <td WIDTH="297" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Allowance for
      obsolescence (deducted from</font></td>
      <td WIDTH="119" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
      $0</font></td>
      <td WIDTH="106" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
      315</font></td>
      <td WIDTH="107" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
      <td WIDTH="108" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">0</font></td>
      <td WIDTH="128" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
      $315</font></td>
    </tr>
    <tr>
      <td WIDTH="297" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">inventory, at
      cost)</font></td>
      <td WIDTH="119" align="right" bgcolor="#E6E6E6">&nbsp;</td>
      <td WIDTH="106" align="right" bgcolor="#E6E6E6">&nbsp;</td>
      <td WIDTH="107" align="right" bgcolor="#E6E6E6">&nbsp;</td>
      <td WIDTH="108" align="right" bgcolor="#E6E6E6">&nbsp;</td>
      <td WIDTH="128" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">&nbsp;</td>
    </tr>
  </table>
  </center>
</div>
<blockquote>
  <p ALIGN="JUSTIFY">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 YEAR ENDED JUNE 30, 2001. THIS
  REPORT ON PAGE F-2 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 FORM S-1, 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. </p>
</blockquote>
<hr><p Style='page-break-before:always'>
</font>

<font FACE="Times New Roman PSMT">
</font>

<b><font FACE="Times New Roman PSMT" SIZE="5">
<p align="center">PART II </p>
<font FACE="Times New Roman PS">
<p align="center">INFORMATION NOT REQUIRED IN PROSPECTUS</font></font></b><font FACE="Times New Roman PSMT" SIZE="2"><font FACE="Times New Roman PSMT" SIZE="5">
</p>
</font>
</font>

<font FACE="Times New Roman PS"><b>
<p>Item 13. Other Expenses of Issuance and Distribution</b></font><font FACE="Times New Roman PSMT" SIZE="2"><font FACE="Times New Roman PSMT">
</p>
</font>
<p>&nbsp;&nbsp;&nbsp; The following sets forth the estimated expenses payable in
connection with the preparation and filing of this Registration Statement: </p>
<table CELLSPACING="0" BORDER="0" WIDTH="60%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="571">&nbsp;</td>
    <td WIDTH="170" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="571" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Securities and
    Exchange Commission Registration Fee</font></td>
    <td WIDTH="170" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $1,700</font></td>
  </tr>
  <tr>
    <td WIDTH="571"><font FACE="Times New Roman PSMT" SIZE="2">NASD Filing Fee</font></td>
    <td WIDTH="170" align="right"><font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
  </tr>
  <tr>
    <td WIDTH="571" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Nasdaq Listing
    Fee</font></td>
    <td WIDTH="170" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
  </tr>
  <tr>
    <td WIDTH="571"><font FACE="Times New Roman PSMT" SIZE="2">Printing Expenses</font></td>
    <td WIDTH="170" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    $2,000</font></td>
  </tr>
  <tr>
    <td WIDTH="571" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Accounting Fees
    and Expenses</font></td>
    <td WIDTH="170" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    $12,500</font></td>
  </tr>
  <tr>
    <td WIDTH="571"><font FACE="Times New Roman PSMT" SIZE="2">Legal Fees and
    Expenses</font></td>
    <td WIDTH="170" align="right"><font FACE="Times New Roman PSMT" SIZE="2">
    $25,000</font></td>
  </tr>
  <tr>
    <td WIDTH="571" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Transfer Agent's
    and Registrar's Fees and Expenses</font></td>
    <td WIDTH="170" align="right" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    -</font></td>
  </tr>
  <tr>
    <td WIDTH="571"><font FACE="Times New Roman PSMT" SIZE="2">Miscellaneous
    Expenses</font></td>
    <td WIDTH="170" align="right" style="border-bottom-style: double; border-bottom-width: 3">
    <font FACE="Times New Roman PSMT" SIZE="2">-</font></td>
  </tr>
  <tr>
    <td WIDTH="571" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Total</font></td>
    <td WIDTH="170" align="right" style="border-bottom-style: double; border-bottom-width: 3" bgcolor="#E6E6E6">
    <font FACE="Times New Roman PSMT" SIZE="2">$41,200</font></td>
  </tr>
</table>
</font>

<font FACE="Times New Roman PS"><b>
<p>Item 14. Indemnification of Directors and Officers</b></font><font FACE="Times New Roman PSMT" SIZE="2"><font FACE="Times New Roman PSMT">
</p>
</font>
<p>&nbsp;&nbsp;&nbsp; Our Certificate of Incorporation, as amended, and Bylaws
provide that we shall indemnify any Director, officer, employee or agent of ours
to the full extent permitted by the New Jersey Business Corporations Act. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Under Section 14A:3-5 of the New Jersey
Business Corporation Act, we have the power to indemnify any person, against his
expenses and liabilities in connection with any proceeding, whether civil or
criminal, who is or was a Director, officer, employee or agent, provided that
such person acted in good faith and with reasonable business prudence. Should
the proceeding involve criminal liability, the Director, officer, employee or
agent shall be indemnified if he reasonably believed that his conduct was not
unlawful. Should the Director, officer, employee or agent be liable to us,
indemnification shall not be provided unless the court in such proceeding
determines that, in light of all surrounding circumstances of the case, such
Director, officer, employee or agent is reasonably entitled to expenses as the
court deems proper. Additionally, we shall indemnify any Director, officer,
employee or agent against expenses should such Director, officer, employee or
agent be successful on the merits in any proceeding referred to in this
paragraph. </p>
<p>&nbsp;&nbsp;&nbsp; Our determination as to whether the Director, officer,
employee or agent should be indemnified shall be made: </p>
<blockquote>
  <ol type="i">
    <li>by way of a majority vote of a quorum of the Board of Directors who were
    not parties to or otherwise involved in the proceeding; <br>
&nbsp;</li>
    <li>
    <p ALIGN="JUSTIFY">or if such quorum is not obtainable, or, even if
    obtainable and directed by such quorum or by a majority vote of the
    disinterested Directors, by independent legal counsel in a written opinion;
    or <br>
&nbsp;</li>
    <li>by our stockholders if directed by a resolution of the Board of
    Directors or of the stockholders. </li>
  </ol>
</blockquote>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; We shall not indemnify any Director,
officer, employee or agent if a judgment or other final adjudication establishes
that his acts or omissions (a) were in breach of his duty of loyalty to us or
our shareholders, (b) were not in good faith or involved a knowing violation of
law, or (c) resulted in receipt by the Director, officer, employee or agent of
an improper personal benefit. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; We may purchase and maintain insurance on
behalf of any person who is or was a Director, officer, employee or agent of
ours, whether or not we would have the power to indemnify such corporate agent
against expenses and liabilities under the provisions of Section 14A:3-5 of the
New Jersey Business Corporation Act. </p>
</font>

<font FACE="Times New Roman PS"><b>
<p>Item 15. Recent Sales of Unregistered Securities</b></font><font FACE="Times New Roman PSMT" SIZE="2"><font FACE="Times New Roman PSMT">
</p>
</font>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; The following securities were issued by us
within the past three years and were not registered under the Securities Act of
1933, as amended (the &quot;Act&quot;). Each of the transactions is claimed to be exempt
from registration under the Act, pursuant to either Rule 506 of Regulation D of
the Act in connection with private placements or Section 4(2) of the act in
connection with respect to services perfomed. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; During the year ended June 30, 1999, we
issued 1,599,332 shares of common stock to employees and consultants for
services performed. We recognized a charge to operations of $8,760,866, based
upon the fair market value of the shares. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In April 1999, we issued 642,000 shares of
our common stock and warrants to purchase up to 642,000 shares of our common
stock at a combined price of $2.50 per share and warrant pursuant to Rule 506 of
Regulation D of the Act for an aggregate of $1,605,000 in cash. </p>
<p>&nbsp;&nbsp;&nbsp; In June and July 1999, we issued 4,426,698 shares of our
common stock at $2.50 per share pursuant to Rule 506 of Regulation D of the Act
for an aggregate of $11,066,745 in cash. </p>
<p>&nbsp;&nbsp;&nbsp; On July 26, 1999, 400,000 warrants previously issued
pursuant to Section 4(2) of the Act for services performed were converted into
352,239 shares of common stock in a cashless exercise. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In June 1999, we also issued 400,000
warrants pursuant to Section 4(2) of the Act for services performed, each to
purchase one share of common stock at an exercise price of $1.00 per share which
expire in June 2004. During the year ended June 30, 2000 these warrants to
purchase 400,000 shares of common stock were exercised generating proceeds of
$400,000. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In December 1999 and January 2000, we
sold, pursuant to Rule 506 of Regulation D of the Act, 1,000,000 shares of
common stock at a price of $4.00 per share, for an aggregate of $4,000,000. In
connection with the private placement, we issued 200,000 and 50,000 warrants to
purchase common stock for services rendered pursuant to Section 4(2) of the Act.
The warrants had an exercise price of $4.00 and $5.00, respectively. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; During February 2000, warrants were issued
pursuant to Section 4(2) of the Act for services performed to purchase 200,000
and 50,000 shares of common stock and were also exercised, at an exercise price
of $4.00 and $5.00, respectively, generating additional proceeds of $1,050,000.
</p>
<p>&nbsp;&nbsp;&nbsp; In May 2000, we issued 1,040,625 shares of our common
stock at $8.00 per share pursuant to Rule 506 of Regulation D of the Act for an
aggregate of $8,325,000 in cash. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In September 2000, we issued 510,000
shares of our common stock at $5.00 per share pursuant to Rule 506 of Regulation
D of the Act for an aggregate of $2,550,000 in cash and in connection therewith
38,250 shares of common stock for services rendered pursuant to Section 4(2) of
the Act. </p>
<p>&nbsp;&nbsp;&nbsp; During the year ended June 30, 2000, we issued 1,164,215
shares of common stock to employees and consultants pursuant to Section 4(2) of
the Act for services performed. </p>
<p>&nbsp;&nbsp;&nbsp; On November 30, 2000, we granted 150,000 shares of common
stock for services rendered pursuant to Section 4(2) of the Act. </p>
<p>&nbsp;&nbsp;&nbsp; During the quarter ended December 31, 2000, we granted
30,000 warrants to a consultant for services performed pursuant to Section 4(2)
of the Act. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; During the six month period ended December
31, 2000, we issued 320,000 shares of our common stock following the exercise of
options and warrants resulting in gross proceeds of $327,500 and granted
1,035,000 options to employees and 1,572,000 options to consultants for services
performed pursuant to Section 4(2) of the Act. </p>
<p>&nbsp;&nbsp;&nbsp; In January 2001, we granted 102,000 shares of common stock
for services rendered pursuant to Section 4(2) of the Act. </p>
<p>&nbsp;&nbsp;&nbsp; In January 2001, we granted 250,000 shares of common stock
for services rendered pursuant to Section 4(2) of the Act. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; On January 26, 2001 and February 9, 2001
we raised approximately $4,685,000 in cash through the issuance of 2,342,500
shares of our common stock and a like amount of warrants to purchase one share
each of our common stock at an exercise price of $3.00 and a term of four years
pursuant to Rule 506 of Regulation D of the Act. The Company issued 162,600
warrants to purchase one share each of our common stock at an exercise price of
$3.00 and a term of four years to consultants in connection with these private
placements. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; On April 3, 2001 we issued warrants to
purchase 1,550,625 shares of common stock at an exercise price of $3.00 per
share expiring on April 3, 2005 to accredited investors, who, as consideration
for consent to certain additional issuances, in May 2000, were issued 1,040,625
shares of our common stock at $8.00 per share pursuant to Rule 506 of Regulation
D of the Act and in September 2000, were issued 510,000 shares of our common
stock at $5.00 per share pursuant to Rule 506 of Regulation D of the Act. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; On April 16, 2001, we issued warrants to
purchase 250,000, 250,000 and 500,000 shares of common stock at respective
exercise prices of $5.00, $2.50 and $1.25 per share in connection with
consulting services rendered pursuant to Section 4(2) of the Act. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; On May 7, 2001, we issued 300,000 shares
of common stock and warrants to purchase 150,000 shares of common stock at an
exercise price of $5.00 per share expiring on May 7, 2006 in connection with
consulting services rendered pursuant to Section 4(2) of the Act. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; On May 25, 2001, we issued 587,000 shares
of our common stock and a like amount of warrants at an exercise price of $3.00
per share and a term of five years pursuant to Rule 506 of Regulation D of the
Act for approximately $587,000 in cash. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; On July 18, 2001, we issued 575,000 shares
of our common stock and a like amount of warrants at an exercise price of $3.00
per share and a term of five years pursuant to Rule 506 of Regulation D of the
Act for approximately $575,000 in cash. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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 pursuant to Section 3(a)(9) of the Act. These issuances included
2,400,000 shares for the conversion of $1,200,000 of liabilities by Janifast;
1,278,000 shares for the conversion of $639,000 of liabilities by Microphase;
954,000 shares for the conversion of $477,000 of liabilities by Lintel
Corporation and its affiliates at that time including Mr. L. Barton, a Director
of the Company at that time; and 208,077 shares for the conversion of $104,038
of liabilities by the Company's Joint venture partner-Alpha-Star and Affiliates.
</p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In September 2001, certain of our officers
and directors purchased an aggregate of 2,000,000 shares of common stock for an
aggregate investment of $1,000,000. These issuances included 1,000,000 shares to
Mr. L. Barton, a director at that time, for an investment of $500,000; 400,000
shares to Mr. Ronald A. Durando, the Company's president and a director, for an
investment of $200,000; 400,000 shares to Mr. Gustave Dotoli , the Company's
vice-president and a director, for an investment of $200,000; and 200,000 shares
to Mr. Martin S. Smiley, the Company's vice-president, for an investment of
$100,000; and were exempt pursuant to Section 4(2) and/or Rule 506 of Regulation
D of the Act. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In December 2001 and January 2002, we
issued 6,797,643 shares of common stock and a like amount of warrants at an
exercise price of $.30 per share for a term of five (5) years pursuant to Rule
506 of Regulation D of the Act for approximately $2,000,000 in cash. This
issuance was exempt pursuant to Section 4(2) and/or Rule 506 of Regulation D of
the Act. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; 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 as follows: </p>
<blockquote>
  <ol type="a">
    <li>
    <p ALIGN="JUSTIFY">During December 2001, the Company converted $660,000 of
    liabilities due to Microphase and $360,000 of liabilities due to Janifast
    into 2,200,000 and 1,200,000, respectively, shares of the Company's 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 pursuant to debt
    conversion agreements pursuant to Section 3(a)(9) of the Act and 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, were issued to
    strategic vendors pursuant to Section 3(a)(9) of the Act. <br>
&nbsp;</li>
    <li>
    <p ALIGN="JUSTIFY">During the quarter ended March 31,2002 the Company
    converted $96,000 of liabilities due to Strategic Vendors into 320,000
    shares of the Company's 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 pursuant to debt conversion agreements pursuant to Section 3(a)(9)
    of the Act. <br>
&nbsp;</li>
    <li>
    <p ALIGN="JUSTIFY">Effective March 31, 2002, the Company converted $420,872
    of liabilities due to Piper Rudnick LLP, outside legal counsel to mPhase
    pursuant to Section 3(a)(9) of the Act 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.
    Additionally, 1,022,996 shares of common stock were issued to 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 strategic vendor, to
    settle $761,786 of liabilities pursuant to Section 3(a)(9) of the Act. The
    conversion of $1,182,658 of such liabilities which, together with gains from
    cash settlements of $27,960 resulted in an aggregate gain on extinguishments
    of $142,236. <br>
&nbsp;</li>
    <li>
    <p ALIGN="JUSTIFY">Effective for June 30 2002, the Company converted
    $360,000 of liabilities due to Microphase and $80,000 of liabilities due to
    Janifast into 2,250,000 and 500,000 shares of the Company's common stock,
    respectively, pursuant to debt conversion agreements pursuant to Section
    3(a)(9) of the Act. </li>
  </ol>
</blockquote>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; During the year ended June 30, 2003, we
issued 4,296,680 shares of Common Stock at $.30 per share plus 5 year warrants
to purchase 4,296,680 shares of Common Stock at $.30 per share in a Private
Placement pursuant to Rule 506 of Regulation D of the Act, generating net
proceeds to the company of approximately $1,164,000. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; From August 2001 to June 2002, we issued
an aggregate of 2,976,068 shares of common stock to consultants for an aggregate
of $1,202,997. We also issued an aggregate of 2,675,000 warrants to consultants
for an aggregate of $1,040,000. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; During the year ended June 30, 2003, the
Company issued 426,000 shares of its common stock valued at $112,245 and
1,690,000 warrants, valued at $203,150 based upon the fair market value of the
Company's common stock on the date of the grant using the Black-Scholes option
pricing model. The Company recorded these charges, totaling $318,395 to
operations for the year ended June 30, 2003. Each transaction was pursuant to
Section 4(2) of the Act. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; During the fiscal year ended June 30,
2003, the Company converted certain payables and accrued expenses with officers,
related parties and strategic vendors pursuant to Section 4(2) and to Section
3(a)(9) of the Act aggregating approximately $1.9 million into 5,923,333
restricted shares of the Company's common stock and 5 year warrants to purchase
an additional 3,706,800 restricted shares of the Company's common stock. Of
these 5,533,333 shares of common stock and 3,491,800 warrants were issued in
settlement of $1,748,756 of debt to related parties as follows: </p>
<blockquote>
  <ol type="a">
    <li>
    <p ALIGN="JUSTIFY">The conversion of $620,000 on and $360,000 on of
    liabilities due to Microphase corporation, and Janifast Ltd into 3,033,000
    shares and 1,500,000 shares of stock, respectively. The value attributable
    to the shares was based upon the market price of the Company's common stock
    on the measurement date, such date was determined pursuant to EITF00-1, as
    to when all the contingent terms of the conversion agreements were met, in
    which no gain or loss was recognized on the conversion of $980,000 of debt.
    <br>
&nbsp;</li>
    <li>
    <p ALIGN="JUSTIFY">Also included in such conversions during the year ended
    June, 30 2003, were transactions whereby the Company converted $525,967 of
    liabilities; $269,362 due to the Company's president, $211,605 due to the
    vice president and $45,000 due to the a sales manager who is also
    concurrently employed by Microphase, for unpaid management compensation and
    sales commissions due from mPhase into warrants to purchase up to a total of
    2,656,500 shares of the Company's common stock. The aggregate value of such
    warrants was estimated using the Black-Scholes options pricing model,
    pursuant to EITF 96-18, having an approximate value of $.21 per share, or
    $538,173. The Company recorded a settlement expense of approximately $12,206
    with respect to the Company's president and vice president. <br>
&nbsp;</li>
    <li>
    <p ALIGN="JUSTIFY">Strategic vendors converted $117,486 of payables into
    340,000 shares of the Company's common stock on the measurement date the
    value of which was based upon the price of the Company,'s common stock on
    the effective date of settlement with each party. This resulted in a gain of
    $37,383, which, when combined with all conversions and the gains from cash
    settlements of $36,049 for the fiscal year 2003, resulted in a net gain on
    extinguishments in the statements of operations of $61,226 for the year
    ended June 30, 2003. </li>
  </ol>
</blockquote>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In August of 2003, the Company issued
333,334 shares of its common stock together with a like amount of warrants in a
private placement pursuant to Rule 506 of Regulation D of the Act, generating
net proceeds of $100,000 which was collected during the three month period ended
on September 30, 2003. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; During the six months ending December 31,
2003, the Company granted 924,667 shares of its common stock and warrants to
purchase 249,667 shares of its common stock to consultants for services
performed value at $307,243 and charged to operations during the period. Each
transaction was pursuant to Section 4(2) of the Act. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; During the three months ended December 31,
2003, the Company issued 500,000 shares of its common stock pursuant to warrants
previously issued to purchase said shares pursuant to Rule 506 of Regulation D
of the Act for an aggregate of $150,000 in cash. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In December of 2003, the Company issued to
five accredited investors 2,300,000shares of its common stock together with a
like amount of 5 year warrants to purchase one share each of the Company's
common stock, with an exercise price of $.35 per share, in a private placement
pursuant to Rule 506 of Regulation D of the Act generating net proceeds of
$805,000, $175,000 of which was collected in January, 2004. An advisor of the
Company was issued 100,000 shares for assisting in this transaction. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In January of 2004, the Company issued to
twenty-three accredited investors 7,160,720 shares of its common stock together
with a like amount of 5 year warrants to purchase one share each of the
Company's common stock, with an exercise price of $.35 per share, in a private
placement pursuant to Rule 506 of Regulation D of the Act generating net
proceeds of $2,506,250, all of which was collected in January, 2004. </p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; In March and April of 2004, the Company
issued to six accredited investors 1,811,429 shares of its common stock together
with a like amount of 5 year warrants to purchase one share each of the
Company's common stock, with an exercise price of $.35 per share, in a private
placement pursuant to Rule 506 of Regulation D of the Act generating net
proceeds of $634,000, all of which was collected in March and April, 2004. Two
advisors of the company were issued 128,826 shares of its common stock together
with a like amount of 5 year warrants to purchase one share each of the
Company's common stock, with an exercise price of $.35 per share for assisting
in this transaction.</p>
</font>

<font FACE="Times New Roman PSMT">
<p ALIGN="JUSTIFY"><font FACE="Times New Roman PS"><b>Item 16. Exhibits and
Financial Statements</b></font></font><font FACE="Times New Roman PSMT" SIZE="2"><font FACE="Times New Roman PSMT">
</p>
</font>

<table CELLSPACING="0" BORDER="0" WIDTH="80%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="119">&nbsp;</td>
    <td WIDTH="101" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Exhibit</font></td>
    <td WIDTH="770">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="119">&nbsp;</td>
    <td WIDTH="101" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Number</font></td>
    <td WIDTH="770"><font FACE="Times New Roman PSMT" SIZE="2">Description</font></td>
  </tr>
  <tr>
    <td WIDTH="119" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">2.1*</font></td>
    <td WIDTH="101" align="center" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="770" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Exchange of Stock
    Agreement and Plan of Reorganization dated January 15, 1997</font></td>
  </tr>
  <tr>
    <td WIDTH="119" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="center" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="770" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(incorporated by
    reference to Exhibit 2(a) to our registration statement on Form</font></td>
  </tr>
  <tr>
    <td WIDTH="119" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="center" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="770" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">10SB-12G filed on
    October 16, 1998 (file no. 000-24969)).</font></td>
  </tr>
  <tr>
    <td WIDTH="119"><font FACE="Times New Roman PSMT" SIZE="2">2.2*</font></td>
    <td WIDTH="101" align="center">&nbsp;</td>
    <td WIDTH="770"><font FACE="Times New Roman PSMT" SIZE="2">Exchange of Stock
    Agreement and Plan of Reorganization dated June 25, 1998</font></td>
  </tr>
  <tr>
    <td WIDTH="119">&nbsp;</td>
    <td WIDTH="101" align="center">&nbsp;</td>
    <td WIDTH="770"><font FACE="Times New Roman PSMT" SIZE="2">(incorporated by
    reference to Exhibit 2(b) to our registration statement on Form</font></td>
  </tr>
  <tr>
    <td WIDTH="119">&nbsp;</td>
    <td WIDTH="101" align="center">&nbsp;</td>
    <td WIDTH="770"><font FACE="Times New Roman PSMT" SIZE="2">10SB-12G filed on
    May 6, 1999 (file no. 000-24969)).</font></td>
  </tr>
  <tr>
    <td WIDTH="119" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">3.1*</font></td>
    <td WIDTH="101" align="center" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="770" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Certificate of
    Incorporation of Tecma Laboratory, Inc. filed December 20, 1979</font></td>
  </tr>
  <tr>
    <td WIDTH="119" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="center" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="770" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(incorporated by
    reference to Exhibit 3(a) to our registration statement on Form</font></td>
  </tr>
  <tr>
    <td WIDTH="119" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="center" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="770" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">10SB-12G filed on
    October 16, 1998 (file no. 000-24969)).</font></td>
  </tr>
  <tr>
    <td WIDTH="119"><font FACE="Times New Roman PSMT" SIZE="2">3.2*</font></td>
    <td WIDTH="101" align="center">&nbsp;</td>
    <td WIDTH="770"><font FACE="Times New Roman PSMT" SIZE="2">Certificate of
    Correction to Certificate of Incorporation of Tecma Laboratory, Inc.</font></td>
  </tr>
  <tr>
    <td WIDTH="119">&nbsp;</td>
    <td WIDTH="101" align="center">&nbsp;</td>
    <td WIDTH="770"><font FACE="Times New Roman PSMT" SIZE="2">dated June 19,
    1987 (incorporated by reference to Exhibit 3(b) to our registration</font></td>
  </tr>
  <tr>
    <td WIDTH="119">&nbsp;</td>
    <td WIDTH="101" align="center">&nbsp;</td>
    <td WIDTH="770"><font FACE="Times New Roman PSMT" SIZE="2">statement on Form
    10SB-12G filed on October 16, 1998 (file no. 000-24969)).</font></td>
  </tr>
  <tr>
    <td WIDTH="119">&nbsp;</td>
    <td WIDTH="101" align="center">&nbsp;</td>
    <td WIDTH="770">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="119">&nbsp;</td>
    <td WIDTH="101" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Exhibit</font></td>
    <td WIDTH="770">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="119">&nbsp;</td>
    <td WIDTH="101" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Number</font></td>
    <td WIDTH="770"><font FACE="Times New Roman PSMT" SIZE="2">Description</font></td>
  </tr>
  <tr>
    <td WIDTH="119" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">3.3*</font></td>
    <td WIDTH="101" align="center" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="770" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Certificate of
    Amendment of Certificate of Incorporation of Tecma Laboratory, Inc.</font></td>
  </tr>
  <tr>
    <td WIDTH="119" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="center" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="770" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">filed August 28,
    1987 (incorporated by reference to Exhibit 3(c) to our registration</font></td>
  </tr>
  <tr>
    <td WIDTH="119" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="center" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="770" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">statement on Form
    10SB-12G filed on October 16, 1998 (file no. 000-24969)).</font></td>
  </tr>
  <tr>
    <td WIDTH="119"><font FACE="Times New Roman PSMT" SIZE="2">3.4*</font></td>
    <td WIDTH="101" align="center">&nbsp;</td>
    <td WIDTH="770"><font FACE="Times New Roman PSMT" SIZE="2">Certificate of
    Amendment of Certificate of Incorporation of Tecma Laboratories, Inc.</font></td>
  </tr>
  <tr>
    <td WIDTH="119">&nbsp;</td>
    <td WIDTH="101" align="center">&nbsp;</td>
    <td WIDTH="770"><font FACE="Times New Roman PSMT" SIZE="2">filed April 7,
    1997 (incorporated by reference to Exhibit 3(d) to our registration</font></td>
  </tr>
  <tr>
    <td WIDTH="119">&nbsp;</td>
    <td WIDTH="101" align="center">&nbsp;</td>
    <td WIDTH="770"><font FACE="Times New Roman PSMT" SIZE="2">statement on Form
    10SB-12G filed on October 16, 1998 (file no. 000-24969)).</font></td>
  </tr>
  <tr>
    <td WIDTH="119" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">3.5*</font></td>
    <td WIDTH="101" align="center" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="770" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Certificate of
    Amendment of Certificate of Incorporation of Lightpaths TP</font></td>
  </tr>
  <tr>
    <td WIDTH="119" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="center" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="770" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Technologies,
    Inc. filed June 2, 1997 (incorporated by reference to Exhibit 3(e) to</font></td>
  </tr>
  <tr>
    <td WIDTH="119" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="center" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="770" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">our registration
    statement on Form 10SB-12G filed on October 16, 1998 (file no.</font></td>
  </tr>
  <tr>
    <td WIDTH="119" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="center" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="770" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">000-24969)).</font></td>
  </tr>
  <tr>
    <td WIDTH="119"><font FACE="Times New Roman PSMT" SIZE="2">3.6*</font></td>
    <td WIDTH="101" align="center">&nbsp;</td>
    <td WIDTH="770"><font FACE="Times New Roman PSMT" SIZE="2">Certificate of
    Amendment of Certificate of Incorporation of mPhase Technologies,</font></td>
  </tr>
  <tr>
    <td WIDTH="119">&nbsp;</td>
    <td WIDTH="101" align="center">&nbsp;</td>
    <td WIDTH="770"><font FACE="Times New Roman PSMT" SIZE="2">Inc. filed
    September 15, 2000 (incorporated by reference to Exhibit 3i to our</font></td>
  </tr>
  <tr>
    <td WIDTH="119">&nbsp;</td>
    <td WIDTH="101" align="center">&nbsp;</td>
    <td WIDTH="770"><font FACE="Times New Roman PSMT" SIZE="2">quarterly report
    on Form 10Q filed on November 13, 2000 (file no. 000-24969)).</font></td>
  </tr>
  <tr>
    <td WIDTH="119" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">3.7*</font></td>
    <td WIDTH="101" align="center" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="770" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Bylaws of the
    Company (incorporated by reference to Exhibit 3(g) to our registration</font></td>
  </tr>
  <tr>
    <td WIDTH="119" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="center" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="770" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">statement on Form
    10SB-12G filed on October 16, 1998 (file no. 000-24969)).</font></td>
  </tr>
  <tr>
    <td WIDTH="119"><font FACE="Times New Roman PSMT" SIZE="2">4.1*</font></td>
    <td WIDTH="101" align="center">&nbsp;</td>
    <td WIDTH="770"><font FACE="Times New Roman PSMT" SIZE="2">Form of
    Registration Rights Agreement, dated January 26, 2001, by and among the</font></td>
  </tr>
  <tr>
    <td WIDTH="119">&nbsp;</td>
    <td WIDTH="101" align="center">&nbsp;</td>
    <td WIDTH="770"><font FACE="Times New Roman PSMT" SIZE="2">Company and the
    purchasers listed on Schedule A attached thereto (incorporated by</font></td>
  </tr>
  <tr>
    <td WIDTH="119">&nbsp;</td>
    <td WIDTH="101" align="center">&nbsp;</td>
    <td WIDTH="770"><font FACE="Times New Roman PSMT" SIZE="2">reference to
    Exhibit 4.1 to our registration statement on Form S-1 filed on June 18,</font></td>
  </tr>
  <tr>
    <td WIDTH="119">&nbsp;</td>
    <td WIDTH="101" align="center">&nbsp;</td>
    <td WIDTH="770"><font FACE="Times New Roman PSMT" SIZE="2">2001 (file no.
    33-63262)).</font></td>
  </tr>
  <tr>
    <td WIDTH="119" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">4.2*</font></td>
    <td WIDTH="101" align="center" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="770" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Form of
    Registration Rights Agreement, dated February 9, 2001, by and among the</font></td>
  </tr>
  <tr>
    <td WIDTH="119" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="center" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="770" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Company and the
    purchasers listed on Schedule A attached thereto (incorporated by</font></td>
  </tr>
  <tr>
    <td WIDTH="119" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="center" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="770" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">reference to
    Exhibit 4.2 to our registration statement on Form S-1 filed on June 18,</font></td>
  </tr>
  <tr>
    <td WIDTH="119" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="101" align="center" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="770" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">2001 (file no.
    33-63262)).</font></td>
  </tr>
  <tr>
    <td WIDTH="119"><font FACE="Times New Roman PSMT" SIZE="2">4.3**</font></td>
    <td WIDTH="101" align="center">&nbsp;</td>
    <td WIDTH="770"><font FACE="Times New Roman PSMT" SIZE="2">Form of Warrant.</font></td>
  </tr>
  <tr>
    <td WIDTH="119" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">4.4**</font></td>
    <td WIDTH="101" align="center" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="770" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Warrant issued to
    Piper Rudnick LLP.</font></td>
  </tr>
</table>
<table CELLSPACING="0" BORDER="0" WIDTH="80%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="105"><font FACE="Times New Roman PSMT" SIZE="2">4.5**</font></td>
    <td WIDTH="87">&nbsp;</td>
    <td WIDTH="677"><font FACE="Times New Roman PSMT" SIZE="2">Warrant issued to
    Piper Rudnick LLP.</font></td>
  </tr>
  <tr>
    <td WIDTH="105" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">4.6**</font></td>
    <td WIDTH="87" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="677" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Form of
    Subscription Agreement, dated December 15, 2001.</font></td>
  </tr>
  <tr>
    <td WIDTH="105"><font FACE="Times New Roman PSMT" SIZE="2">5.1</font></td>
    <td WIDTH="87">&nbsp;</td>
    <td WIDTH="677"><font FACE="Times New Roman PSMT" SIZE="2">Opinion of Martin
    S. Smiley, General Counsel to the Company.</font></td>
  </tr>
  <tr>
    <td WIDTH="105" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">10.1*</font></td>
    <td WIDTH="87" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="677" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">License
    Agreement, dated March 26, 1998, between the Company and Georgia Tech</font></td>
  </tr>
  <tr>
    <td WIDTH="105" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="87" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="677" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Research
    Corporation (incorporated by reference to Exhibit 10(e) to our registration</font></td>
  </tr>
  <tr>
    <td WIDTH="105" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="87" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="677" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">statement on Form
    10SB-12G filed on October 16, 1998 (file no. 000-24969)).</font></td>
  </tr>
  <tr>
    <td WIDTH="105"><font FACE="Times New Roman PSMT" SIZE="2">10.2*</font></td>
    <td WIDTH="87">&nbsp;</td>
    <td WIDTH="677"><font FACE="Times New Roman PSMT" SIZE="2">First Amendment
    to the License Agreement, dated January 8, 2001, between the</font></td>
  </tr>
  <tr>
    <td WIDTH="105">&nbsp;</td>
    <td WIDTH="87">&nbsp;</td>
    <td WIDTH="677"><font FACE="Times New Roman PSMT" SIZE="2">Company and
    Georgia Tech Research Corporation (incorporated by reference to</font></td>
  </tr>
  <tr>
    <td WIDTH="105">&nbsp;</td>
    <td WIDTH="87">&nbsp;</td>
    <td WIDTH="677"><font FACE="Times New Roman PSMT" SIZE="2">Exhibit 10.2 to
    our registration statement on Form S-1 filed on June 18, 2001 (file</font></td>
  </tr>
  <tr>
    <td WIDTH="105">&nbsp;</td>
    <td WIDTH="87">&nbsp;</td>
    <td WIDTH="677"><font FACE="Times New Roman PSMT" SIZE="2">no. 33-63262)).</font></td>
  </tr>
  <tr>
    <td WIDTH="105" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">10.3*</font></td>
    <td WIDTH="87" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="677" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Employment
    Agreement between Ronald A. Durando and the Company</font></td>
  </tr>
  <tr>
    <td WIDTH="105" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="87" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="677" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(incorporated by
    reference to Exhibit 10.8 to our registration statement on Form SB-2</font></td>
  </tr>
  <tr>
    <td WIDTH="105" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="87" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="677" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">filed on August
    13, 1999 (file no. 333-85147)).</font></td>
  </tr>
  <tr>
    <td WIDTH="105"><font FACE="Times New Roman PSMT" SIZE="2">10.4*</font></td>
    <td WIDTH="87">&nbsp;</td>
    <td WIDTH="677"><font FACE="Times New Roman PSMT" SIZE="2">Employment
    Agreement between Gustave T. Dotoli and the Company (incorporated</font></td>
  </tr>
  <tr>
    <td WIDTH="105">&nbsp;</td>
    <td WIDTH="87">&nbsp;</td>
    <td WIDTH="677"><font FACE="Times New Roman PSMT" SIZE="2">by reference to
    Exhibit 10.9 to our registration statement on Form SB-2 filed on</font></td>
  </tr>
  <tr>
    <td WIDTH="105">&nbsp;</td>
    <td WIDTH="87">&nbsp;</td>
    <td WIDTH="677"><font FACE="Times New Roman PSMT" SIZE="2">August 13, 1999
    (file no. 333-85147)).</font></td>
  </tr>
  <tr>
    <td WIDTH="105" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">10.5*</font></td>
    <td WIDTH="87" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="677" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Employment
    Agreement between Martin S. Smiley and the Company, dated as of</font></td>
  </tr>
  <tr>
    <td WIDTH="105" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="87" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="677" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">August 15, 2000
    (incorporated by reference to Exhibit 10.5 to our registration</font></td>
  </tr>
  <tr>
    <td WIDTH="105" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="87" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="677" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">statement on Form
    S-1 filed on June 18, 2001 (file no. 33-63262)).</font></td>
  </tr>
  <tr>
    <td WIDTH="105"><font FACE="Times New Roman PSMT" SIZE="2">10.6*</font></td>
    <td WIDTH="87">&nbsp;</td>
    <td WIDTH="677"><font FACE="Times New Roman PSMT" SIZE="2">Employment
    Agreement between David C. Klimek and the Company, dated as of</font></td>
  </tr>
  <tr>
    <td WIDTH="105">&nbsp;</td>
    <td WIDTH="87">&nbsp;</td>
    <td WIDTH="677"><font FACE="Times New Roman PSMT" SIZE="2">April 1, 2001
    (incorporated by reference to Exhibit 10.6 to our registration statement</font></td>
  </tr>
  <tr>
    <td WIDTH="105">&nbsp;</td>
    <td WIDTH="87">&nbsp;</td>
    <td WIDTH="677"><font FACE="Times New Roman PSMT" SIZE="2">on Form S-1 filed
    on June 18, 2001 (file no. 33-63262)).</font></td>
  </tr>
  <tr>
    <td WIDTH="105" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">10.7*</font></td>
    <td WIDTH="87" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="677" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Manufacturing
    Services Agreement, dated March 14, 2001, by and between the</font></td>
  </tr>
  <tr>
    <td WIDTH="105" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="87" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="677" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Company and
    Flextronics International USA, Inc (incorporated by reference to</font></td>
  </tr>
  <tr>
    <td WIDTH="105" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="87" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="677" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Exhibit 10.7 to
    our registration statement on Form S-1 filed on June 18, 2001 (file</font></td>
  </tr>
  <tr>
    <td WIDTH="105" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="87" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="677" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">no. 33-63262)).</font></td>
  </tr>
  <tr>
    <td WIDTH="105"><font FACE="Times New Roman PSMT" SIZE="2">10.8*</font></td>
    <td WIDTH="87">&nbsp;</td>
    <td WIDTH="677"><font FACE="Times New Roman PSMT" SIZE="2">Supply Agreement
    by and between the Company and Hart Telephone Company, Inc.,</font></td>
  </tr>
  <tr>
    <td WIDTH="105">&nbsp;</td>
    <td WIDTH="87">&nbsp;</td>
    <td WIDTH="677"><font FACE="Times New Roman PSMT" SIZE="2">date of August
    19, 1998 (incorporated by reference to Exhibit 10.8 to our registration</font></td>
  </tr>
  <tr>
    <td WIDTH="105">&nbsp;</td>
    <td WIDTH="87">&nbsp;</td>
    <td WIDTH="677"><font FACE="Times New Roman PSMT" SIZE="2">statement on Form
    S-1 filed on June 18, 2001 (file no. 33-63262)).</font></td>
  </tr>
  <tr>
    <td WIDTH="105">&nbsp;</td>
    <td WIDTH="87">&nbsp;</td>
    <td WIDTH="677">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="105">&nbsp;</td>
    <td WIDTH="87" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Exhibit</font></td>
    <td WIDTH="677">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="105">&nbsp;</td>
    <td WIDTH="87" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Number</font></td>
    <td WIDTH="677"><font FACE="Times New Roman PSMT" SIZE="2">Description</font></td>
  </tr>
  <tr>
    <td WIDTH="105" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">10.9*</font></td>
    <td WIDTH="87" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="677" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    Facilities/Services Agreement between the Company and Microphase
    Corporation,</font></td>
  </tr>
  <tr>
    <td WIDTH="105" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="87" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="677" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">dated as of July
    1, 1998. (incorporated by reference to Exhibit 10.9 to our</font></td>
  </tr>
  <tr>
    <td WIDTH="105" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="87" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="677" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">registration
    statement on Form S-1 filed on June 18, 2001 (file no. 33-63262)).</font></td>
  </tr>
  <tr>
    <td WIDTH="105"><font FACE="Times New Roman PSMT" SIZE="2">10.10*</font></td>
    <td WIDTH="87">&nbsp;</td>
    <td WIDTH="677"><font FACE="Times New Roman PSMT" SIZE="2">Company's 2001
    Stock Incentive (incorporated by reference to Exhibit C to our</font></td>
  </tr>
  <tr>
    <td WIDTH="105">&nbsp;</td>
    <td WIDTH="87">&nbsp;</td>
    <td WIDTH="677"><font FACE="Times New Roman PSMT" SIZE="2">preliminary proxy
    statement on Form Pre 14A filed on March 21, 2001 (file no.000-</font></td>
  </tr>
  <tr>
    <td WIDTH="105">&nbsp;</td>
    <td WIDTH="87">&nbsp;</td>
    <td WIDTH="677"><font FACE="Times New Roman PSMT" SIZE="2">30202)).</font></td>
  </tr>
  <tr>
    <td WIDTH="105" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">10.11*</font></td>
    <td WIDTH="87" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="677" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">License
    Agreement, dated July 31, 1996, by and between AT&amp;T Paradyne</font></td>
  </tr>
  <tr>
    <td WIDTH="105" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="87" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="677" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Corporation and
    Microphase Corporation. (incorporated by reference to Exhibit 10.11</font></td>
  </tr>
  <tr>
    <td WIDTH="105" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="87" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="677" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">to our
    registration statement on Form S-1 filed on June 18, 2001 (file no.
    33-63262)).</font></td>
  </tr>
  <tr>
    <td WIDTH="192" COLSPAN="2"><font FACE="Times New Roman PSMT" SIZE="2">
    10.12(a)*</font></td>
    <td WIDTH="677"><font FACE="Times New Roman PSMT" SIZE="2">Assignment
    Agreement, dated February 17, 1997, by and between the Company and</font></td>
  </tr>
  <tr>
    <td WIDTH="105">&nbsp;</td>
    <td WIDTH="87">&nbsp;</td>
    <td WIDTH="677"><font FACE="Times New Roman PSMT" SIZE="2">Microphase
    Corporation. (incorporated by reference to Exhibit 10.12 to our</font></td>
  </tr>
  <tr>
    <td WIDTH="105">&nbsp;</td>
    <td WIDTH="87">&nbsp;</td>
    <td WIDTH="677"><font FACE="Times New Roman PSMT" SIZE="2">registration
    statement on Form S-1 filed on June 18, 2001 (file no. 33- 63262)).</font></td>
  </tr>
  <tr>
    <td WIDTH="192" COLSPAN="2" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">
    10.12(b)*</font></td>
    <td WIDTH="677" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Distribution
    Agreement effective May 15, 2002 by and between Corning Cable</font></td>
  </tr>
  <tr>
    <td WIDTH="105" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="87" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="677" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">System and the
    Company.</font></td>
  </tr>
  <tr>
    <td WIDTH="105"><font FACE="Times New Roman PSMT" SIZE="2">10.13*</font></td>
    <td WIDTH="87">&nbsp;</td>
    <td WIDTH="677"><font FACE="Times New Roman PSMT" SIZE="2">Development
    Agreement between Lucent Technologies, Inc. and mPhase</font></td>
  </tr>
  <tr>
    <td WIDTH="105">&nbsp;</td>
    <td WIDTH="87">&nbsp;</td>
    <td WIDTH="677"><font FACE="Times New Roman PSMT" SIZE="2">Technologies,
    Inc., effective as of December 1, 2002, relating to Video Services</font></td>
  </tr>
  <tr>
    <td WIDTH="105">&nbsp;</td>
    <td WIDTH="87">&nbsp;</td>
    <td WIDTH="677"><font FACE="Times New Roman PSMT" SIZE="2">Switch and
    Statement of Work, dated December 9, 2002.***</font></td>
  </tr>
  <tr>
    <td WIDTH="105" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">10.14*</font></td>
    <td WIDTH="87" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="677" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Purchase Order
    between the Company and Lucent Technologies, Inc., dated</font></td>
  </tr>
  <tr>
    <td WIDTH="105" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="87" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="677" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">December 15,
    2002, for cost reduction of the mPhase Traverser INI&#153 set box.***</font></td>
  </tr>
  <tr>
    <td WIDTH="105"><font FACE="Times New Roman PSMT" SIZE="2">10.15*</font></td>
    <td WIDTH="87">&nbsp;</td>
    <td WIDTH="677"><font FACE="Times New Roman PSMT" SIZE="2">Co-Branding
    Agreement, dated as of January 21, 2003, between the Company and</font></td>
  </tr>
  <tr>
    <td WIDTH="105">&nbsp;</td>
    <td WIDTH="87">&nbsp;</td>
    <td WIDTH="677"><font FACE="Times New Roman PSMT" SIZE="2">Lucent
    Technologies, Inc.</font></td>
  </tr>
  <tr>
    <td WIDTH="105" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">10.16*</font></td>
    <td WIDTH="87" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="677" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Systems
    Integrator Agreement, dated as of April 4, 2003, between the Company and</font></td>
  </tr>
  <tr>
    <td WIDTH="105" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="87" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="677" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Lucent
    Technologies, Inc.***</font></td>
  </tr>
  <tr>
    <td WIDTH="105"><font FACE="Times New Roman PSMT" SIZE="2">10.17*</font></td>
    <td WIDTH="87">&nbsp;</td>
    <td WIDTH="677"><font FACE="Times New Roman PSMT" SIZE="2">Development
    Agreement between Lucent Technologies, Inc. and mPhase</font></td>
  </tr>
  <tr>
    <td WIDTH="105">&nbsp;</td>
    <td WIDTH="87">&nbsp;</td>
    <td WIDTH="677"><font FACE="Times New Roman PSMT" SIZE="2">Technologies,
    Inc., relating to Broadcast Television Switch (BTS) effective as of</font></td>
  </tr>
  <tr>
    <td WIDTH="105">&nbsp;</td>
    <td WIDTH="87">&nbsp;</td>
    <td WIDTH="677"><font FACE="Times New Roman PSMT" SIZE="2">September 15,
    2003.***</font></td>
  </tr>
  <tr>
    <td WIDTH="105" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">10.18*</font></td>
    <td WIDTH="87" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="677" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Development
    Agreement effective February 3, 2004 between Lucent Technologies,</font></td>
  </tr>
  <tr>
    <td WIDTH="105" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="87" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="677" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Inc. and mPhase
    Technologies, Inc. for development of micro fuel cell</font></td>
  </tr>
  <tr>
    <td WIDTH="105" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="87" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="677" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">NanoTechnology.***</font></td>
  </tr>
  <tr>
    <td WIDTH="105"><font FACE="Times New Roman PSMT" SIZE="2">21*</font></td>
    <td WIDTH="87">&nbsp;</td>
    <td WIDTH="677"><font FACE="Times New Roman PSMT" SIZE="2">List of
    Subsidiaries (incorporated by reference to Exhibit 21 to our registration</font></td>
  </tr>
  <tr>
    <td WIDTH="105">&nbsp;</td>
    <td WIDTH="87">&nbsp;</td>
    <td WIDTH="677"><font FACE="Times New Roman PSMT" SIZE="2">statement on Form
    S-1 filed on June 18, 2001 (file no. 33-63262)).</font></td>
  </tr>
  <tr>
    <td WIDTH="105" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">23.1*</font></td>
    <td WIDTH="87" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="677" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Consents of
    Schuhalter, Coughlin &amp; Suozzo, LLC dated August 31, 1998 and</font></td>
  </tr>
  <tr>
    <td WIDTH="105" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="87" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="677" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Mauriello,
    Franklin &amp; LoBrace, P.C. dated August 31, 1998 (incorporated by</font></td>
  </tr>
</table>
<table CELLSPACING="0" BORDER="0" WIDTH="80%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="22%" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="78%" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">reference to
    Exhibit 23 to our registration statement on Form 10SB-12G filed on</font></td>
  </tr>
  <tr>
    <td WIDTH="22%" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="78%" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">October 16, 1998
    (file no. 000-24969)).</font></td>
  </tr>
  <tr>
    <td WIDTH="22%"><font FACE="Times New Roman PSMT" SIZE="2">23.2*</font></td>
    <td WIDTH="78%"><font FACE="Times New Roman PSMT" SIZE="2">Consents of
    Schuhalter, Coughlin &amp; Suozzo, LLC dated April 23, 1999 and</font></td>
  </tr>
  <tr>
    <td WIDTH="22%">&nbsp;</td>
    <td WIDTH="78%"><font FACE="Times New Roman PSMT" SIZE="2">Mauriello,
    Franklin &amp; LoBrace, P.C. dated April 23, 1999 (incorporated by reference</font></td>
  </tr>
  <tr>
    <td WIDTH="22%">&nbsp;</td>
    <td WIDTH="78%"><font FACE="Times New Roman PSMT" SIZE="2">to Exhibit 23 to
    our registration statement on Form 10SB-12G filed on May 6, 1999</font></td>
  </tr>
  <tr>
    <td WIDTH="22%">&nbsp;</td>
    <td WIDTH="78%"><font FACE="Times New Roman PSMT" SIZE="2">(file no.
    000-24969)).</font></td>
  </tr>
  <tr>
    <td WIDTH="22%" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">23.3*</font></td>
    <td WIDTH="78%" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Consent of
    Schuhalter, Coughlin &amp; Suozzo, LLC dated August 13, 1999</font></td>
  </tr>
  <tr>
    <td WIDTH="22%" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="78%" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">(incorporated by
    reference to Exhibit 23.1 to our registration statement on Form SB-2</font></td>
  </tr>
  <tr>
    <td WIDTH="22%" bgcolor="#E6E6E6">&nbsp;</td>
    <td WIDTH="78%" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">filed on August
    13, 1999 (file no. 333-85147)).</font></td>
  </tr>
  <tr>
    <td WIDTH="22%"><font FACE="Times New Roman PSMT" SIZE="2">23.4</font></td>
    <td WIDTH="78%"><font FACE="Times New Roman PSMT" SIZE="2">Consent of
    Schuhalter, Coughlin &amp; Suozzo, LLC.</font></td>
  </tr>
  <tr>
    <td WIDTH="22%" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">23.5</font></td>
    <td WIDTH="78%" bgcolor="#E6E6E6"><font FACE="Times New Roman PSMT" SIZE="2">Consent of
    Rosenberg Rich Baker Berman and Company.</font></td>
  </tr>
  <tr>
    <td WIDTH="22%" bgcolor="#FFFFFF"><font FACE="Times New Roman PSMT" SIZE="2">24.1**</font></td>
    <td WIDTH="78%" bgcolor="#FFFFFF"><font FACE="Times New Roman PSMT" SIZE="2">Power of Attorney
    (included as a part of the signature page of the initial filing of this</font></td>
  </tr>
  <tr>
    <td WIDTH="22%" bgcolor="#FFFFFF">&nbsp;</td>
    <td WIDTH="78%" bgcolor="#FFFFFF"><font FACE="Times New Roman PSMT" SIZE="2">Registration
    Statement).</font></td>
  </tr>
</table>
<p>--- <br>
* Incorporated by reference. <br>
** Previously filed. <br>
*** Portions of such documents have been omitted pursuant to Rule 406 of the
Securities Act of 1933, or Rule 424(b) of the Securities Exchange Act of 1934.
Omitted portions of documents have been separately filed with the Securities and
Exchange Commission. </p>
</font>

<font FACE="Times New Roman PS"><b>
<p>Item 17. Undertakings.</b></font><font FACE="Times New Roman PSMT" SIZE="2"><font FACE="Times New Roman PSMT"><b>
</b></p>
</font>
<ol type="a">
  <li>The undersigned registrant hereby undertakes: <br>
&nbsp;<ol>
    <li>To file, during any period in which offers or sales are being made, a
    post-effective amendment to this registration statement: <br>
&nbsp;<ol type="i">
      <li>To include any prospectus required by Section 10(a)(3) of the
      Securities Act of 1933; <br>
&nbsp;</li>
      <li>
      <p ALIGN="JUSTIFY">To reflect in the prospectus any facts or events
      arising after the effective date of this registration statement (or the
      most recent post-effective amendment thereof) which, individually or in
      the aggregate, represent a fundamental change in the information set forth
      in this Registration Statement. Notwithstanding the foregoing, any
      increase or decrease in volume of securities offered (if the total dollar
      value of securities offered would not exceed that which was registered)
      and any deviation from the low or high end of the estimated maximum
      offering range may be reflected in the form of prospectus filed with the
      Commission pursuant to Rule 424(b) promulgated under the Securities Act of
      1933 if, in the aggregate, the changes in volume and price represent no
      more than a 20% change in the maximum aggregate offering price set forth
      in the Calculation of Registration Fee&quot; table in this Registration
      Statement; <br>
&nbsp;</li>
      <li>
      <p ALIGN="JUSTIFY">To include any material information with respect to the
      plan of distribution not previously disclosed in this registration
      statement or any material change to such information in this Registration
      Statement. </li>
    </ol>
    </li>
  </ol>
  </li>
</ol>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Provided, however, that paragraphs
(a)(1)(i) and (a)(1)(ii) shall not apply if the information required to be
included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to section 13 or section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference in
this registration statement. </p>
<blockquote>
  <ol start="2">
    <li>
    <p ALIGN="JUSTIFY">That, for the purpose of determining any liability under
    the Securities Act of 1933, each such post-effective amendment shall be
    deemed to be a new registration statement relating to the securities offered
    therein, and the offering of such securities at that time shall be deemed to
    be the initial bona fide offering thereof. </li>
  </ol>
  <ol start="3">
    <li>
    <p ALIGN="JUSTIFY">To remove from registration by means of a post-effective
    amendment any of the securities being registered which remain unsold at the
    termination of the offering. </li>
  </ol>
  <ol start="4">
    <li>
    <p ALIGN="JUSTIFY">Insofar as indemnification for liabilities arising under
    the Securities Act may be permitted to directors, officers, and controlling
    persons of the registrant pursuant to the foregoing provisions, or
    otherwise, the registrant has been advised that in the opinion of the
    Securities and Exchange Commission such indemnification is against public
    policy as expressed in the Securities Act and is, therefore, unenforceable.
    In the event that a claim for indemnification against such liabilities
    (other than the payment by the Registrant of expenses incurred or paid by a
    director, officer, or controlling person of the registrant in the successful
    defense of any action, suit or proceeding) is asserted by such director,
    officer or controlling person in connection with the securities being
    registered, the registrant will, unless in the opinion of counsel the matter
    has been settled by controlling precedent, submit to a court of appropriate
    jurisdiction the question of whether such indemnification by it is against
    public policy as expressed in the Securities Act and will be governed by the
    final adjudication of each issue. </li>
  </ol>
</blockquote>
<font FACE="Times New Roman PS" SIZE="2"><b>
<hr><p Style='page-break-before:always'>
<p align="center">SIGNATURES</b></font><font FACE="Times New Roman PSMT" SIZE="2">
</p>
<p ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp; Pursuant to the requirements of the
Securities Act of 1933, as amended, the registrant has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Norwalk, State of Connecticut, on the 26nd day
of April, 2004. </p>
</font>
<div align="right">
  <table CELLSPACING="0" BORDER="0" WIDTH="40%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
    <tr>
      <td COLSPAN="2" width="347"><font FACE="Times New Roman PSMT" SIZE="2">
      mPHASE TECHNOLOGIES, INC.</font></td>
    </tr>
    <tr>
      <td WIDTH="72"><font FACE="Times New Roman PSMT" SIZE="2">B</font></td>
      <td WIDTH="273"><font FACE="Times New Roman PSMT" SIZE="2">/s/ Ronald A.
      Durando</font></td>
    </tr>
    <tr>
      <td WIDTH="72"><font FACE="Times New Roman PSMT" SIZE="2">y:</font></td>
      <td WIDTH="273"><font FACE="Times New Roman PSMT" SIZE="2">Ronald A.
      Durando</font></td>
    </tr>
    <tr>
      <td WIDTH="72">&nbsp;</td>
      <td WIDTH="273"><font FACE="Times New Roman PSMT" SIZE="2">President and
      Chief Executive Officer</font></td>
    </tr>
  </table>
</div>
<p>&nbsp;&nbsp;&nbsp; Pursuant to the requirements of the Securities Act of
1933, this Registration Statement has been signed by the following persons in
the capacities and on the dates indicated. </p>
<table CELLSPACING="0" BORDER="0" WIDTH="70%" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111">
  <tr>
    <td WIDTH="255" COLSPAN="2" align="center">
    <font FACE="Times New Roman PSMT" SIZE="2">
    <p align="left">Signature</font></td>
    <td WIDTH="318" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Title</font></td>
    <td WIDTH="295" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Date</font></td>
  </tr>
  <tr>
    <td WIDTH="70">&nbsp;</td>
    <td WIDTH="185" align="center"><font FACE="Times New Roman PSMT" SIZE="2">*</font></td>
    <td WIDTH="318" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Chairman of the Board of Directors</font></td>
    <td WIDTH="295" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    April 26, 2004</font></td>
  </tr>
  <tr>
    <td WIDTH="70">&nbsp;</td>
    <td WIDTH="185" align="center">&nbsp;</td>
    <td WIDTH="318" align="center">&nbsp;</td>
    <td WIDTH="295" align="center">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="70">&nbsp;</td>
    <td WIDTH="185" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Necdet F. Ergul</font></td>
    <td WIDTH="318" align="center">&nbsp;</td>
    <td WIDTH="295" align="center">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="70">&nbsp;</td>
    <td WIDTH="185" align="center"><font FACE="Times New Roman PSMT" SIZE="2">*</font></td>
    <td WIDTH="318" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    President, Chief Executive Officer</font></td>
    <td WIDTH="295" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    April 26, 2004</font></td>
  </tr>
  <tr>
    <td WIDTH="70">&nbsp;</td>
    <td WIDTH="185" align="center">&nbsp;</td>
    <td WIDTH="318" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    and Director (Principal Executive Officer)</font></td>
    <td WIDTH="295" align="center">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="70">&nbsp;</td>
    <td WIDTH="185" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Ronald A. Durando</font></td>
    <td WIDTH="318" align="center">&nbsp;</td>
    <td WIDTH="295" align="center">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="70">&nbsp;</td>
    <td WIDTH="185" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    /s/ Martin S. Smiley</font></td>
    <td WIDTH="318" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Executive Vice President of Finance,</font></td>
    <td WIDTH="295" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    April 26, 2004</font></td>
  </tr>
  <tr>
    <td WIDTH="70">&nbsp;</td>
    <td WIDTH="185" align="center">&nbsp;</td>
    <td WIDTH="318" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Chief Financial Officer, and General Counsel</font></td>
    <td WIDTH="295" align="center">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="70">&nbsp;</td>
    <td WIDTH="185" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Martin S. Smiley</font></td>
    <td WIDTH="318" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    (Principal Financial and Accounting Officer)</font></td>
    <td WIDTH="295" align="center">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="70">&nbsp;</td>
    <td WIDTH="185" align="center"><font FACE="Times New Roman PSMT" SIZE="2">*</font></td>
    <td WIDTH="318" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Director</font></td>
    <td WIDTH="295" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    April 26, 2004</font></td>
  </tr>
  <tr>
    <td WIDTH="70">&nbsp;</td>
    <td WIDTH="185" align="center">&nbsp;</td>
    <td WIDTH="318" align="center">&nbsp;</td>
    <td WIDTH="295" align="center">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="70">&nbsp;</td>
    <td WIDTH="185" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Michael P. McInerney</font></td>
    <td WIDTH="318" align="center">&nbsp;</td>
    <td WIDTH="295" align="center">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="70">&nbsp;</td>
    <td WIDTH="185" align="center"><font FACE="Times New Roman PSMT" SIZE="2">*</font></td>
    <td WIDTH="318" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Director</font></td>
    <td WIDTH="295" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    April 26, 2004</font></td>
  </tr>
  <tr>
    <td WIDTH="70">&nbsp;</td>
    <td WIDTH="185" align="center">&nbsp;</td>
    <td WIDTH="318" align="center">&nbsp;</td>
    <td WIDTH="295" align="center">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="70">&nbsp;</td>
    <td WIDTH="185" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Anthony H. Guerino</font></td>
    <td WIDTH="318" align="center">&nbsp;</td>
    <td WIDTH="295" align="center">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="70">&nbsp;</td>
    <td WIDTH="185" align="center"><font FACE="Times New Roman PSMT" SIZE="2">*</font></td>
    <td WIDTH="318" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Chief Operating Officer and Director</font></td>
    <td WIDTH="295" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    April 26, 2004</font></td>
  </tr>
  <tr>
    <td WIDTH="70">&nbsp;</td>
    <td WIDTH="185" align="center">&nbsp;</td>
    <td WIDTH="318" align="center">&nbsp;</td>
    <td WIDTH="295" align="center">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="70">&nbsp;</td>
    <td WIDTH="185" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Gustave T. Dotoli</font></td>
    <td WIDTH="318" align="center">&nbsp;</td>
    <td WIDTH="295" align="center">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="70">&nbsp;</td>
    <td WIDTH="185" align="center"><font FACE="Times New Roman PSMT" SIZE="2">*</font></td>
    <td WIDTH="318" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Chief Technology Officer and Director</font></td>
    <td WIDTH="295" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    April 26, 2004</font></td>
  </tr>
  <tr>
    <td WIDTH="70">&nbsp;</td>
    <td WIDTH="185" align="center">&nbsp;</td>
    <td WIDTH="318" align="center">&nbsp;</td>
    <td WIDTH="295" align="center">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="70">&nbsp;</td>
    <td WIDTH="185" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    David L. Klimek</font></td>
    <td WIDTH="318" align="center">&nbsp;</td>
    <td WIDTH="295" align="center">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="70">&nbsp;</td>
    <td WIDTH="185" align="center"><font FACE="Times New Roman PSMT" SIZE="2">*</font></td>
    <td WIDTH="318" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Director</font></td>
    <td WIDTH="295" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    April 26, 2004</font></td>
  </tr>
  <tr>
    <td WIDTH="70">&nbsp;</td>
    <td WIDTH="185" align="center">&nbsp;</td>
    <td WIDTH="318" align="center">&nbsp;</td>
    <td WIDTH="295" align="center">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="70">&nbsp;</td>
    <td WIDTH="185" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    Abraham Biderman</font></td>
    <td WIDTH="318" align="center">&nbsp;</td>
    <td WIDTH="295" align="center">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="70">&nbsp;</td>
    <td WIDTH="185" align="center">&nbsp;</td>
    <td WIDTH="318" align="center">&nbsp;</td>
    <td WIDTH="295" align="center">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="70"><font FACE="Times New Roman PSMT" SIZE="2">By:</font></td>
    <td WIDTH="185" align="center"><font FACE="Times New Roman PSMT" SIZE="2">
    /s/ Martin S. Smiley</font></td>
    <td WIDTH="318" align="center">&nbsp;</td>
    <td WIDTH="295" align="center">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="255" COLSPAN="2"><font FACE="Times New Roman PSMT" SIZE="2">
    Martin S. Smiley</font></td>
    <td WIDTH="318">&nbsp;</td>
    <td WIDTH="295">&nbsp;</td>
  </tr>
  <tr>
    <td WIDTH="255" COLSPAN="2"><font FACE="Times New Roman PSMT" SIZE="2">
    Attorney-in-fact</font></td>
    <td WIDTH="318">&nbsp;</td>
    <td WIDTH="295">&nbsp;</td>
  </tr>
</table>
</font>

<hr>

</body>

</html>
[{"type": "S-1", "sequence": "1", "filename": "mphases1.htm", "description": "MPHASE TECHNOLOGIES INC. - FORM S-1", "secsgml_size_bytes": 1241717}]
{"company-data": {"conformed-name": "MPHASE TECHNOLOGIES INC", "cik": "0000825322", "assigned-sic": "7385", "irs-number": "222287503", "state-of-incorporation": "NJ", "fiscal-year-end": "0630"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-114885", "film-number": "04755500"}, "business-address": {"street1": "587 CONNECTICUT AVE", "street2": "PO BOX 566", "city": "NORWALK", "state": "CT", "zip": "06854", "phone": "2038312212"}, "mail-address": {"street1": "587 CONNECTICUT AVE", "street2": "PO BOX 566", "city": "NORWALK", "state": "CT", "zip": "06854"}, "former-company": {"former-conformed-name": "TECMA LABORATORIES INC", "date-changed": "19980915"}}
mPhase Technologies Inc.: Form S-1 - Prepared by TNT Filings Inc.
As filed with the Securities and Exchange Commission on April
26, 2004
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
mPHASE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
New Jersey
7385
22-2287503
(State or other
      jurisdiction
(Primary Standard
      Industrial
(I.R.S. Employer
of incorporation or
      organization)
Classification Code
      Number)
Identification
      Number)
587 Connecticut Avenue
Norwalk, Connecticut 06854-1711
Telephone: (203) 838-2741
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Martin S. Smiley
Chief Financial Officer
mPHASE TECHNOLOGIES, INC.
587 Connecticut Avenue
Norwalk, Connecticut 06854-1711
Telephone: (203) 831-2242
Telecopy: (203) 853-3304
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.
If this form is filed to register additional securities for
an offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.
CALCULATION OF REGISTRATION FEE
Proposed
Proposed
maximum
maximum
offering
aggregate
Amount of
Title
    of each class of
Amount to be
price per
offering
Registration
securities to be
    registered
Registered
share(1)
price(1)
fee
Stock, no par value
29,027,026
$0.39
$11,320,540
$1,434.31
(1) Estimated solely for the purpose of calculating the
registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as
amended, on the basis of the average of the bid and ask prices per share of our
common stock, as reported on the OTC Bulletin Board, on April 23, 2004.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON
SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE.
April 26, 2004
PROSPECTUS
mPHASE TECHNOLOGIES, INC.
29,027,026
Shares of Common Stock
This prospectus relates to the resale of up to
29,027,026 shares of common stock, of which 10,825,975 shares are issued and
outstanding and up to 18,201,051 shares may be issued upon the exercise of warrants and/or options held by the selling
stockholders. The selling stockholders listed on pages 61-69 may sell the shares
from time to time.
Our common stock is listed on the Over-the-Counter Bulletin Board under the
symbol "XDSL.OB" The last reported sales price of our common stock on April 23,
2004 was $.39 per share.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK. PLEASE
REFER TO "RISK FACTORS" BEGINNING ON PAGE 8.
Our principal executive offices are located at 587 Connecticut Avenue,
Norwalk, Connecticut 06854-1711. Our phone number is (203) 838-2741.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER
REGULATORY BODY HAS APPROVED OR DISAPPROVED ANY OF THESE SECURITIES OR PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is April 26, 2004
TABLE OF CONTENTS
Page
Prospectus Summary
1
The
    Offering
4
Forward-Looking Statements
4
Summary
    Financial Data
6
Risk
    Factors
8
Use of
    Proceeds
11
Price
    Range of Common Stock
12
Selected Financial Data
13
Selected Quarterly Financial Data
14
Company
    Operations
17
Business
36
Legal
    Proceedings
52
Our
    Management
52
Stock
    Options
55
Security Ownership of Certain Beneficial Owners and Management
58
Certain
    Relationships and Related Transactions
60
Selling
    Stockholders
66
Plan of
    Distribution
72
Description of Securities
74
Legal
    Matters
75
Experts
76
Where
    You Can Find Additional Information
76
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS
DOCUMENT OR THOSE DOCUMENTS TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS
DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES.
THE DELIVERY OF THIS PROSPECTUS OR ANY ACCOMPANYING SALE DOES
NOT IMPLY THAT: (1) THERE HAVE BEEN NO CHANGES IN OUR AFFAIRS AFTER THE DATE OF
THIS PROSPECTUS; OR (2) THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT
AFTER THE DATE OF THIS PROSPECTUS.
PROSPECTUS SUMMARY
You should read this Prospectus Summary together with the
more detailed information contained in this prospectus, including the risk
factors and financial statements and the notes to the financial statements. This
prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those discussed in
the forward-looking statements. Factors that might cause such a difference
include those discussed in the Risk Factors section and elsewhere in this
prospectus.
From inception (October 2, 1996), through December 31, 2003
the Company had incurred (unaudited) development stage losses and has an
accumulated deficit of approximately $111 million and a stockholders' deficit of
approximately $4.7 million respectively. Cumulatively, through June 30, 2003 and
December 31, 2003, (unaudited) the Company had negative cash flows from
operations of approximately $43.6 million and $44.7 million respectively. The
auditors report for the fiscal year ended June 30, 2003 is qualified as to the
Company's ability to continue as a going concern. Management estimates the
Company needs to raise approximately $2,000,000 during the next 12 months to
sustain its current level of operations.
mPHASE TECHNOLOGIES, INC.
mPhase Technologies, Inc. (mPhase, the Company, we or us), a
New Jersey corporation, founded in 1996 is a publicly-held company with
approximately 11,000 shareholders and approximately 85 million shares of common
stock outstanding. mPhase is a developer of broadband communications products,
specifically, digital subscriber line (DSL) products for telecommunications
service providers around the world. Since our inception in 1996 we have been a
development-stage company.
The Company's common stock is traded on the NASDAQ Over the
Counter Bulletin Board under the ticker symbol XDSL. We are headquartered in
Norwalk, Connecticut with offices in Little Falls, New Jersey and Atlanta,
Georgia. mPhase shares common office space and common management with Microphase
Corporation, a privately-held company. Microphase sells radio frequency and
filtering technologies to the defense and telecommunications industry.
Microphase has been in operation for almost 50 years and supports mPhase with
engineering, administrative and financial resources, as needed.
Our primary activities have consisted of designing,
manufacturing and testing our flagship products designed to deliver broadcast
television over DSL. We have not, as yet, derived significant sales revenue from
such products. Our products facilitate telephone companies becoming full service
communications providers by enabling the simultaneous delivery of digital
broadcast television, high speed data and voice services over the existing
telephone line infrastructure. mPhase has developed its flagship line of
products primarily for telephone companies in parts of the world where access to
multi-channel television is limited.
Recently, the Company has entered into the field of
Nanotechnology research and development of micro power cell batteries of various
voltages. The initial goal is to develop batteries for military applications
capable of operating for significantly longer periods of time than are currently
available in the market. The Company believes that such development is
consistent with its strategy of being a pioneer in areas of high growth
technology and potentially diversifies its mix of products.
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 plain
old telephone service (POTS) 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) that allows for the delivery of any television channel to all
users at any given time without a dilution in quality. The DVDDS consists of an
Access Shelf located at a telephone service provider's central office (CO) and
an Intelligent Network Interface (INI)™ set top box located in a customer's
home. Because it is a proprietary end-to-end system, the DVDDS does not
interoperate with other manufacturers' DSL Central Office (CO) equipment or
customer premises equipment (CPE) modems. The DVDDS utilizes Asymetric DSL
(ADSL) that allows for significantly more downstream than upstream bandwidth for
transmission and is well suited for delivery of broadcast television. The system
is the only system on the market that utilizes non-Internet Protocol (IP)
transmission over ADSL. The Company continues to market this product, and
believes it to be best-suited for customers specifically interested in
supporting television services with a minimal need to support high-speed data
customers.
The DVDDS is installed at Hart Telephone Company in Hartwell,
Georgia, where a limited user system is currently operational. A DVDDS system is
also installed at the BMW manufacturing plant in Spartanburg, South Carolina for
use as a telebroadcast system in a commercial setting.
The mPhase TV+ platform, recently developed in conjunction with the Bell Labs
division of Lucent Technologies, Inc. (Lucent), is a new product also designed
to allow for the simultaneous delivery of voice, high speed data, and broadcast TV over copper telephone lines
between a telephone service provider's CO and the customer premises. The TV+
formerly named 'Simple TV', is a modular solution for the delivery of several
hundred broadcast television channels over ADSL that utilizes an
industry-leading, standards-based Lucent Stinger™ DSL Access Concentrator for
transport of digital television plus high speed internet and voice. The mPhase
TV+ platform consists of a cost-reduced Traverser INI™ set top box located in a
customer's premises plus the Lucent Stinger located at the telephone company's
CO. A newly developed mPhase Broadcast Television Switch ("BTS") interfaces with
the Stinger and a video headend built by a telephone service provider to
downlink broadcast television programming from satellites. The BTS formats the
video data prior to distribution to a customer by the Stinger and supports
administrative tasks associated with subscriber management. Using the Lucent
Stinger (digital subscriber line access mutiplexer commonly known as a DSLAM)
for transport in the TV+ platform results in a highly scalable architecture for
the delivery of video. This scalability is accomplished by internally
multicasting each television channel for delivery from the CO to a larger number
of end users than would be otherwise possible over ADSL. We believe that the TV+
platform is the most cost- effective, standards-based solution for delivery of
broadcast television using ADSL. The Stinger is one of a few DSLAM's currently
on the market with robust internal multicasting capabilities. For mPhase, the
alliance with Lucent marks a change in strategy from selling a complete
proprietary platform to providing an industry-standard modular solution.
Both the TV+ platform and the legacy DVDDS products are aimed
for use in markets primarily outside of the United States that do not have a
hybrid fiber coaxial cable ("HFC") infrastructure necessary for cable TV or
fiber to the curb necessary for very fast DSL (VDSL). We believe there is a
significant cost advantage when our mPhase TV+ solution is compared against
other platforms utilizing existing telephone lines containing the
same
features. The mPhase TV+ platform does not contain the features such as the
delivery of two or more TV channels to a single set top box over copper
telephone lines or video on demand and interactive TV features. As ADSL
technology migrates forward to ADSL2 or ADSL2+, mPhase will include additional
features to its TV+ platform in a modular scaleable cost- effective manner
depending upon
actual
market demand for such features in markets that
mPhase is targeting.
We believe the legacy DVDDS developed by GTRC, when combined
with a version of the cost-reduced Traverser INI™ set top box redesigned by
Lucent, continues to be a cost effective TV platform. The DVDDS can be sold in
international markets where primary demand is for multi-channel digital
broadcast television plus voice only and where there is little demand for high
speed internet. We believe the mPhase TV+ platform is the optimal solution for
both a telecommunications service provider where the ultimate customer requires
all three services, i.e. high-speed internet, voice and digital broadcast
television over ADSL.
For those television markets in the United States that are
not served by HFC, we believe the availability of programming content is
essential to facilitate potential sales of our TV platforms over ADSL. In March
of 2000, we established mPhase Television net., Inc. (mPhase TV), a joint
venture between mPhase and Alphastar International, Inc. mPhase TV can provide
contracts, licensing agreements, marketing and legal support to service
providers interested in deploying television over ADSL for U.S. markets. mPhase
TV has secured licenses to resell programming for approximately 80 channels of
U.S. broadcast television. mPhase TV enables telecommunications service
providers in the U.S. to provide customers a full complement of television
programming. This enables a U.S. telecommunications service provider to avoid
the necessity of securing such contracting rights individually with many
different providers of broadcast television content. It is important to note
that the role of mPhase TV has changed since its inception. Originally, mPhase
TV was to utilize a satellite uplink/downlink facility and serve as an
aggregator of television content. This would eliminate the need for a
telecommunications service provider, purchasing a TV delivery platform from
mPhase, from having to build a full scale television reception facility
(head-end) to downlink broadcast television channels from satellites orbiting
the earth. However, recent advances in technology have significantly reduced the
costs for a telephone company to build a full scale headend. Therefore, the role
of mPhaseTV is now limited to providing the appropriate licenses and
relationships as opposed to offering a content aggregation solution. As part of
its cost reduction efforts, mPhase terminated its lease of Alphastar's earth
station satellite uplink and downlink facility in Oxford, CT. mPhase owns
approximately 57% of mPhase TV.
NanoTechnology Products
Effective February 3, 2004, mPhase entered into a Research
and Development Agreement with the Bell Labs division of Lucent Technologies,
Inc. to develop micro power cell battery arrays employing nantextured
superhydrophobic materials for $1.2 million. Under the terms of the contract,
the Company will share in royalties from any licensing of the products developed
with Lucent. mPhase believes that the initial market for the product will be
military applications and that a prototype of the product will be completed by
the end of the second quarter in fiscal year 2005.
mPhase DSL Component Products
mPhase also has designed and markets a line of DSL component
products ranging from items such as Plain Old Telephone Service (POTS) splitters
to innovative loop management products. From our inception in 1996 to date
virtually all of mPhase's revenue has been derived from sales of our component
DSL products such as POTS splitters and low pass filters. Our newest innovation
in our suite of DSL component products is our
i
POTS or Intelligent POTS
splitter product. This product enables telephone service providers comprehensive
remote and automated test access to all elements of a DSL network. The
i
POTS
1
,
and
i
POTS3 allow a telephone service provider to bypass POTS splitters on
a DSL network and avoid having to manually intervene and disrupt line usage so a
test signal can pass through a DSL network. This product marks an advancement in
automating DSL loop management. As DSL deployments increase, it is becoming more
important for telecommunications service providers to streamline the process for
rolling-out and troubleshooting DSL services. Additionally, as competition for
high speed Internet expands, the market is witnessing a reduction in the price
for such service. Therefore, it has become imperative that telecommunications
service providers lower the operational costs involved with supporting DSL
services. Currently our
i
POTS
1
is designed for use with the Lucent
Stinger, whereas, the
iPOTS3
is compatible with DSLAM's manufactured by
other vendors. mPhase currently has a nonexclusive worldwide distribution
agreement with Corning Cable Systems for the sale of the
i
POTS products.
Such arrangement potentially expands exposure for this product, as Corning is
one of the largest vendors of central office DSL filtering equipment. The
Company is also aggressively pursuing direct efforts with respect to sales of
the
i
POTS product.
For the year ending June 30, 2003 sales from our POTS
Splitter Shelves were $1,581,639 with a Net Loss of $6,650,211 as compared to
POTS Splitter Shelf sales of $2,582,446 and a Net Loss of $11,245,361 for the
fiscal year ended June 30, 2002. For the six months ending December 31, 2003 (unaudited),
sales from POTS Splitter Shelves were $3,780,137 with a Net Loss of $2,565,877
compared to sales of $771,837 and a Net Loss of $3,421,396 for the same period
ending December 31, 2002. (See Financial Statements which commence on page F-1.)
THE OFFERING
Common stock offered:Up to 29,027,026 shares of common stock,
of which 10,825,975 shares are issued and outstanding and up to 18,201,051
shares may be issued pursuant to convertible notes and upon exercise of warrants
and options held by the selling stockholders.
Common Stock to be outstanding after this offering:
Approximately 84,930,962 shares of common stock. This does not include an
aggregate of 64,940,621 shares that are reserved for issuance pursuant to
convertible notes, outstanding employee stock options, non-employee stock
options and warrants.
Use of proceeds: We will not receive any proceeds from the
sale and issuance of the common stock included in this offering. However, we
will receive approximately  $4,546,741 upon the conversion of convertible notes
and the exercise of all of the warrants and options by the selling stockholders,
which would be used for general working capital.
Risk Factors:An investment in our common stock is subject to
significant risks. You should carefully consider the information set forth in
the "Risk Factors" section of this prospectus as well as other information set
forth in this prospectus, including our financial statements and related notes.
Dividend policy:We do not expect to pay dividends on our common stock in the
foreseeable future. We anticipate that all future earnings, if any, generated
from operations will be retained to develop and expand our business.
Plan of Distribution:The shares of common stock (OTC Bulletin
Board symbol: XDSL.OB) offered for resale may be sold by the selling
stockholders pursuant to this prospectus in the manner described under "Plan of
Distribution."
We have applied for trademarks on certain marks which relate
to the following products: Traverser™, INI, Intelligent Network Interface, DVDDS,
Digital Video and Data Delivery System. This prospectus also contains product
names, trade names and trademarks of ours as well as those of other
organizations. All other brand names and trademarks appearing in this prospectus
are the property of their respective holders.
FORWARD-LOOKING STATEMENTS
In addition to the other information contained in this
prospectus, investors should carefully consider the risk factors disclosed in
this prospectus, including those beginning on page 7, in evaluating an
investment in our common stock. This prospectus includes "forward-looking
statements". All statements other than statements of historical fact are
"forward-looking statements" for purposes of these provisions, including any
projections of earnings, revenues or other financial items, any statements of
the plans and objectives of management for future operations, any statements
concerning proposed new products or services, any statements regarding future
economic conditions or performance, and any statement of assumptions underlying
any of the foregoing. In some cases, forward-looking statements can be
identified by the use of terminology such as "may", "will", "expects", "plans",
"anticipates", "estimates", "potential", or "continue" or the negative thereof
or other comparable terminology.
Although we believe that the expectations reflected in the
forward-looking statements contained herein and in such incorporated documents
are reasonable, there can be no assurance that such expectations or any of the
forward-looking statements will prove to be correct, and actual results could
differ materially from those projected or assumed in the forward-looking
statements. Our future financial condition and results of operations, as well as
any forward-looking statements, are subject to inherent risks and uncertainties,
including but not limited to the risk factors set forth above and for the
reasons described elsewhere in this prospectus. All forward-looking statements
and reasons why results may differ included in this prospectus are made as of
the date hereof, and we assume no obligation to update any such forward-looking
statement or reason why actual results might differ.
SUMMARY FINANCIAL DATA
The summary 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 consolidated financial statements
and notes included in this prospectus. The statements of operations data from
October 2, 1996 (date of inception) to June 30, 1998 are derived from financial
statements that have been audited by (i) Schuhalter, Coughlin & Suozzo, PC,
independent auditors from inception to June 30, 1998, and (ii) by Arthur
Andersen for the years ended 1999, 2000 and 2001 included in this prospectus.
The statement of operations data for the year ended June 30, 2002 and June 30,
2003 are derived from the financial statements that have been audited by
Rosenberg, Rich, Baker, Berman & Company in this prospectus.
Cumulative
Totals
from
Inception
Year Ended June 30,
(October
2, 1996)
to June 30,
1999
2000
2001
2002
2003
2003
Total
    revenues
$-
$279,476
$10,524,134
$2,582,446
$1,581,639
$14,967,695
Expenses:
Cost of sales
-
131,756
5,804,673
2,415,129
1,493,394
9,844,952
Research and development
3,562,901
10,156,936
10,779,570
3,819,583
3,538,305
34,347,079
General and administrative
17,685,714
27,859,330
17,321,614
7,038,923
2,683,534
74,877,136
Depreciation and
amortization
410,303
471,101
660,372
670,183
515,417
2,767,029
Operating loss
(21,658,918)
(38,339,647)
(24,042,095)
(11,361,372)
(6,649,011)
(106,868,501)
Other
    income (expense), net
(1,161,622)
20,000
-
142,236
49,968
(1,254,263)
Interest income (expense)
(17,804)
158,105
43,361
(26,225)
(51,168)
106,267
Net
    loss
$(22,838,344)
$(38,161,542)
$(23,998,734)
$(11,245,361)
$(6,650,211)
$(108,016,497)
Basic
    and diluted net loss per
share*
$(1.42)
$(1.41)
$(0.72)
$(0.23)
$(0.10)
Shares
    used in basic and diluted
net
    loss per share*
16,038,009
26,974,997
33,436,641
49,617,280
65,217,088
*
Does not include any common
stock equivalents since their effect would be anti-dilutive.
The balance sheet data as of June 30, 2002 and 2003 is
derived from the financial statements that have been audited by Rosenberg, Rich,
Baker, Berman & Company in this prospectus and the balance sheet data for
December 31, 2003, and include all adjustments (consisting of normal recurring
items) that management considers necessary for a fair presentation of the
financial statements have been derived from the unaudited financial statements
reviewed by Rosenberg, Rich Baker Berman & Company included in this prospectus.
As of
As of
As of
June 30,
June 30,
December
2002
2003
31, 2003
(Unaudited)
BALANCE SHEET DATA:
Cash
    and cash equivalents
$47,065
$396,860
$319,923
Working
    capital (deficit)
$399,321
(1,405,331)
$(3,007,74
8)
Total
    assets
$6,942,515
$3,781,649
$2,622,661
Total
    stockholders' equity (deficit)
$(42,849)
$(3,228,886)
$(4,705,992)
The statement of operations data for the six months ended
December 31, 2003 and December 31, 2002 have been derived from the unaudited
financial statements reviewed by Rosenberg, Rich Baker Berman & Company included
in this prospectus and include all adjustments (consisting of normal recurring
items) that management considers necessary for a fair presentation of the
financial statements. The (unaudited) results for the six month period ended
December 31, 2003 are not necessarily indicative of the operating results to be
expected in the future.
Cumulative
Totals
>From Inception
Six Months Ended
(October 2,
December 31,
1996)
to December 31,
2002
2003
2003
(Unaudited)
(Unaudited)
(Unaudited)
Total
    revenues
$771,837
$3,780,187
$18,747,831
Expenses:
Cost of sales
744,030
3,289,937
13,134,889
Research and development
1,556,142
1,454,899
35,801,977
General and administrative
1,624,178
1,518,411
76,395,547
Depreciation and amortization
259,391
74,082
2,841,111
Operating loss
(3,411,899)
(2,557,192)
(109,425,693)
Other
    income (expense), net
24,641
23,087
(1,231,176)
Interest income (expense)
(34,649)
(31,272)
74,098
Net
    loss
$(13,421,396)
$(2,565,377)
$(110,581,874)
Basic
    and diluted net loss per share*
$(0.06)
$(0.04)
Shares
    used in basic and diluted
net
    loss per share*
63,397,799
72,251,251
*
Does not include any common
stock equivalents since their effect would be anti-dilutive.
RISK FACTORS
An investment in the common stock offered by this prospectus
involves a high degree of risk. In addition to the other information in this
prospectus and any supplements to this prospectus, you should carefully consider
the following risks before making an investment decision.
Risks Related to Financial Aspects of Our Business
The Company has recently entered into the new and emerging business of
Nanotechnology which entails significant development and commercial risk.
The Company is spending a total of $1.2 million pursuant to a
contract with Lucent Technologies, Inc. to initially develop longer life fuel
cells for military applications. Even if a prototype product be successfully
developed, pure research involves a high degree of risk with significant
uncertainty as to whether a commercially viable product will result.
mPhase's stock price has suffered significant declines during the past three
years and remains volatile.
The market price of our common stock closed at $2.72 on
December 12, 2000 and closed at $.43 on December 12, 2003. Stocks in
telecommunications equipment providers of DSL products have been very volatile
during such period. 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 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. Such customers
consist only of "established customers" and "Accredited Investors" (within the
meaning of Rule 501 of Regulation D of the Securities Act of 1933, as
amended-generally individuals and entities of substantial net worth) thereby
limiting the liquidity of our common stock.
We have reported net losses for each of our fiscal years from our inception
in 1996 and for the first quarter (unaudited) ended September 30, 2003 and may
not be able to operate profitability in the future.
We have had substantial operating losses since our inception
in 1996 (including $6,649,011 and $11,361,372 for the fiscal year ended June 30,
2003 and fiscal year ended June 30, 2002, respectively and (unaudited) $ 864,511
and $1,801,425 for the quarters ending September 30, 2003 and September 30, 2002
respectively) and cannot be certain when or if we will ever be profitable. We
expect to continue to have net losses for the foreseeable future and have a need
to raise not less than $2 million in additional cash in the next 12 months
through further offerings to continue operations. We have never been profitable
from our inception in October, 1996 through September 30, 2003 (unaudited) and
we have incurred (a) accumulated losses of $108,881,008 and a stockholder's
deficit of $3,881,154 and (b) cumulative negative cash flow of $44,031,903. As
of September 30, 2003 (unaudited) we have a negative net worth of $3,881,154 and
a negative working capital of $2,385,525.
Our independent auditor's report express doubt about our ability to continue
as a going concern.
The reports of the Company's outside auditors' Rosenberg,
Rich, Baker, Berman & Company with respect to its latest audited 10K for the
fiscal years ended June 30, 2003, June 30, 2002 and June 30, 2001 stated that
"there is substantial doubt of the Company's ability to continue as a going
concern." Such opinion from our outside auditors makes it significantly more
difficult and expensive for the Company to raise additional capital necessary to
continue our operations.
Our common stock is subject to significant dilution upon issuance of shares
we have reserved for future issuance.
As of April 23, 2004, we have warrants and options
outstanding convertible into approximately48,717,287 shares and 14,690,000
shares of mPhase common stock which, upon conversion, may adversely affect the
future price of our common stock. As of April 23, 2004 we have warrants and
options convertible into approximately 39,980,562 and 5,135,000 shares of our
common stock at $.35 per share or less that, upon exercise, will result in
significant dilution to many of our current shareholders and may adversely
affect the future price of our common stock. As of April 23, 2004, the Company
has approximately 1,533,334 shares of common stock reserved for the issuance
upon the conversion of certain 12% convertible notes to related parties at $.30
per share which may adversely affect the future price of our common stock. 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. Certain warranties with key vendors are subject to cashless
exercise and may be immediately exercised with no resulting proceeds to the
Company to satisfy overdue debt. (See note payable due December 31, 2003 in the
amount of $420,872 that is in default the details of which are set forth on page
34.)
Risk Factors Related to Our Operations
We have been a development-stage company since our inception in 1996 and have
not to date had a significant deployment of either of our main platforms for
delivery of televison over DSL.
We have had to date no material revenues derived from sales
of our Traverser™ Digital Video Data Delivery System (DVDDS) or our mPhaseTV+
products or our new line of Intelligence POTS Splitters. There have been to date
no major deployments of Television over DSL by telephone service providers
globally and there currently is uncertainty as to the extent, if at all, that
deployments will occur in the future.
We depend upon outsourcing of our research and product development of our
television platforms to two outside entities.
We depend upon GTRC for continued technical assistance in
connection with deployment of the Traverser™ DVDDS platform and our business
would be materially adversely affected if GTRC were to terminate our
relationship since the Company does not have certain technical resources
available at GTRC for deployment of the Traverser™ DVDDS. We owe GTRC
approximately $1.8 million and are finalizing an agreement to convert all of
such payables into our common stock at $.35 per share. We depend upon Lucent for
the successful development of our TV+ product and our business would be
materially adversely affected if Lucent were to terminate our relationship.
The loss of key personnel could adversely effect our business.
Management and employment contracts with all of our officers
have expired and no assurances can be given that such executives will remain
with the Company or that the Company will be able to successfully enter into
agreements with such key executives. All of our officers have been granted stock
options that are intended to represent a key component of their compensation.
Such options may not provided the intended incentives to such officers if our
stock price declines or experiences significant volatility.
Economic support from affiliated companies has been significant.
During the Downturn in The Telecommunications Industry, both
Microphase Corporation, and Janifast Ltd. had provided significant financial
support to mPhase during the past two years in the form of either cash infusions
or conversions of related party debt. Such companies, which share common
management with mPhase, are under no legal obligation to and may not be able to
sustain such economic support of mPhase in the future should such support be
necessary.
Sales and margins from our component DSL products has varied dramatically
during the past two years and remains volatile.
Sales and gross margins from our POTS Splitter and other DSL
products have experienced a significant decline during the period from June 30,
2001 through June 30, 2003 as a result of the significant downturn in capital
spending by telecommunications service providers. Although there has been a
significant recovery in such sales during the quarter ended September 30, 2003
the outlook for continuing growth in sales remains uncertain. Failure to achieve
significant sales with adequate gross margins with respect to our component DSL
products will negatively effect the cash available to the Company prior to
commencement of sales of our flagship television platforms thereby having a
negative effect upon the overall financial condition of the Company and the
price of our common stock.
We rely on single sources for supply of a certain component for out POTS
splitter product that has been the source of all of our revenues to date.
We purchase the core torroid which is a key component in our
POTS Splitter Product from VAC corporation. We purchase such component on a
purchase order basis and have no long term contract for the supply of such
component. The loss of this current source of supply could result in us having
to redesign our product at additional cost and result in lost revenues from our
main source of sales to date.
We may incur substantial expenditures in the future in order to protect our
intellectual property.
Although our Traverser™ DVDDS television platform is
patent-protected and not the subject of any infringement allegations we do not
have currently patents or patents pending for our TV+ product. 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.
Risk Factors Related to Our Targeted Markets
Historically the sale of infrastructure products to telecommunication
providers in the international markets has a long lead time and a multiplicity
of risks.
We expect the majority of our future revenues to be derived
from international emerging markets and our success depends upon our ability to
sell our flagship television platforms outside of the United States where
political, currency and regulatory risks are significantly greater. As a result
of their distance from the United States, different time zones, culture,
management and language differences, these operations pose greater risk than
selling in the United States. Our sales cycle for our TV over DSL platforms is
lengthy (since it involves a major strategic decision by an international
telecommunications service provider) and we may incur significant marketing
expenses with no guarantee of future sales. A significant market for our Traverser™ DVDDS, mPhaseTV+ products may never develop if international
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 and other
deployment as a result of the current economic downturn in the industry. Future
market demand that will cause telephone service providers to continue to
aggressively roll out DSL, in general, and ADSL, ADSL2 and ADSL2+ in particular,
is highly unpredictable especially in markets outside of the United States.
Certain telephone companies (especially in developing international economies)
may have copper wire infrastructure that is not of sufficient quality to
accommodate the Traverser™ or mPhaseTV+ platform. Currency flucturations,
changes in foreign taxes and import duties and economic and political
instability in international markets pose a greater risk to our operations than
U.S. markets.
Our televison platforms may not achieve compliance with regulatory
requirements in foreign countries.
Our Traverser™ DVDDS and mPhaseTV+ platforms may fail to meet
foreign regulatory standards. Since our targeted markets for our Television
platforms involve countries outside of the United States, such products are
subject to greater regulatory risks since they must comply with different
standards of different countries than can vary widely in the telecommunications
industry. The failure to meet such regulatory standards would result in
potential customers in countries outside of the United States not deploying of
our TV platforms.
The telecommunications industry is subject to intense competition
charazterized by swift changes in technology.
The Telecommunications equipment industry is subject to swift
and continuing innovation and technological changes that could render our
Traverser™ DVDDS and TV+ products obsolete and intense competition in the
industry could prevent our ever becoming profitable. Our competitors that sell
DSL systems that compete with the Traverser™ and mPhaseTV+ system 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, Fujitsu, 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, Minerva Corporation and Myrio Corporation.Telephone service providers
that are our targeted customers face competition from cable-based technologies,
fixed wireless technologies and satellite technologies that may cause them not
to deploy our Traverser™ DVDDS or TV+ products.
Deployment of our television platforms requires certain additional
investments by telecommunications service providers.
Our Customers may need to build a digital head-end to
download television content from satellites involving a significant additional
capital expenditure to utilize the digital Television capabilities of our
Traverser™ DVDDS and TV+ products. Such additional capital costs to build a
digital headend may cause a number of potential customers not to deploy our TV
platforms.
We may not be able to evolve our technology, products and services or develop
new technology, products and services that are acceptable to our customers.
The market for our broadcast digital television platforms over DSL is
  characterized by:
Rapid technology change;
New and improved product introductions;
Changing customer Demands; and
Evolving industry standards and product obsolescence.
Our future success will depend upon our ability to
continually enhance our existing broadcast digital television platforms as
Asymetric Digital Subscriber Line (ADSL) technology migrates forward to ADSL2
and ADSL2+ with enhanced features such as the ability to deliver multiple
television channels to one set top box and continually cost-reduce our platforms
consistent with the demands of telecommunications service providers. The development of enhanced and new technology, products and
services is a complex and uncertain process requiring high levels of innovation,
highly-skilled engineering and development personnel, and the accurate
anticipation of technological and market trends. We may not be able to identify,
develop, market or support new or enhanced technology, products, or services on
a timely basis, if at all owing to our size and limited financial resources.
Telecommunications service providers outside of the United States must be
able to access sources for broadcast television content in order to deploy our
either of our television platforms.
In order to have an incentive to deploy either the TV+ or the
Traverser DVDDS platforms, an international telecommunications service provider
must have access, to multiple channels of Television programming from content
providers at prices that enable such provider to earn a profit from the
deployment of television programming. In certain of our key target markets, such
as Brazil, only cable companies are permitted under current law to provided such
content and therefore a local service provider must either establish a working
relationship with such a cable provider to have an incentive to utilize our
products.
USE OF PROCEEDS
The selling stockholders will receive the proceeds from the
resale of the shares of common stock. We will not receive any proceeds from the
resale of the shares of common stock by the selling stockholders. However, we
will receive approximately $4,546,741 if all of the warrants, options and
convertible notes are converted to purchase shares of common stock registered
under this prospectus are exercised, which would be used for general working
capital.
PRICE RANGE OF COMMON STOCK
The primary market for our common stock is the OTC Bulletin
Board, where it trades under the symbol "XDSL.OB". The following table sets
forth the high and low closing bid prices for the shares for the periods
indicated as provided by the National Quotation Bureau, Inc. The quotations
shown reflect inter-dealer prices, without retail mark-up, mark-down, or
commission and may not represent actual transactions.
Year/Quarter
High
Low
Fiscal
    year ended June 30, 1999
First
    Quarter
$4.25
$0.75
Second
    Quarter
3.65625
1.5625
Third
    Quarter
5.625
1.875
Fourth
    Quarter
8.75
2.90625
Fiscal
    year ended June 30, 2000
First
    Quarter
$9.25
$2.96875
Second
    Quarter
6.1875
2.50
Third
    Quarter
19.125
6.50
Fourth
    Quarter
14.125
6.00
Fiscal
    year ended June 30, 2001
First
    Quarter
$9.25
$3.00
Second
    Quarter
5.9375
1.4688
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
Fiscal
    year ended June 30, 2003
First
    Quarter
$.32
$.15
Second
    Quarter
.31
.15
Third
    Quarter
.36
.19
Fourth
    Quarter
.42
.28
Fiscal
    Year ended June 30, 2004
First
    Quarter
$.42
$.29
Second
    Quarter
$.61
$.26
Third
    Quarter
$.69
$.41
As of April 23, 2004 (unaudited), we had 84,930,962 shares of
common stock outstanding and approximately 11,000 stockholders. The last
reported sales price of our common stock on April 23, 2004 was $.39 per share.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our
common stock and do not anticipate paying any cash dividends in the foreseeable
future. We currently intend to retain future earnings, if any, to finance
operations and the expansion of our business. Any future determination to pay
cash dividends will be at the discretion of the board of directors and will be
based upon our 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 are relevant.
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in
conjunction with "Company Operations" and the historical financial statements
and notes included in this prospectus The statement of operations data for the
years ended June 30, 1999, 2000 and 2001, are derived from financial statements
that have been audited by Arthur Andersen LLP, and the statement of operations
data for the years ended June 30, 2002 and June 30, 2003 are derived from
financial statements that have been audited by Rosenberg, Rich, Baker, Berman &
Company, independent auditors, and are included in this prospectus. The
operations data for the quarterly periods ended September 30, 1999 and each
quarter thereafter to and including the quarter ended December 31, 2001 are
derived from unaudited financial statements reviewed by Arthur Andersen LLP and
the operations data for the quarterly periods from March 31, 2002 and each
quarter thereafter through and including the quarter ended December 31, 2003,
have been derived from unaudited financial statements reviewed by Rosenberg,
Rich, Baker, Berman & Company, which include all adjustments (consisting of
normal recurring items) that management considers necessary for a fair
presentation. The results for the fiscal year ended June 30, 2003 and the are
results for the six months ended December 31, 2003 are not necessarily
indicative of the operating results to be expected in the future.
For The Year Ended
For The Six Months
June 30,
Ended December 30,
(Unaudited)
1999
2000
2001
2002
2003
2002
2003
STATEMENT OF
OPERATIONS
DATA:
Total
    revenues
$-
$279,476
$10,524,134
$2,582,446
$1,581,639
$771,837
$3,780,137
Costs
    and
Expenses:
Cost of
    sales
-
131,756
5,804,673
2,415,129
1,493,394
744,030
3,288,937
Research and
development
3,562,901
10,156,936
10,779,570
3,819,583
3,538,305
1,556,142
1,454,899
General
    &
administrative
17,685,714
27,859,330
17,321,614
7,038,923
2,683,534
1,624,178
1,518,481
Depreciation &
amortization
410,303
471,101
660,372
670,183
515,417
259,391
74,082
Operating loss
(21,658,918)
(38,339,647)
(24,042,095)
(11,361,372)
(6,649,011)
(3,411,899)
(2,557,192)
Other
    income
(expense), net
(1,161,622)
20,000
-
142,236
49,968
24,647
23,087
Interest income
(expense)
(17,804)
158,105
43,361
(26,225)
(51,168)
(34,149)
(31,232)
Net
    Loss
$(22,838,344)
$(38,161,542)
$(23,998,734)
$(11,245,361)
$(6,650,211)
$(3,421,396)
$(2,565,377)
Basic
    and diluted
net
    loss per share
$(1.42)
$(1.41)
$(0.72)
$(0.23)
$(0.10)
$(.06)
$(.04)
Shares
    used in
basic
    and diluted
net
    loss per
share(1)
16,038,809
26,974,997
33,436,641
49,617,280
65,217,088
63,397,799
72,251,251
(1) Does not include shares on a pro forma basis for all
periods presented for shares which may be issued pursuant to warrants issued in
private placements, options or conversion rights for certain notes; of which the
underlying shares of the Company's common stock for such common equivalent
shares are subject to registration by this prospectus, since their effect is
anti-dilutive. Common equivalent shares for such shares other than the options, warrants and convertible rights subject to registration
herein, have also been excluded from the computation of diluted earnings per
share since their effect is anti-dilutive.
The balance sheet data as of June 30, 1999, 2000, 2001 are
derived from financial statements that have been audited by Arthur Andersen LLP
and June 30, 2002 and 2003 are derived from financial statements that have been
audited by Rosenberg, Rich, Baker, Berman & Company and the balance sheet data
as of December 31, 2003, have been derived from unaudited financial statements
reviewed by Rosenberg, Rich, Baker, Berman & Company, and include all
adjustments (consisting of normal recurring items) that management considers
necessary for a fair presentation.
Balance Sheet Data as of:
June 30,
December 31,
1999
2000
2001
2002
2003
2003
(unaudited)
Cash
    and cash
equivalents
$7,977,860
$6,432,417
$31,005
$47,065
$396,860
$319,923
Working
    capital
(deficit)
4,936,361
3,556,587
(1,458,227)
399,321
(1,405,331)
(3,077,748)
Total
    assets
10,624,105
11,184,246
8,997,182
6,942,515
3,781,649
2,622,661
Total
    Long-term
obligations, net of
current
    portion
0
0
90,000
2,890,535
2,607,552
2,085,484
Total stockholders'
equity
    (deficit)
$6,974,006
$7,328,504
$1,864,642
$(42,849)
$(3,228,886)
$(4,705,992)
SELECTED QUARTERLY FINANCIAL DATA
The statement of operations data as of the periods indicated
below are derived from unaudited financial statements, of which the quarterly
periods ended September 30, 1999 and each quarter thereafter to and including
the quarter ended December 31, 2001 are derived from unaudited financial
statements reviewed by Arthur Andersen LLP. The operations data for the
quarterly periods ended March 31, 2002 and each quarter thereafter through and
including the quarter ended December 31, 2003, have been derived from unaudited
financial statements reviewed by Rosenberg, Rich, Baker, Berman & Company. The
foregoing 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,
(in thousands, except share amounts)
FISCAL
    2004 QUARTERLY
STATEMENT OF OPERATIONS DATA:
Total
    revenues
$2,489
$1,291
Costs
    and Expenses:
Cost of sales
2,099
1,191
Research and development
612
843
General and administrative
605
914
Depreciation and amortization
46
28
Operating loss
(872)
(1,685)
Interest expense, Net
(15)
(16)
Gain on
    extinguishment
2
-
Net
    Loss
$865
$(1,701)
Basic
    and diluted net loss per share
$(.01)
$(.02)
Shares
    used in basic and diluted net loss per share(1)
71,725,318
72,814,272
(1) The quarterly earnings per share data above are computed
independently for each of the quarters presented. As such, the sum of the
quarterly per common share information may not equal the full year amounts due
to rounding differences resulting from changes in the weighted-average number of
common shares outstanding.
The statement of operations data as of the periods indicated
below are derived from unaudited financial statements. The operations data for
the quarterly periods ended September 30, 1999 and each quarter thereafter to
and including the quarter ended December 31, 2001 are derived from unaudited
financial statements reviewed by Arthur Andersen LLP and the operations data for
the quarterly periods from March 31, 2002 and each quarter thereafter through
and including the quarter ended June 30, 2003, have been derived from unaudited
financial statements reviewed by Rosenberg, Rich, Baker, Berman & Company, 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)
FISCAL
    2003 QUARTERLY
STATEMENT OF
OPERATIONS DATA:
Total
    revenues
$210
$562
$210
$600
Costs
    and Expenses:
Cost of
    sales
197
547
205
544
Research and development
803
753
906
1,077
General
    and administrative
893
731
544
516
Depreciation and amortization
131
129
129
127
Operating loss
(1,814)
(1,598)
(1,574)
(1,664)
Interest expense, Net
(18)
(15)
(11)
(6)
Gain on
    debt extinguishment
41
-
9
11
Gain
    (Loss) on investments
-
(16)
(12)
17
Net
    Loss
$(1,791)
$(1,629)
$(1,588)
$(1,642)
Basic
    and diluted net loss per share
$(.03)
$(.07)
$(.02)
$(.02)
Shares
    used in basic and diluted net loss per share(1)
60,881,131
65,914,466
65,956,810
68,164,160
Three Months Ended
September 30
December 31
March 31
June 30
(in thousands, except share amounts)
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
2,862
1,641
1,355
1,182
Depreciation and amortization
193
209
136
132
Operating loss
(4,086)
(3,092)
(1,888)
(2,296)
Interest expense, Net
(10)
(1)
(5)
(10)
Gain
    (Loss) on debt extinguishment
33
5
85
19
Net
    Loss
$(4,063)
$(3,088)
$(1,808)
$(2,287)
Basic
    and diluted net loss per share
$(.10)
$(.07)
$(.03)
$(.04)
Shares
    used in basic and diluted net loss per share(1)
42,037,506
44,645,458
55,606,168
56,459,167
(1) The quarterly earnings per share data above are computed
independently for each of the quarters presented. As such, the sum of the
quarterly per common share information may not equal the full year amounts due
to rounding differences resulting from changes in the weighted-average number of
common shares outstanding.
The statement of operations data as of the periods indicated
below are derived from unaudited financial statements. The operations data for
the quarterly periods ended September 30, 1999 and each quarter thereafter to
and including the quarter ended December 31, 2001 are derived from unaudited
financial statements reviewed by Arthur Andersen LLP and the operations data for
the quarterly periods from March 31, 2002 and each quarter thereafter through
and including the quarter ended September 30, 2003, have been derived from
unaudited financial statements reviewed by Rosenberg, Rich, Baker, Berman &
Company, 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)
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
3,485
3,314
3,105
7,406
Depreciation and amortization
123
136
200
201
Operating loss
(5,779)
(4,316)
(4,255)
(9,683)
Interest income, Net
28
8
4
3
Net
    loss
$(5,751)
$(4,308)
$(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(1)
31,562,727
32,324,964
34,205,000
35,702,797
Three Months Ended
September 30
December 31
March 31
June 30
(in thousands, except share amounts)
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
1,210
1,226
12,776
12,648
Depreciation and amortization
114
116
118
123
Operating loss
(2,815)
(3,246)
(15,731)
(16,548)
Other
    income, net
-
-
-
20
Interest income, Net
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(1)
24,942,965
25,907,602
27,743,996
29,729,060
(1) The quarterly earnings per share data above are computed
independently for each of the quarters presented. As such, the sum of the
quarterly per common share information may not equal the full year amounts due
to rounding differences resulting from changes in the weighted-average number of
common shares outstanding.
SELECTED BALANCE SHEET DATA
The summary financial data set forth below should be read in
conjunction with "Company's Operations" and the historical consolidated
financial statements and notes included in this prospectus. The balance sheet
data including the effects of Changes in the Statement of Stockholders from
October 2, 1996 (date of inception) to June 30, 1998 are derived from financial
statements that have been audited by (i) Schuhalter, Coughlin & Suozzo, PC,
independent auditors from inception to June 30, 1998 (ii) from financial
statements that have been audited by Arthur Andersen for the years ended 1999,
2000 and 2001 and the balance sheet data as of June 30, 2002 and 2003, which are
included in this prospectus, are derived from financial statements that have
been audited by Rosenberg, Rich, Baker, Berman & Company.
Year Ended June 30,
1997
1998
1999
2000
2001
2002
2003
(in thousands)
BALANCE
    SHEET
DATA:
Cash
    and cash equivalents
$162
$-
$7,978
$6,432
$31
$47
$397
Working
    capital (deficit)
(212)
(3,073)
4,936
3,557
(1,458)
(399)
(1,405)
Total
    assets
369
2,175
10,624
11,184
8,997
6,943
3,781
Long-term obligations, net
of current portion
-
-
-
-
90
2,890
2,608
Total
    stockholders' equity
(deficit)
$(23)
$(915)
$6,974
$7,329
$1,865
$(43)
$(3,229)
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 11,000 shareholders and approximately 85 million shares of common
stock outstanding. 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, digital subscriber line (DSL) products for telecommunications
service providers around the world. Recently, mPhase has entered into the new
and emerging area of NanoTechnology. Since our inception in 1996 we have been a
development-stage company and operating activities have related primarily to
research and development, establishing third-party manufacturing relationships
and developing product brand recognition among telecommunications service
providers.
We are headquartered in Norwalk, Connecticut with offices in
Little Falls, New Jersey and Atlanta, Georgia. mPhase shares common office space
and common management with Microphase Corporation, a privately-held company.
Microphase is a seller of radio frequency and filtering technologies to the
defense industry. Microphase has been in operation for almost 50 years and
supports mPhase with engineering, administrative and financial resources, as
needed.
Description of Operations
mPhase develops, markets and sells an innovative line of
broadband communications equipment for transmission of broadcast television,
high speed data and voice over copper telephone lines utilizing DSL technology.
We have developed two different platforms (the Traverser DVDDS™ (DVDDS) and the
TV+ respectively) that enable telecommunications service providers to deliver,
simultaneously, digital broadcast television, high-speed internet and voice
between a service provider's central office and its customers' premises. In
particular, our products are designed to enable telecommunications service
providers to enter into the business of providing several hundred channels of
digital broadcast television over the existing copper wire infrastructure. To
date, our primary activities have consisted of designing, manufacturing, testing
and marketing our flagship products that enable deliver broadcast television
over DSL by telephone service providers. We have not, to date, derived material
revenues from such products.
Both our DVDDS and the TV+ platforms require a
telecommunications service provider to build a digital video head-end to
downlink channels of broadcast television programming from satellites. The cost
of building a digital head end has been substantially reduced in the past few
years as off the shelf technology has become less expensive. Such equipment
includes a satellite receiving dish, video grooming equipment and mPhase's
system management software necessary for managing the video content. mPhase does
not manufacture such digital head-end equipment.
Both the DVDDS and TV+ products utilize aysmetric DSL (more bandwidth
downstream than upstream) which is well-suited for the delivery of broadcast
television and high-speed internet.
mPhase has developed its flagship line of products for
telephone companies in parts of the world where access to multi-channel
television is limited. Our products are currently designed primarily for service
providers located outside of the United States where fiber optic infrastructure
does not exist. Our products enable service providers to support proven,
revenue-generating services (i.e., broadcast TV) on the most cost effective
basis possible. This is achieved by utilizing the existing copper wire
infrastructure of a telephone service provider to transport broadcast television
from a central office without fiber for the "last mile" to a customer's
premises. Our solution avoids the tremendous cost of upgrading such
infrastructure to fiber to provide sufficient bandwidth in order to deliver
broadcast television. Our products utilize "compression technology" in order to
transport broadcast television along with voice and high-speed data to a
customer.
We believe there is a significant cost advantage when our
products are compared with other platforms utilizing ADSL for the delivery of
broadcast television with the
same features
. Neither of our platforms
currently contain such features as the ability to deliver two or more TV
channels to a single set top box, video on demand and interactive TV. Our
belief, is that such features cannot currently be delivered at a cost
commensurate with a price people are capable and willing to pay in markets
lacking fiber optic infrastructure necessary for cable TV. As ADSL technology
migrates forward to ADS2 and ADSL2+, mPhase plans to include additional features
in its new TV+ platform in a modular scalable cost-effective manner depending
upon
actual
market demand.
mPhase introduced its first TV over DSL product, the DVDDS in
1998. The DVDDS, is a patented end-to-end system based upon proprietary
technology developed in conjunction with Georgia Tech Research Corporation.
Because it is an end-to-end video-over-ADSL system, the DVDDS does not
interoperate with other manufacturer's digital subscriber line access
multiplexing equipment (DSLAM) located in a telephone service provider's central
office or modems or set top boxes residing in a customer's premises. This system
delivers native MPEG2 digital television from a satellite downlink or digital headend to the customer without reformatting such content into internet packets.
The system is the only non-Internet Protocol system for delivery of broadcast
television over ADSL on the market today. Telephone service providers using the
mPhase legacy DVDDS need to build a digital video headend or programming and
control center ("PCC") to downlink broadcast television programming content 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
actual office or remotely located and connected to each Central Office ("CO")
via fiber. The DVDDS CO equipment, known as the mPhase Universal Access Shelf,
integrate 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 broadcast channel, high-speed data and POTS ("Plain Old Telephone
Service") to subscribers over existing telephone lines. Upon reaching the home
or office, the DSL line is fed into the mPhase intelligent network interface INI,
or digital set top box. The INI separates the three signals and routes them to
the television, PC and telephone. The Company continues to market this product,
and believes it is best suited for customers specifically interested in
supporting television services with a minimal need to support high-speed data
customers.
The DVDDS consists of three key elements: a digital head-end
called the Programming and Control Center (PCC), Central Office (CO) equipment
called the Universal Access Shelf or DSLAM, and the Customer Premises Equipment
(CPE called the Intelligent Network Interface (INI™). At the PCC, local off-air
channels are received, digitized and combined with broadcast television signals
down-linked from satellites. The PCC can be co-located with a single central office (CO) of a service provider or
remotely located and connected to each CO of a telephone service provider by
fiber not currently in use.
The DVDDS CO equipment, known as the mPhase Universal Access
Shelf, integrates video signals from the PCC with the internet and voice
signals. The output of the Universal Access Shelf consists of DSL "lines"
capable of carrying a single stream of native MPEG- 2 digital quality broadcast
television, high-speed data and voice. Upon reaching a residence or business,
the DSL line is fed into the Traverser™ intelligent network interface (INI)
digital set top box which separates and routes the television, high-speed data
and voice signals to the television, home computer and telephone, respectively.
The digital compression technology used by the DVDDS
transports digital television signals in native motion pictures experts group 2
(MPEG2) format over the DSL spectrum. At no point does the DVDDS packetize the
video content or deliver it over an internet protocol (IP) or asynchronous
transfer mode (ATM) network. Up until recent developments by Lucent
Technologies, Inc. for its Stinger DSLAM, which is used as the method for
transport in our TV+ platform, the DVDDS technology had certain quality of
service advantages over IP based Video transmission methods over ADSL.
The DVDDS is installed at Hart Telephone Company in Hartwell,
Georgia, where a limited user system is currently operational. Hart Telephone
competed the construction of its digital head end toward the end of 2001,
marking the DVDDS's transition to commercial deployment. A DVDDS system is also
installed at the BMW manufacturing plant in Spartanburg, South Carolina for use
as a telebroadcast system in a commercial setting.
mPhase has recently introduced its second product for deliver
of broadcast television, high speed data and voice over ADSL originally named
Simple TV and now called the TV+ platform. This product has been developed in
conjunction with the Bell Labs division of Lucent Technologies, Inc. TV+ is a
modular solution that is also designed to simultaneously deliver digital
broadcast television, high speed data plus voice over copper telephone wires.
The TV+ utilizes the industry-leading, standards-based Lucent Stinger Digital
Access Concentrator (the Stinger™) for transport.
The TV+ platform requires a telephone service provider to
built a digital head-end to down-link channels to television programming from
satellites. Unlike the headend utilized with the Traverser™ DVDDS, the signals
are converted at the head-end from native MPEG- 2 into IP format. The
architecture developed by Bell Labs for the mPhase TV+ product encompasses:
The mPhase Traverser™ BTS (Broadcast Television Switch) layer
interfacing the video headend and the DSLAM. The BTS supports administrative
tasks associated with subscriber management by communicating with each Traverser™
INI set top box to enable access by users to programming selected by such user
as well as compiling customer billing information for a service provider.
Lucent's Stinger Digital Access Concentrator, a field-tested
central office (CO) piece of equipment containing the new Lucent IP 2000 card
that provides DSL connections to individual customers and the greater bandwidth
necessary to support internal multicasting of hundreds of channels of video
traffic. This capability results in a highly scaleable and cost effective video
delivery architecture based upon a leading standards based IP delivery
technology.
mPhases Traverser™ INI Set Top Box, a highly integrated piece of customer
premises equipment (CPE) to deliver digital television in the home environment
from the DSL link.
During the first half of fiscal year 2003, mPhase began
discussions with the Bell Labs division of Lucent to redesign, feature enhance
and cost reduce its Traverser™ INI (intelligent network interface) set top box
CPE portion of the DVDDS. In December of 2002 Bell Labs approached mPhase about
creating the hybrid, mPhaseTV+ solution over DSL that would add broadcast
television capabilities to the Lucent Stinger DSLAM and capitalize upon the fact
that such DSLAM is deployed to over 4 million customers worldwide for voice and
data delivery over copper telephone lines. The goal is to create the most
reliable scaleable and cost-effective method for delivery of broadcast quality
television and high-speed data over copper telephone lines.
The initial design of the mPhaseTV+ solution does not contain
features that would currently require expensive upgrades to a telephone service
provider's infrastructure such as the delivery of more than one different
television channel through one set-top box to a customer, video on demand and
interactive television which is currently available on many cable systems
throughout the United States. Our goal is to achieve wide acceptance of our
television platforms indeveloping markets outside of the United States for
multi-channel broadcast television at significant gross margins by creating an
extremely cost-effective product. We believe such markets do not demand, or can
afford, feature-rich and expensive solutions available with alternate
technologies such as cable, VDSL and much more expensive platforms for ADSL. As
ADSL technology migrates forward to ASDL2 or ASDL2+, mPhase will include some or
all of these features in its TV+ platform in a modular scalable cost-effective
manner depending upon
actual
market demand for such features in markets
that mPhase is targeting.
As noted above, Bell Labs had been working in a contract
engineering capacity helping mPhase to cost-reduce its digital set top box, the
Traverser™ INI Set Top Box (INI). mPhase's original set top box designed by GTRC
to be used as the CPE portion of the Traverser™ has recently been reduced in
size and costs by Lucent. This product is a low-cost set-top box developed
specifically for delivering Motion Picture Experts Group two (MPEG2) standard
video bitstreams over DSL links. The integrated DSL modem makes the connection
between the set-top box and the DSLAM. The INI's video output sends television
signals directly to the end-user's TV. Such integration of the set-top-box with
the DSL modem provides greater video content security by having the video
content decoded directly by the set top box into the television signal. Thus
digital television cannot be downloaded and saved directly from a DSL modem.
While no system is completely impenetrable to video theft, the INI solution
thwarts and discourages such activity. mPhase's cost reduced INI designed by
Lucent utilizes standard Asynchronous Transfer Mode over ADSL transport.
mPhase DSL Component Products
. mPhase also has designed
and markets a line of DSL component products ranging from commodity items such
as POTS splitters to innovative loop management products. Most notable in the
suite of DSL component products is the recently introduced
i
POTS or
Intelligent POTS Splitter product. The
i
POTS
1
product is designed
to work in conjunction the Lucent Stinger DSLAM. A newly developed version of
the product called the
i
POTS
3
ids compatible with the Lucent
Stinger as well as DSLAM's manufactured by other vendors. This product marks a
significant advancement in automating loop management. As DSL deployments scale,
it is becoming increasingly more important for telecommunications service
providers to streamline the process for provisioning and troubleshooting DSL
services. Additionally, as competition for high speed Internet expands, the
market is witnessing a reduction in price. Therefore, it has become imperative
that telecommunications service providers lower the operational costs involved
with supporting DSL services. The
i
POTS is a device that allows service
providers to perform full loop testing without having to deploy manual assets by
allowing service providers to temporarily bypass the POTS Splitter and have a
comprehensive view of their DSL networks. Prior to the introduction of this
product in order to perform full testing, service providers would have to
manually intervene so that so that test signals could be passed through the
network. mPhase has established a worldwide non-exclusive distribution agreement
with Corning Cable Systems for the sale of
i
POTS product. Utilizing
Corning as a distribution channel expands exposure for this product, as Corning
is one of the largest vendors of central office DSL filtering equipment. mPhase
also continues to market the product directly to major telephone service
providers.
Nanotechnology
Effective February 3, 2004, mPhase has entered into a
Development Agreement with Lucent Technologies, Inc. to commercialize the use of
nano power cell technology. We believe that this arrangement with the Bell Labs
division of Lucent will give mPhase the opportunity to develop and offer
breakthrough battery technology 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 believes that a prototype of its first nano
power cell product could be completed as early as 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.
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 Traverser™ and mPhase TV+ products to various
telecommunications service providers and (ii) the Company's recent entry into
the NanoTechnology business. Since the Company believes that there may be a
significant international market for the Traverser™ and the mPhaseTV+ products
involving many different countries, with different regulations, certifications
and commercial practices than the United States, future revenues are highly
subject to the changing variables and uncertainties. Additionally, the recent
instability of the telecommunications market evidenced by reduction in capital
spending across the whole in the telecom sector contributes to our difficulty in
accurately predicting future revenues.
Cost of revenues
. The costs necessary to generate
revenues from the sale of POTS Splitter Shelves and other related DSL component
products include direct material, labor and manufacturing. mPhase paid these
costs to Janifast Ltd., which has facilities in the People's Republic of China
and is owned by and managed by certain senior executives of the Company. The
cost of revenues also includes certain royalties paid to Microphase Corporation,
a privately held corporation organized in 1955, which shares certain common
management with the Company and is majority-owned by a director of mPhase. Costs
for future production of the Traverser™ and Simple TV Platform products will
consist primarily of payments to manufacturers to acquire the necessary
components and assemble the products and, in the case of the Traverser™, future
patent royalties payable to Georgia Tech Research Corporation (GTRC).
Research and development
. Research and development
expenses consist principally of the payments made to GTRC, Microphase and
Lucent, respectively, for development of the Traverser™ DVDDS, the
i
POTS
and the TV+ products respectively. The TV+ solution consists of the newly
developed mPhase Broadcast Television Switch together with the Lucent Stinger
voice and data delivery system product. All research and development costs are
expensed as incurred.
General and administrative
. Selling, general and
administrative expenses consist primarily of salaries and related expenses for
personnel engaged in direct marketing of the Traverser™ the Simple TV Platform,
the POTS Splitter Shelves, the
i
POTS and other DSL component products, as
well as support functions including executive, legal and accounting personnel.
Certain administrative activities are outsourced on a monthly fee basis to
Microphase and mPhase leases its principal office in Norwalk, Connecticut from
Microphase.
Non-Cash compensation charges
. The Company makes
extensive use of stock options and warrants as a form of compensation to
employees, directors and outside consultants. We incurred non-cash compensation
charges totaling $48,114,097 from inception (October 2, 1996) through June 30,
2003, of which $2,045,669 was included in research and development expenses;
$46,090,349 was included in general and administrative expenses of which
$20,996,614 pertains to advisors and consultants for services and $25,093,735
pertains to stock- based compensation of employees.
Twelve Months Ended June 30, 2003 vs. June 30, 2002
Revenue
Total revenues were $1,581,639 for the year ended June 30,
2003 compared to $2,582,446 for the year ended June 30, 2002. The decrease was
attributable to the continued slowing sales during fiscal year 2003 of the
Company's POTS Splitter product line, caused by the general downturn in the
telecommunications market, including 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 a significant part of DSL
deployment worldwide. The Company cannot say when the demand for
telecommunication equipment will resume.
Cost of Revenues
Cost of sales
was $1,493,394 for the fiscal year ended June, 2003 as compared to $2,415,219 in
the prior period, representing 94% of gross revenues, for each of the fiscal
years ended June 30, 2003 and 2002, respectively. The margins have contracted
dramatically in the past two fiscal years as spending among the
telecommunications providers has contracted, coupled with downward pressures
related to the supply and demand of telecommunications products.
Research and
Development
Research and development expenses were $3,538,305 for the fiscal
year ended June 30, 2003 as compared to $3,819,583 during the comparable period
in 2002; or a decrease of $281,278.
Such expenditures include $100,000 incurred with GTRC for the
fiscal year ended June 30, 2003 as compared to $450,000 during the comparable
period in 2002. In addition, the Company incurred research and development
expenses for depreciation of test equipment located at Hart Telephone Company
and at mPhase of $839,735 and $845,783 for the fiscal years ended June 30, 2003
and 2002, respectively.
Other portions of research and development expenses include
(a) a decrease of research and development expenses incurred with Microphase by
$322,640 to $428,434 for the fiscal year ended June 30, 2003 from $751,074 for
the comparable period ended June 30,2002, (b) non cash compensation of $385,495
for the twelve month period ended June 30, 2003 compared to $267,338 for the
same period ending June 30, 2002 and (c) miscellaneous expenses of $143,024 and
$298,227 for the periods ended June 30, 2003 and June 30, 2002, respectively.
The Company incurred increased charges with Lucent
Technologies, Inc. in the current year, totaling $1,112,500 incurred on
development of the Broadcast Television Switch for use with Lucent's Stinger DSL
product, $437,500 incurred for the cost reduction effort for mPhase's set top
box. In addition, $75,000 was incurred for software development associated with
mPhase's
i
POTS3 product, as compared with $156,250 incurred in the year
ended June 30, 2002.
The elements contributing to the decrease in other research
and development expenses included a decrease in the operations of the Company's
joint venture, mPhase Television.net. The major costs incurred by the joint
venture were payroll expenses attributable to research and development of the
Company's transmission capabilities and acquisition of television content. Costs
incurred by the joint venture during the fiscal year ended June 30, 2002 were
$232,334 as compared to $62,352 for the period ended June 30, 2003.
Additionally, this decrease can be attributed to the Company abandoning certain
research projects on DSL components the Company believed were no longer
commercially viable, this approximated $12,960 in fiscal 2003 compared to
$440,295 in fiscal 2002.
The decrease in research expenditures incurred with GTRC is
due to the Company's shift of capital expenditures from the Traverser™ DVDDS to
the TV+ product. The Company's project with Lucent provides for cost reduction
of the INI set top box and other product enhancements as well as development of
a Broadcast Television Switch for use with Lucent's Stinger product. To date
expenses incurred with respect to the TV+ platform and development of the new
cost reduced InI are $593,750, and $437,500 respectively for the fiscal year
ended June 30, 2003.
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
i
POTS™ and the mPhase Stretch. We believe the mPhase
i
POTS™
offers a much needed solution for the DSL industry; the
i
POTS™ enables
telecommunications service providers to remotely and cost-effectively perform
loop management and maintenance including line testing, qualification and
troubleshooting. Prior to the introduction of the
i
POTS™, loop management
could not be remotely performed through a conventional POTS Splitter without the
use of expensive cross connects or relay banks because of the mandatory DC
blocking capacitors in traditional POTS splitters, as required by various
telephone protocol and regulatory standards. The unique (patent pending)
i
POTS™
circuit allows most test heads to perform both narrow and wideband testing of
the local loop through the central office POTS Splitter without having to
physically disconnect the POTS Splitter, thereby eliminating the need to
dispatch personnel and a truckroll. The Company anticipates future demand for
this product, as it significantly reduces the cost of deploying and maintaining
DSL services. Also recently developed is the DSL loop extender product called
mPhaseStretch. This product extends the service distance for the mPhase
Traverser™ and can be used in conjunction with other DSL services. The Company
believes there will be future demand for the Stretch loop extender product as it
addresses a primary issue in DSL services.
General and Administrative Expenses
General and administrative expenses were $2,654,971 for the
twelve-month period ended on June 30, 2003 as compared to $6,490,373 for the
same period ended June 30, 2002. This represents a decrease of these expenses of
$3,836,402, or approximately 59% in fiscal 2003 as a percentage of these
expenses in fiscal 2002. The decrease in administrative costs included a
decrease of $1,696,771 in non-cash changes for the issuance of options to
consultants which totaled $748,840 for the year ended June 30, 2003 as compared
to $2,445,561 during the comparable period in 2002. The decrease also occurred
as a result of the reduction in workforce and the reduction in marketing
expenses which the Company began 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 included decreases in
(a) executive compensation and administrative payroll and related costs of
approximately $775,000, (b) marketing expenses such as trade shows of
approximately $250,000, (c) reductions in occupancy costs by approximately
$290,000, (d) decreases in shareholder services and related expenses by
approximately $190,000, (e) insurance and risk management costs by approximately
$145,000 and (f) various decreases in other administrative categories
aggregating approximating $490,000. The foregoing approximated reductions of
general and administraive expenses other than non-cash charges of $2,125,000 in
the twelve months ended June 30, 2003 compared to the same period ended June 30,
2002.
We do not expect this downward trend to continue, yet
administrative expenses are expected to remain at the current levels until the
Company begins its marketing effort to roll out its TV+ products in the second
quarter, and at such time we expect that selling and travel expenses will grow.
Further when the Company begins to implement and support its Television over DSL
platforms then administrative payroll and related costs will again rise as the
Company will need to add employees to its administrative workforce.
Depreciation and Amortization
Depreciation and amortization expense was $515,417 in fiscal
2003 as compared to $670,183 for 2002. These expenses decreased $154,766, or
approximately 23% of the prior years expense as a result of the Company's
reduced need for and outlays on capital expenditures in its two preceding fiscal
years. We do not expect such downward trend to continue but such depreciation
and amortization expense should remain at the current reduced levels until the
Company commences deployment of its Television over DSL platforms. We expect to
increase capital expenditures in connecting with the deployment of equipment at
test sites with various telecommunications service providers globally as
deployment of our TV+ product progresses and such equipment will need to be
depreciated or amortized, as the case may be, that will result in increased
depreciation at that time.
Net Loss
The Company recorded a net loss of $6,650,211 for the period
ended June 30, 2003 as compared to a loss of $11,245,361 for the period ended
June 30, 2002. This represents a loss per common share of $.10 for the fiscal
year ended June 30, 2003 as compared to a loss per common share of $.23 for the
fiscal year ended June 30, 2002 based upon weighted average common shares
outstanding of 65,217,008 and 49,617,780 during the fiscal years ended June 30,
2003 and 2002, respectively.
Twelve Months Ended June 30, 2002 vs. June 30, 2001
Revenue
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. 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 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 2% of the amount invoiced if paid within 29
days of the invoice date, amounted to $14,389 for the period ended June 30,
2002. Such discounts were offered to two major customers that are leading
telecommunications service providers. In each case, the discount was offered to
an existing customer to accelerate collections in connection with a reorder of
our POTS Splitter product and was treated as a purchase discount to our
customer, and the resultant reduction to net sales lowered the gross margins in
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
prototypes of the set top box and the central office equipment associated with
its Traverser™ product in 2002. Generally, as the Company anticipates the
completion of its Traverser™ 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.
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™ and mPhase Stretch. We believe the mPhase iPOTS™ offers a
much needed solution for the DSL industry; the iPOTS™ 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™, loop management could not be remotely performed through a conventional
POTS Splitter without manual deployment of personnel. The unique (patent
pending) iPOTS™ circuit allows most test heads to perform both narrow and
wideband testing of the local telephone loop from a network operations center
central office POTS Splitter without having to physically disconnect the POTS
Splitter, thereby eliminating the need to dispatch personnel and a truckroll to
either a central office in the field or a customer premises. The Company
believes there will be a 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™ and can be used in conjunction with
other DSL services.
The Company believes there will be demand for the Stretch loop
extender product as it extends the reach of delivery of television and data over
DSL.
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.
Six Months Ended December 31, 2003 vs. December 31, 2002
Revenue
Total revenues were $3,780,137 for the six months ended December
31, 2003 compared to $771,837 for the six months ended December 31, 2002,
representing an increase of $3,008,300. The increase was primarily attributable
to an increased demand of the Company's Pots Splitter product line. The Company
continues to believe that its line of Pots Splitter products is positioned to be
competitively priced with high reliability and connectivity, and as such has the
potential to be a significant part of DSL deployment worldwide. The Company
still cannot say if the upturn in sales of its Pots Splitter line will be
sustained at this level. The revenue increase was primarily from two customers Covad Communications and Bell South.
Cost of Revenues
Cost of sales were $3,289,937 for the six months ended December
31, 2003 as compared to $744,030 in the prior period, representing 87.0% of
gross revenues for the first half of fiscal 2004 which ended December 31, 2003
and 96.4% for the first half of fiscal 2003 which ended December 31, 2002,
respectively. Our gross margins have contracted dramatically over the past three
years as spending among the telecommunications providers has contracted, coupled
with downward pressures related to the supply and demand of telecommunications
products. Margins for the first half of fiscal 2004, which ended December 31,
2003, increased by 7.4% over the margins for the same period ended December 31,
2002 due to better cost of materials used in the Pots Splitter product line. Due
to pricing pressure in the current quarter, the improvement of our gross margins
year to date is down 2.2% from the 9.6% improvement we noted in the last
quarter. We are unable to determine whether such increase in margins will
continue for the remainder of fiscal year 2004.
Research and Development
Research and development expenses were $1,454,889 for the six
months ended December 31, 2003 as compared $1,556,142 during the comparable
period in 2002, or a decrease of $101,243. This decrease is comprised primarily
of a reduction in expenses to GTRC of $100,000, compared to the six months ended
December 31, 2002, decreases in expenses to Microphase of approximately $116,000
and $262,500 in the non-cash option expense component of research and
development and expenditures; offset by costs incurred for the increased
research efforts on the TV+ product with Lucent of over $420,000 for the first
half of fiscal 2004 when compared to the first half of fiscal 2003 which ended
December 31, 2002.
Such decreases are the result primarily of elimination of
further development of the TRAVERSER DVDDS product by GTRC as the Company
focuses its efforts on research and development and expenditures associated
therewith on the TV+ product with Lucent, which has been comparatively, to date,
less expensive to develop.
The Company does, however, expect an increase in research and
development costs beginning in March, 2004. In order to broaden and diversify
its current line of business into additional high growth technology areas, the
Company has entered into a Development Agreement, effective February 3, 2004,
with the Bell Labs division of Lucent Technologies, Inc. to commercialize the
use of nano power cell technology. Under the terms of the $1.2 million contract, Lucent/Bell Labs will develop for
mPhase micro-power source arrays fabricated using nanotextured, superhydrophobic
materials. This new business arrangement with Lucent Bell Labs will give mPhase
the opportunity to develop and offer breakthrough battery technology
applications, initially to government market segments including defense and
homeland security, and ultimately to the commercial market. The initial
applications for the nano power cell technology will address the need to supply
emergency and reserved power to a wide range of electronic devices for the
defense department.
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™
and the mPhase stretch. We believe the mPhase
ipots™
offers a much-needed solution for the DSL industry; the
ipots™
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™
, loop management could not be remotely
performed through a conventional Pots splitter without the use of expensive
cross connects or relay banks because of the mandatory dc blocking capacitors in
traditional Pots splitters, as required by the ITU, ANSI and ETSI. The unique
(patent pending)
ipots™
circuit allows most test heads to perform both
narrow and wideband testing of the local loop through the central office Pots
splitter without having to physically disconnect the Pots splitter, thereby
eliminating the need to dispatch personnel and a truckroll. The Company
anticipates future demand for this product, as it significantly reduces the cost
of deploying and maintaining DSL services. Also recently developed is the DSL
loop extender product called mPhase stretch. This product extends the service
distance for the mPhase Traverser™ and can be used in conjunction with other DSL
services. The Company anticipates future demand for the stretch loop extender
product as it addresses a primary issue in DSL services.
General and Administrative Expenses
Selling, general and administrative expenses were $1,518,411 for
the six months ending December 31, 2003 down from $1,624,178 or a decrease of
$105,767 from the comparable period in 2002. The decrease in the selling,
general and administrative costs is comprised primarily of a reduction in
expenses of non-cash charges relating to the issuance of common stock and
options to consultants, which totaled $307,245 for the six months ended December
31, 2003 as compared to $484,358 for the comparable period ended December 31,
2002 resulting in a savings of $177,113. This decrease, coupled with other
reductions in selling, general and administrative costs including travel were
offset by increases in marketing costs, including payroll and related expenses
for two new technical sales managers having the composite effect of increasing
aggregate administrative expenses other than non-cash charges relating to the
issuance of equity investments by approximately $75,000. We expect sales and
travel expenses to grow as the Company's approaches the deployment of its TV+
products in the future.
Depreciation and Amortization
Depreciation and amortization expense was $74,082 for the six
months ending December 31, 2003, down from $259,381, or a decrease of $185,299
from the comparable period in 2002. The decrease is a result of the Company's
reduced outlays for capital expenditures in its two most recent fiscal years. We
do not expect such downward trend to continue but such depreciation and
amortization expense should remain at the current reduced levels until the
Company commences deployment of its Television over DSL platforms. We expect to
increase capital expenditures in connecting with the deployment of equipment at
test sites with various telecommunications service providers globally as
deployment of our TV+ product progresses.
Net Loss
The Company recorded a net loss of $2,565,377 for the six months
ended December 31, 2003 as compared to a loss of $3,421,396 for the six months
ended December 31, 2002. This represents a loss per common share of $.04 for the
six month period ended December 31, 2003 as compared to a loss per common share
of $.06 for the six months ending December 31, 2002; based upon weighted average
common shares outstanding of 63,397,799 and 72,251,251 during the periods ending
December 31, 2003 and 2002, respectively.
Although it is difficult to predict the exact timing of our fist
sales, the Company believes the initial major deployments and the resultant
revenues of its flagship products, the
traverser™
and the
TV+
respectively, are not expected until the second quarter of fiscal year 2005,
which along with any upturn of spending in the telephone industry will also
increase sales and improve the Company's margins and provide the Company with
the opportunities to attain profitability.
The Outlook for the Company's Flagship Products
The Company believes the initial deployments and resultant
revenues of its Flagship products, The Traverser™ DVDDS amd the TV+
respectively, are not expected until the second quarter of fiscal year 2005,
which, if accompanied by a material upturn in spending in the telephone industry
could lead to increased sales and 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 both of its TV platforms as well as its POTS splitter products. 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 DVDDS legacy product.
Microphase has performed research and development for mPhase with respect to
certain component DSL products such as the iPOTS products, low pass filters and
POTS Splitters and the legacy DVDDS product. Most recently, mPhase has engaged
Lucent to cost-reduce its INI set top box and develop its new TV+ product.
For the years ended June 30, 2003, 2002 and 2001 and for the
period since inception (October 2, 1996) to June 30, 2003, approximately
$100,000, $450,000, $3,813,683 and $13,524,300, respectively, has been billed to
mPhase for research and development conducted by GTARC. With the completion of
the DVDDS legacy product, the Company has shifted its research and development
from GATRC to Lucent Technologies Inc. Such new research and development was (a)
initially for cost reduction of its INI set top box (b) development by Lucent of
the new TV+ product (consisting of a newly designed television broadcast switch
compatible with the Lucent Stinger data delivery system as well as equipment of
other major vendors). The Company has recently expanded its research and
development efforts with Lucent Technologies to the NanoTechnology business
segment. The Company incurred research and development expenses with Lucent for
fiscal years ended June 30, 2003 and 2002 of $1,112,500 and $156,250,
respectively.
In February of 2004, the Company and GTRC entered into a final
agreement to convert approximately $1.8 million in payables outstanding to GTRC
and exchange mutual releases in consideration for the issuance to GTRC of a
Warrant (which may be exercised on a cashless basis) to purchase 5,069,242
shares of the Company's common stock valued at $.35 per share. In addition the
Company is obligated to pay GTRC a total of $100,000 in quarterly installments
payments commencing at the end of March of 2004. Under the terms of its license
from GTRC mPhase is the sole, worldwide licensee of the technology developed by
GTARC in conjunction with the legacy DVDDS product. Upon completion of the
legacy DVDDS 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, 2003 is
$34,347,079. During the year ended June 30, 2003, the Company incurred research
and development expenses of $3,538,305 related to the continued development of
its current TV platforms and other DSL products and services as compared to
$3,819,583 for the same period ended June 30, 2002.
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 iPOTS3, as well as its other "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. mPhase continues to aggressively directly
market these product since the current agreement with Corning is non-exclusive
in scope.
In addition, the Company has entered into a Co-Branding
Agreement with Lucent for its redesigned cost reduced Traverser INI set top box.
In addition, pursuant to a Systems Integration Agreement with Lucent, the
Company has been designated as the exclusive worldwide reseller of the Lucent
Stinger when bundled as part of the mPhase TV+ product.
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, 2003 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™ 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,
2003 may be limited due to "changes in control" of our common stock that
occurred.
Stock-based Compensation
Financial Accounting Statement No. 123, Accounting for Stock
Based Compensation, encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation for
grants to employees using the intrinsic method prescribed in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock. The Company has adopted the "disclosure only" alternative described
in SFAS 123 and SFAS 148, which require pro forma disclosures of net income and
earnings per share as if the fair value method of accounting had been applied.
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. The allowance represents
management's assessment and reserve for the technical obsolescence based upon
the inter-operability of its component products, primarily filters and
splitters, with presently deployed and next generation DSL infrastructures as
well as a reserve for marketability based upon current prices and the overall
demand for the individual inventory items. Material changes in either the
technical standards of future DSL deployments or further erosion in the demand
for deployments of DSL infrastructures could affect the estimates and
assumptions resulting in the amounts reported. The allowance is estimated as the
difference between inventory at historical cost, on a first in first out basis,
and market based upon assumptions about future demand, current prices and
product liability, and charged to the provision for inventory, which is a
component of cost of sales. At the point the historical cost is adjusted, a
lower cost-basis for that inventory is established, and subsequent changes in
facts and circumstances do not result in the restoration or increase in that
newly established cost basis.
During the fiscal years ended June 30, 2003, 2002 and 2001, the
Company reserved approximately $302,000, approximately $928,000, and
approximately $315,000, respectively, for technical obsolescence and
marketability based upon current prices and overall demand and charged a like
amount to expense, representing 8.4% of average inventory, at cost, of
approximately $3,588,000 on hand during the period in fiscal 2003; 20.2% of
average inventory, at cost, of approximately $4,602,000 on hand during the
period in fiscal 2002; and 13.6% of average inventory, at cost, of approximately
$2,309,000 on hand during fiscal 2001. The reserve and corresponding charges in fiscal 2002 were increased as the
Company experienced a dramatic decrease, along with the entire telephonic
industry, in demand for our component products in addition to the decision to
table the production of certain product line items built on certain European
standards and which the Company does not expect to pursue in the near future. As
of June 30, 2003, the Company recorded a cost adjustment of approximately
$1,059,000, recognizing permanent cost reductions due to price adjustments
approximating $318,000 and reductions due to obsolescence resulting from a lack
of inter-operability of certain components in inventory with the Company's
present product line approximating $741,000. As a result on June 30, 2003 the
Company had a total inventory valuation reserve of $486,500 against its
inventory with a total balance, at cost, of $2,589,678, or 18.8%. If there was
to be a sudden and significant decrease in demand for our products, or if there
were a higher incidence of inventory obsolescence because of rapidly changing
technology and customer requirements, we could be required to increase our
inventory allowances and our gross margins could be adversely affected.
Material Related Party Transactions
The Company records material related party transactions. The
Company incurs costs for engineering, design and production of prototypes and
certain administrative functions from Microphase Corporation and the purchase of
finished goods, primarily consisting of DSL splitter shelves and filters, from
Janifast Limited. The Company has incurred costs for obtaining transmission
rights. This enabled the Company to obtain retransmission accreditation to
proprietary television content that the Company plans to provide with its
flagship product, the Traverser™ within its incorporated joint venture mPhase
Television.Net, in which the Company owns a 56.5% interest.
Directors that are significant shareholders of Janifast Limited include
Messrs Ronald A. Durando, Gustave T. Dotoli, and Necdet F. Ergul.
Mr. Michael McInerney, an outside Director, is employed by Lintel Inc. and
Mr. Abraham Biderman was employed until September 30, 2003 by our former
investment banking firm Lipper & Company.
Messrs, Biderman, McInerney and Mr. Anthony Guerino own a relatively small
amount of stock, warrants and options in mPhase Technologies, Inc.
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™. In addition the Company has tested its TV+ platform in July of
2003 with 3 customers of Hart Telephone. 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 and COB of Janifast Limited. Mr. Durando
and Mr. Dotoli are officers of Microphase Corporation. Mr. Dotoli is also a
shareholder of Janifast Limited. Mr. Ergul, the chairman of the board of mPhase,
owns a controlling interest and is a director of Microphase Corporation and is a
director and shareholder of Janifast Limited. 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.
Significant charges from related parties are summarized for the periods
enumerated as follows:
Charges and Expenses with Related Parties
For the Three Months
Ended December 31,
For the Years Ended June 30,
(Unaudited)
2001
2002
2003
2002
2003
Charges
    incurred with Janifast
included in:
Cost of
    sales and ending inventory
$8,932,378
$1,759,308
$178,959
$132,465
$1,816,019
Total
    Janifast
$8,932,378
$1,759,308
$178,959
$132,465
1,816,019
Charges
    incurred with Microphase Corp.
included in:
Cost of
    sales and ending inventory
(Including Royalties)
$335,777
$200,440
$86,468
$62,319
$22,948
Research and development
1,660,606
876,074
428,434
240,000
54,000
General
    and administrative
132,600
136,080
133,200
73,200
15,000
Total
    Microphase Corp.
$2,128,983
$1,212,594
$648,102
$375,519
$91,948
Charges
    incurred with Lintel & Affiliates
included in:
Research and development
$192,000
$0
$0
$0
$0
General
    and administrative
285,000
0
0
0
0
Total
    Lintel & Affiliates
$477,000
$0
$0
$0
$0
Charges
    incurred with Joint Venture
Partners & Affiliates
included in:
Research and development
$949,420
$64,039
$0
$0
$0
General
    and administrative
60,000
0
0
0
0
Total
    Joint Venture Partner & Affiliates
$1,009,420
$64,039
$0
$0
$0
Total
    Charges with Related Parties
included in:
Cost of
    sales and ending inventory
$9,268,155
$1,959,748
$265,427
$194,784
$1,838
Research and development
2,802,026
940,113
428,434
240,000
54,000
General
    and administrative
477,600
136,080
133,200
73,200
15,000
Total
    Charges with Related Parties
$12,547,781
$3,035,941
$827,061
$507,784
$1,907,967
Liquidity and
Capital Resources
From inception (October 2, 1996) through December 30, 2003
and June 30, 2003 the Company has incurred cumulative (a) development stage
losses and has an accumulated deficit of $110,581,874 and $108,016,497
respectively and (b) negative cash flow from operations of $44,364,545 and
$43,615,413 respectively. The auditors report for the fiscal year ended June 30,
2003 includes the statement that "there is substantial doubt of the Company's
ability to continue as a going concern". Management estimates that the Company
needs to raise approximately $2,000,000 during the next 12 months to continue
operations. As of June 30, 2003, the Company had a negative net worth of
$3,228,886 up from a negative net worth of $42,849 as a result of continuing net
losses incurred after June 30, 2002.
At June 30, 2003 mPhase had working capital deficit of
$1,405,331 as compared to working capital of $399,321 at June 30, 2002. Through
June 30, 2003, the Company had incurred development stage losses totaling
$108,016,497. At June 30, 2003, the Company had $396,860 of cash and cash
equivalents and $287,135 of net accounts receivables to fund short-term working
capital requirements. At December 31, 2003 mPhase had working capital deficit of
$3,007,748 as compared to working capital deficit of $1,405,331 at June 30,
2003. Through December 31, 2003, the Company had incurred development stage
losses totaling approximately $110,581,874. At December 31, 2003, the Company
had approximately $319,923 of cash, cash equivalents and approximately $182,136
of trade receivables to fund short- term working capital requirements. The
Company's ability to continue as a going concern and its future success is
dependent upon its ability to raise capital in the near term to: (1) satisfy its
current obligations, (2) continue its research and development efforts, and (3)
the successful wide scale development, deployment and marketing of its products.
Historically, mPhase has funded its operations and capital
expenditures primarily through private placements of common stock. Management
expects that its ongoing financial needs will be provided by financing
activities and believes that the sales of its line of POTS Splitter products and
other related DSL component products will provide some offset to cash flow used
in operations, although there can be no assurance as to the level and growth
rate of such sales in future periods as seen with quarter to quarter
fluctuations in component sales. At June 30, 2003, the Company had cash and cash
equivalents of $396,860 compared to $47,065 at June 30, 2002, net accounts
receivable of $287,135 and net inventory of $2,103,328. This compared to
$273,780 of net accounts receivable and $3,342,716 of net inventory at June 30,
2002. At December 31, 2003, the Company had cash and cash equivalents of
$319,923 compared to $396,860 at June 30, 2003, accounts receivable of $182,186
and inventory of $1,088,875. This compared to $287,135 of accounts receivable
and $2,103,328 of inventory at June 30, 2003.
Cash used in operating activities was $749,303 during the six
months ending December 31, 2003. The cash used by operating activities
principally consists of the net loss, and significant changes in assets and
liabilities, including additional cash used for decreasing accrued expenses by
$420,000 offset by depreciation and amortization of $402,257, and by non-cash
charges of $307,425 for common stock options and warrants issued for services
and cash flow provided from a decrease in inventory of approximately $615,000.
The Company does not expect decreases of inventory to be as significant in
upcoming quarters, yet we will not need to increase inventory until the roll out
of our TV+ platform and the increase in accounts receivable is temporary as a
significant sale and shipment occurred late in the September quarter.
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 $100,000
and $450,000, for the twelve month periods ended June 30, 2003 and 2002,
respectively, and $13,524,300 from the period from inception through December
31, 2003.
In February of 2004, the Company and GTRC entered into a
final agreement to convert approximately $1.8 million in payables outstanding to
GTRC and exchange mutual releases in consideration for the issuance to GTRC of a
Warrant (which may be exercised on a cashless basis) to purchase 5,069,242
shares of the Company's common stock valued at $.35 per share. In addition the
Company is obligated to pay GTRC a total of $100,000 in quarterly installments
payments commencing at the end of March of 2004. mPhase is the sole, worldwide
licensee of the technology developed by GTARC in conjunction with the Traverser™
DVDDS product line. Upon completion of the commercial product, GTRC may receive
a royalty of up to 5% of product sales.
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 fiscal year ended June 30, 2002 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.
During the twelve months ending June 30, 2003, certain
strategic vendors and related parties converted approximately $1.9 million of
accounts payable and accrued expenses into 5,923,333 shares of the Company's
common stock and warrants to purchase 3,706,800 shares of common stock of mPhase.
As of December 30, 2003, mPhase is obligated to pay Lucent
Technologies, Inc., the sum of $140,000 per month through May of 2004 under a
new Development Agreement with Lucent for further development of the TV+ product
representing charges the Company has yet to incur of approximately $560,000 in
addition to $420,000 included in accounts payable at December 31, 2003, for a
total sum of $980,000 pertaining to DSL Delivery Systems.
The Company does, however, expect an increase in research and
development costs beginning in February, 2004. In order to broaden and diversify
its current line of business into additional high growth technology areas, the
Company has entered into a Development Agreement, effective February 3, 2004,
with the Bell labs division of Lucent Technologies, Inc. to commercialize the
use of nano power cell technology. Under the terms of the $1.2 million contract,
Lucent/ Bell Labs will develop for mPhase micro-power source arrays fabricated
using nanotextured, superhydrophobic materials. This new business arrangement
with Lucent Bell Labs will give mPhase the opportunity to develop and offer
breakthrough battery technology applications, initially to government market
segments including defense and homeland security, and ultimately to the
commercial market. The initial applications for the nano power cell technology
will address the need to supply emergency and reserved power t o a wide range of
electronic devices for the defense department.
The Company has no commitments from affiliates or related
parties to provide additional financing. The Company has, from time to time,
been able to obtain financing 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.
As a result, conversions of Debt with related parties and strategic vendors
during the periods enumerated is a follows:
For the Six Months
Ended December 31,
For the Years Ended June 30,
(Unaudited)
Equity
    Conversions of Debt With Related
2001
2002
2003
2002
2003
Parties
    and Strategic Vendors
Related Party Conversions
Number
    of shares
4,840,077
6,546,550
5,533,333
4,533,333
0
Number
    of warrants
0
3,733,334
3,491,800
2,491,800
0
Amount
    converted to equity
$2,420,038
$1,594,628
$1,748,756
$1,448,756
$0
Strategic Vendor Conversions
Number
    of shares
0
999,662
390,000
340,000
0
Number
    of warrants
0
870,000
215,000
0
0
Amount
    converted to equity
$0
$529,503
$198,032
$117,486
$0
Total Related Party and Strategic
Party Conversions
Number
    of shares
4,840,077
7,546,212
5,923,333
4,873,333
0
Number
    of warrants
0
4,603,334
3,706,800
2,491,800
0
Amount
    converted to equity
$2,420,038
$2,124,131
$1,946,788
$1,566,242
$0
Gain on
    Extinguishment of Debt
$0
$142,236
$61,226
$40,725
$0
During the fiscal years ended June 30, 2002 and 2003 the Company was able to
negotiate extended payment terms for overdue accounts payable with strategic
vendors. These obligations are now classified as notes payable and included in current and long-term portions of
notes payable in the accompanying balance sheets, based upon the revised payment
terms. The company believes they can maintain its present repayment schedule, or
otherwise renegotiate such terms that are satisfactory to the Company and these
vendors.
On December 31, 2003, the Company became in arrears with
respect to $420,872 of a balloon payment on a Note payable to its outside Law
Firm, Piper & Rudnick LLC. The Company is in discussion with respect to such law
firm to extend and/or cancel all or portions of this debt. It should be noted
that Piper & Rudnick hold warrants received in March of 2001 in exchange for
cancellation of certain payables. Such warrants have conversion rights into our
common stock for 2,233,490 shares that are being registered hereunder (see
Selling Shareholders list-page 65 hereof) and are cashless. Such warrants could
be exercised shares of our common stock which could then be sold in the open
market upon the effectiveness of this Registration Statement on Form S-1 in the
open market to recover our outstanding payable. See also Risk Factor Section on
Page 8 hereof.
As of June 30, 2003, mPhase is obligated to pay Lucent
Technologies, Inc., the sum of $100,000 per month through November of 2003 for
development of mPhase's new Broadcast Television Switch that will enable the
Lucent Stinger Digital Subscriber Line Technology to deliver television as well
as data and voice over copper telephone lines. mPhase has no other material
commitments for capital expenditures. The Company entered a Development
Agreement, dated as of September 15, 2003, with Lucent Technologies, Inc. for
further development of its TV+ product. Under the terms of such agreement, the
Company paid Lucent an initial installment of $70,000 in December of 2003 plus
the obligation to pay 8 additional installments of $140,000 per month commencing
on January 1, 2004. Under the contract, Lucent will enhance the features of the
Television+ product to include a programming guide, near video on demand,
advanced management software and a low bitrate encoder.
We have evaluated our cash requirements for fiscal year 2004
and into fiscal year 2005 and beyond based upon certain assumptions, including
our ability to raise additional working capital from equity financing and
increased sales of our POTS Splitter. The Company anticipated that it would need
to raise, at a minimum, approximately $2,000,000 primarily in private placement
of its common stock with accredited investors, in the current fiscal year. As of
January 30, 2004, the Company has raised approximately $1,990,000, and as such,
we will not need to curtail certain expenses as incurred at the present levels
including marketing and research and development expenses.
Management believes that the $2 million to be raised, in new
Private Placements in the capital markets, will be sufficient to cover its
current operating expenses and permit the company to maintain its present
operational levels. This amount may be supplemented with additional funds that
could be received from investors, including selling shareholders' listed in this
prospectus, currently holding warrants to purchase up to a total of
approximately $19.8 million shares of common stock at exercise prices of
approximately $.30 per share which are presently "in the money" and can be
exercised during the next 12 months; the likelihood and potential for which will
increase should this prospectus become effective and should the price of the
Company's common stock continue to rise.
Should these cash flows not be available to us, we believe we
would have the ability to revise our operating plan and make certain further
reductions in expenses, so that our resources which were available at June 30,
2003, plus financing to be secured during fiscal year 2004, and expected POTS
splitter revenues, will be sufficient to meet our obligations until the end of
fiscal year 2004 and for the first half of fiscal year 2005. We have continued
to experience operating losses and negative cash flows. To date, we have funded
our operations with a combination of component sales, debt conversions with
related parties and strategic vendors, and private equity offerings. Management
believes that we will be able to secure the necessary financing in the
short-term to fund our operations into our next fiscal year. However, failure to
raise additional funds, or generate significant cash flows through revenues,
could have a material adverse effect on our ability to achieve our intended
business objectives.
Current Developments
On February 3, 2004 the Company entered into a Research and
Development Agreement with the Bell Labs division of Lucent Technology, Inc. to
develop micro power source arrays fabricated using nanotextured superhydrophobic
materials. Under the terms of the contract, mPhase is obligated to pay a total
of $1.2 million with an initial deposit of $100,000 plus installments of
$100,000 per month commencing February 2004 and ending December 2004.
BUSINESS
Overview
We develop, market and sell innovative DSL broadband
telecommunications equipment. Our main focus is developing the most cost
effective products to enable telecommunications service providers to deliver
digital quality television (together with data and voice) over ordinary copper
telephone lines. The primary markets for mPhase's television delivery products
are regions of the world outside of the United State that do not have coaxial
fiber infrastructure capable of delivering a large number of digital broadcast
television channels. mPhase is not seeking, at this point in time, to develop
robust feature-intensive expensive television platforms to compete with cable in
the United States currently both of our TV over DSL solutions support a single
television stream over a telephone wire. Therefore our television products are
targeted primarily for International markets outside of the United States.
On February 3, 2003, mPhase entered into the emerging area of
NanoTechnology as a new and second line of business with its execution of a new
Research and Development Agreement with the Bell Labs division of Lucent
Technologies, Inc. NanoTechnology involves the synthetic assembly of new
structures and materials at the molecular level. NanoTechnology has many
potential applications including in industries such as biotechnology, semi
conductors and power cells. The Company is initially focusing its efforts in
developing new power cell NanoTechnology products designed for military
applications.
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 out sources digital
engineering development for the Traverser™ DVDDS System to GTARC. It also out
sources analog engineering development and certain administrative functions to
Microphase Corporation and manufacturing of its POTS Splitter product to
Janifast Ltd.
We have currently have no contracts in place for the
manufacturing of our products with either Microphase Corporation or Janifast
Ltd. or any other non-affiliated third party manufacturers. We periodically
execute purchase orders for the the manufacture of quantities of POTS Splitters
that are made by Janifast Ltd.
mPhase has outsourced to Lucent Technologies, Inc. cost
reduction of its Traverser™ INI set top box and development of its new TV+
platform. With respect to manufacturing of its TV+ Platform, mPhase is targeting
leading contract manufacturing companies with strategically located facilities
globally 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.
The Company has entered into a number of significant
agreements with Lucent Technologies, Inc which include a Co-Branding Agreement,
dated as of January 21, 2003, allowing the Company to add the Lucent name and
Logo to its cost-reduced Traverser™ INI set top box. Such agreement is for an
initial period of one year and is subject to renewal on an annual basis by
mutual consent. In addition, the Company has entered into a Systems Integrator
Agreement, dated as of April 4, 2003 designating the Company as a reseller of
the Lucent Stinger DSL transport product when bundled as part of the mPhase TV+
platform globally. Such agreement gives mPhase the exclusive right to sell the
TV+ product worldwide containing the Lucent Stinger as the DSL transport
mechanism for delivering broadcast television, high speed data and voice over
copper telephone wires. In order to qualify for such status, as an accredited
reseller, Lucent Technologies, Inc. determined that the Company's TV+ platform
added significant software and hardware value to the Stinger DSL product by
enabling such product to deliver broadcast television over ADSL in addition to
the Stinger's well known existing world-class capabilities for the delivery of
voice and high-speed data over copper telephone lines. Such agreement is for an
initial two year term provided that either party may cancel such agreement with
60 days' notice to the other party.
As a number of the Lucent Business Partner organization,
mPhase is able to leverage established relationships with an existing Stinger
customer base without having to expand its sales force. To date there are
approximately 4 million ports of the Stinger deployed around the world. MPhase
and the Lucent Global Business Partners group are also targeting other Business
partners in markets where there currently is a lack of cable television
infrastructure.
The Company has recently entered into a new Development
Agreement, dated as of September 15, 2003, with Lucent that provides for
continuing development and enhancement of capabilities of its TV+ product at a
cost of $1,190,000.
mPhase also develops and designs component DSL products
including Plain Old Telephone Service Splitters (POTS Splitters) and low pass
filters. Since its inception in 1996, virtually all of mPhase's sales revenue
has been derived from the sales of POTS Splitters and other DSL component
products. Recently mPhase introduced its
intelligent
line of POTS
Splitter products. The
i
POTS is a device which allows telecommunications
service providers to perform DSL loop qualification from a central office
without having to deploy workers to the field. mPhase has established a worldwide non-exclusive distribution
agreement with Corning Cable for the
i
POTS product and continues to
market such product directly.
Industry Background
The Company believes there is a significant market for its
television over DSL products, in particular, for its latest TV+ Platform.
Telephone companies worldwide need to deliver a combination of services (i.e.,
voice, television and data) in order to reverse negative economic trends of
reduced margins and customers. The multichannel television business is a growing
industry. Much of the world is largely underserved, with little access to
digital television programming. Cable, outside the US and pockets of Europe, is
in the early stages of deployment. In fact, according to Kagan World Media, the
percent of television-owning households subscribing to multi-channel television
services outside of North America in 2002 was only 36%. Both the Traverser™
DVDDS and mPhaseTV+ platforms empower telecommunications service providers to
(a) capitalize upon this growing revenue-generating segment and (b) be able to
compete more effectively with other technologies, such as cable where installed,
and direct broadcast satellite (DBS) services.
We believe the incentive for telephone companies to deploy
advanced digital services is significant. The traditional revenue model for
telecommunications service providers is shifting as fixed line calling revenues
are continuing to decline with the advent of as wireless telephony and voice
delivered over the Internet. Traditional telephone companies can no longer rely
on a captured market and need to offer new, revenue-generating services in order
to maintain or increase profitability and by offering new services to their
customers.
Cable television providers are also beginning to offer cable
telephony and cable modems for high-speed Internet service, in addition to their
traditional multichannel television services. Additionally, in the U.S., direct
broadcast satellites providers (DBS) are upgrading to two-way satellite
communication to provide data services. In more advanced markets, these
technologies have converged, leaving telephone, cable and direct satellite
television providers competing for the same customers and the same dollars.
mPhase's flagship products enable telephone companies and
other communications service providers utilizing twisted pair telephone wires to
respond to these competitive threats and immediately offer fully integrated
broadband service packages to their subscribers. Importantly, with mPhase's
products, telecommunications service providers are able to compete with cable
and satellite providers in the high-margin multichannel digital television
market. Neither of mPhase's product solutions require a capital-intensive fiber
nor cable build- out, long lead times, or a technically challenging deployment.
Instead, utilizing their already installed copper telephone line infrastructure,
telephone companies can increase their per subscriber revenue, capture
additional marketshare, stave off competition and ultimately increase their
overall market valuation by becoming full-service communications providers
today.
Incumbent telecommunications service providers will have an
opportunity to preempt wide digital cable or satellite adoption that deploy
mPhase's systems DSL and become market leaders in providing data and video
services. Most telecommunications companies and industry analysts currently
understand that data-only solutions are not sufficient to attract new customers,
retain existing ones, and maintain or achieve profitability.
Our Television Over DSL Solution
mPhase markets and sells a line of innovative DSL (digital
subscriber line)-based broadband telecommunications equipment. Our flagship
product line includes two systems enabling the delivery of television over DSL.
Both of these products facilitate telephone companies becoming full service
communications providers by enabling the simultaneous delivery of digital
broadcast television, high speed data and voice services over the existing
telephone line infrastructure. mPhase has these systems with a specific target
in mind, specifically, telephone companies in parts of the world where access to
multi-channel television is limited, as well as domestic, rural telephone
operators.
mPhase introduced its first TV over DSL product, the
Traverser™ Digital Video and Data Delivery System, (DVDDS) in 1998. The DVDDS,
is an end-to-endsystembased upon proprietary technology developed in conjunction
with Georgia Tech Research Corporation. Because it is an end-to-end
video-over-ADSL (asymetric digital subscriber line) equipment. The proprietary
transport method utilized in the Traverser™ System is patent protected. The
intellectual property embodied by the DVDDS System includes the ability to
deliver a plurality of channels to a plurality of users, ensuring that all
channels are available to all users at all times. The Company continues to
market this product, and believes it to be ideal for customers particularly
interested in supporting television services with a minimal need to support
high-speed data customers.
The DVDDS is installed at Hart Telephone Company in Hartwell,
Georgia, where a 70-user system is currently operational. Hart Telephone
completed the construction of its digital headend toward the end of 2001,
signifying the commencement of commercial deployment. Another DVDDS system is
installed at the BMW manufacturing plant in Spartanburg, South Carolina for use
as a closed television system in a commercial setting.
mPhase recently introduced its second product in its flagship
line, called the mPhaseTV+ platform. mPhaseTV+ is a modular solution utilizing
the industry-leading, standards-based Lucent Stinger DSL Access Concentrator for
transport. During July of 2003, mPhase successfully tested its TV+ product with
3 customers of Hart telephone.
Bell Labs approached mPhase about creating a hybrid, mPhaseTV+
solution that would capitalize upon the strengths of each company's DSL platform
in December of 2002. Prior to this, Bell Labs had been working in a contract
engineering capacity helping mPhase to cost-reduce its digital set top box.
The two companies elected to team and create what we believe
to be the most reliable, scaleable and cost-effective system for the delivery of
television services over copper telephone wires. This collaborative platform
combines the data centric strengths of Lucent's Stinger with the TV-centric
strengths of mPhase's Traverser™, resulting in a best of breed solution. For
mPhase, the TV+ Solution marks a shift in strategy from selling a complete,
proprietary platform to providing an industry-standard, modular solution. This
joint approach offered a number of advantages. For instance, by utilizing the
Lucent Stinger for transport, mPhase's mPhaseTV+ platform can capitalize upon
the proven, extremely robust and cost effective method of supporting and
delivering data combined with the Traverser's™ method of supporting video.
The mPhaseTV+ platform eliminates the need for telephone
companies to replace their already installed equipment. Because this solution is
modular, telephone companies that already have Stingers deployed can quickly and
easily upgrade to support television in addition to data and voice services.
There are currently 4 million Stinger ports deployed in 20 countries around the
globe that deliver voice and data over DSL. With minor modifications, mPhase's
BTS and Traverser™ CPE are also interoperable with other leading vendor's DSLAMs
on the market today, making it possible for any telephone company with an
installed base of equipment to quickly and relatively inexpensively become full
service communications providers.
The mPhaseTV+ platform is ideally suited for large-scale
deployments, and in parts of the world which cannot afford the cost of upgrading
to cable infastructure. In contrast to the DVDDS, the TV+ Platform is well
designed for markets where there either is currently or will likely be a demand
to support high speed data AND television services simultaneously and cost
effectively.
NanoTechnology
mPhase has recently entered the business of NanoTechnology
which represents the latest scientific area involving the disciplines of
molecular engineering, quantum physics and electrochemistry, amongst others to
create new advances in products. mPhase is currently focusing upon the
development of advanced battery and power cell products for military
applications.
Business Development, Organization, and Acquisition Activities
We were incorporated in New Jersey in 1979 under the name
Tecma Laboratory, Inc. In 1987, we changed our name to Tecma Laboratories, Inc.
As Tecma Laboratories, Inc., the Company has primarily engaged in the research,
development and exploitation of products in the skin care field. On February 17,
1997, we acquired Lightpaths, Inc., a Delaware corporation, which was engaged in
the development of telecommunications products incorporating DSL technology, and
we changed our name to Lightpaths TP Technologies, Inc.
On January 29, 1997, we formed another wholly-owned
subsidiary called TLI Industries, Inc. The shares of TLI were spun off to our
stockholders on March 31,1997 after we 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, we
became the holding company of our wholly owned subsidiary, Lightpaths, Inc. on
February 17, 1997.
On June 2, 1997, we completed a reverse merger with Lightpaths TP
Technologies, Inc. and changed our name to mPhase Technologies, Inc.
On June 25, 1998, we acquired Microphase Telecommunications,
Inc., a Delaware corporation, by issuing 2,500,000 shares of our common stock.
Microphase Telecommunications' principal assets were patents and patent
applications utilized in the development of our proprietary Traverser™
technology (as discussed in related footnote 11 of financial statements on P
F-35). See also "Material Related Party Transactions," contained with "Critical
Accounts Policies" on P 27 and "Certain Relationships and Related Transaction" P
51.
In March 2000, we entered into a joint venture with Alphastar
International, Inc. to form a company called mPhase Television.net, Inc., (mPhaseTV)
in which we held a 50% interest. On May 1, 2000, we acquired an additional 6.5%
interest in mPhaseTV, and made it one of our consolidated subsidiaries.
On March 14, 2000, we entered into an agreement with BMW Manufacturing Corp.,
located in South Carolina. Under the agreement, we installed version 1.0 of the
Traverser™ for BMW's telephone transmission network. BMW has agreed that, upon its notice and consent, we
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 its deployment to 48 unique units.
Our flagship installation, Hart Telephone, has completed the
build and development of its digital headend during fourth quarter of 2001. The
completion of their digital headend marks the move from beta to commercial
deployment of the Traverser™ platform. Hart currently has approximately 70
customers receiving about 80 channels of television services.
In May of 2002 mPhase initiated discussions for development of a cost-reduced
intelligent network interface (INI) set top box with the Bell Laboratories
division of Lucent Technologies, Inc.
Effective December 1, 2002, mPhase entered into a Development
Agreement with the Bell Laboratories division of Lucent Technologies, Inc. for
the development of mPhase's broadcast television switch (BTS) as an intergrated
platform with the Lucent Stinger™ DSL Access Concentrator.
On December 9, 2002, pursuant to a Statement of Work, Lucent commenced
development of the BTS for mPhase.
On December 15, 2003, mPhase engaged Lucent for the cost-reduction of its
Traverser™ INI set top box.
On January 21, 2003, mPhase entered into a Co-Branding Agreement with Lucent
under which mPhase's INI set top box will be co-branded with the Lucent
Technologies, Inc. name and logo.
On April 4, 2003, mPhase entered into a Systems Integration
Agreement with Lucent. Under the terms of the agreement, mPhase has been given
the exclusive right to sell worldwide a "bundled" solution consisting of mPhase
BTS and the Lucent Stinger.
In May of 2003, MPhase has announced development of the
mPhaseTV+ Platform with Lucent Technologies' Bell Labs. This modular product, as
described in the "Our Solutions" section earlier, utilizes the industry-standard
Lucent Stinger for transport. Bell Labs has been design contracted to design the mPhase BTS and Traverser™ CPE to be used in conjunction with the Lucent Stinger.
A redesigned cost reduced second generation set top box CPE equipment has been
completed. A prototype version of the BTS is also completed and has been
successfully tested with 3 customers at Hart telephone in July of 2003. The
first version of our TV+ product is scheduled to be completed during the second
quarter of fiscal year 2004.
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 years ended June 30, 2002 and June
30, 2003 respectively, we generated approximately $2.6 million and $1.6 million
in revenue, respectively, from the commercial sale of our component products.
Our other component products, including Filters and Central Office POTS Filter
Shelves, are marketed to other DSL equipment vendors. We do not believe that the
sales of our Traverser™, mPhaseTV+ or INI2 feature products will be materially
impaired by the sale of these component products to these potential competitors.
mPhase is in the process of evaluating a full range of
contract manufacturers, including manufacturers outside of the U.S. We believe
that there are many qualified manufacturers around the world. mPhase is likely
to contract with multiple companies depending on which countries the Traverser™
DVDDS and TV+ products are deployed and depending upon cost-competitiveness.
Our Products & Services
To date mPhase's revenue has been derived exclusively from
sales of DSL component telephone equipment parts, the majority of which has come
from our sales of POTS Splitter Shelves. We have derived no material revenue to
date with respect to either of our broadcast television platform over DSL
platforms. In our fiscal years ended June 30, 2003 and June 30, 2002 we
generated approximately $1.6 million and $2.6 million in revenue, respectively,
from the commercial sale of our component products and overall losses for such
years of $6,650,211 and $11,245,361, respectively.
mPhase supplies the telecommunications industry with products designed to
enable, enhance or support broadband DSL services. mPhase's line of TV-over-DSL
products include its legacy, end to end platform, the Traverser™ Digital Video
and Data Delivery System (DVDDS,) as well as its newly available mPhaseTV+
Platform. Additionally, mPhase markets a line of DSL component products ranging
from commodity items such as traditional POTS Splitters and microfilters to
higher-end, feature-rich products such as the recently introduced Intelligent
POTS Splitter.
Traverser™ DVDDS
mPhase's legacy television-over-DSL System is the Traverser™
DVDDS. This system is a patented end-to-end solution enabling the delivery of
digital broadcast television, high speed data services, and traditional voice
services (requires Class5E voice switch) over a pair of copper telephone wires.
The mPhase DVDDS consists of three key elements: a digital
headend called the Programming and Control Center (PCC), Central Office (CO)
equipment which includes the Universal Access Shelf and POTS Splitter Shelf, and
adjusted set top box called the INI. In order for a subscriber to receive
services from a telco via the Traverser™ System, all three components must be
installed.
Telecommunications service providers using the mPhase DVDDS
need to build a digital video head-end to receive television content. 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. The PCC can be co-located with a single central office or remotely
located and connected to each CO via DWDM, SONET or ATM. mPhase does not
manufacture digital head end equipment. However, after extensive lab and field
testing, it has established vendor relationships with a number of head end
equipment providers.
The Traverser™ DVDDS Central Office (CO) equipment, known as
the mPhase Universal Access Shelf and POTS splitter shelf, integrate video
signals from the PCC with the Internet and voice signals. The outputs are DSL
"lines" capable of carrying a single high- quality video stream, high-speed data
at speeds up to 2 Mbps downstream and telephone voice services.
Upon reaching the home or business, the DSL line is fed into
the Traverser™ INI set top box, which functions as a combined DSL modem and
digital set-top box. The set top box separates the three signals and routes them
to the television, PC and telephone.
The DVDDS is telco switching and operating equipment agnostic
and is not dependent on a specific operating configuration. However, because the
DVDDS is based upon proprietary technology, it does not interoperate with other
manufacturer's DSL equipment, at neither the CO nor the home. Our patented
television delivery method transmits signals in native MPEG-2 format to ensure
high quality and reliability.
The Traverser™ utilizes technology we license exclusively from
Georgia Tech Company and technology which we license non-exclusively from
Globespan Semiconductor, Inc. Georgia Tech provided a significant part of the
engineering research and design to develop the Traverser™. The Traverser™ also
utilizes an advanced filler technology developed by Microphase Corp.
mPhaseTV+ Platform
mPhase and Bell Labs Lucent Technologies have teamed together to
create an industry-standard, high quality and cost effective television over DSL
platform known as the mPhaseTV+ Platform. This solution consists of three key
elements:
The mPhase BTS (broadcast television switch) layer interfacing the video
headend and the DSLAM;
Lucent's Stinger DSL Access Concentrator, a field-tested central office (CO)
piece of equipment which provides DSL connections to individual customers; and
mPhase CPE, a highly integrated set top box to deliver video in the home
environment from the DSL link.
This hybrid, collaborative platform capitalizes upon the
strengths of both Lucent's and mPhase's technology. The BTS embodies the same
video networking intelligence as the Traverser™ DVDDS. However, when combined
with the proven, robust Stinger, which effectively and cost-effectively supports
data, the end result is what we believe to be a best-of-breed, industry-standard
solution.
The mPhase BTS resides between the DSLAM and the video
headend and provides video networking intelligence that enables television
services over DSL. The BTS is also responsible for video-related functionality
such as demuxing and mapping MPEG-2 bitstreams, video subscriber management,
video content management and billing management.
MPhase has developed, in conjunction with Bell Labs, a low
cost, efficient and compact digital set top box with an integrated DSL Modem
called the INI. Various versions of this device exist or are in development such
as a standards-based product inoperable with the Lucent Stinger as well as other
manufactures' DSLAMs, and a proprietary version interoperable with the mPhase
Traverser™.
Together with a digital video headend (or PCC) and the Lucent
Stinger, the mPhaseTV+ platform provides another end-to-end solution for
customers wanting to provide television and high-speed data services over their
existing copper infrastructure. Based on a streamlined, modular architecture,
future upgrade, additional features and ancillary services can be implemented
without major modifications to the entire system.
The Company expects to sell the mPhaseTV+ platform to customers
planning to support large scale deployments, delivering both high speed data and
television services. The original Traverser™ DVDDS is better suited for smaller
deployments where the customer is primarily interested in delivering television
and not necessarily high speed data. Both products are suited for markets
lacking an existing coaxial cable infrastructure. Currently, both platforms
support a single television stream and are therefore not competitive in urban
and suburban U.S. markets where digital cable and DBS servers are prolific.
The Company believes the initial major deployments and any
revenues from sales of its flagship products, the Traverser™ DVDDS and the TV+,
are not expected until the second quarter of fiscal year 2005. An upturn of
spending in the telephone industry should also increase sales and improve the
Company's margins and provide the Company with the opportunity to attain
profitability.
Component Parts Pots Splitter Shelves Intelligent Pots
Splitter (iPots)
mPhase also designs and markets a line of DSL component products
ranging from commodity items such as carrier-class POTS splitters located at the
central office as well as CPE splitters and filters located in the home.
Recently, mPhase has introduced a line of innovative loop management products
intended to lower the operational costs involved with supporting DSL services.
The
i
POTS, (intelligent POTS Splitter), product line includes the
i
POTS
1
and the
i
POTS
3
. These products mark a significant advancement in
automating loop management by utilizing "intelligent functionality" thereby
enabling testing of a telephone loop for DSL deployment without having to
dispatch personnel to the field to manually perform such tests. These products
reduce the operational costs of deploying and maintaining DSL services. The
i
POTS
3
is an upgrade from the original
i
POTS
1
, allowing service providers
a 3-way view of the network and is compatible with DSLAM's of most vendors. The
i
POTS
1
is designed for use only with the Lucent Stinger DSLAM.
mPhase has established a worldwide non-exclusive distribution
agreement with Corning Cable Systems for the sale of the
i
POTS product
line. Utilizing Corning as a distribution channel potentially expands exposure
for this product, as Corning is one of the largest vendors of central office DSL
filtering equipment. In parallel, the Company continues to aggressively market
this product directly.
mPhaseStretch™
mPhase has developed another product known as the mPhaseStretch™.
This product is a loop extender which enhances the performance of the legacy
Traverser™ DVDDS System by extending its transmission distance for the delivery
of voice, video and data up to 20,000 feet. The mPhaseStretch™ is a powered
device that is placed on the line at approximately 9,000 feet or before the
signal degrades. The addition of the Stretch gives mPhase what the Company
believes to be the greatest serviceable distance radius for the delivery of
converged services. Our current product is only compatible with the Traverser™
DVDDS. A universal version of the Stretch™, or a version interoperable with
other vendor's DSLAM equipment, (including the mPhase TV+/Lucent Stinger
solution) is currently being developed by mPhase.
Microfilters
We have developed a complete line of microfilters, including a 2
and 4 pole filter for use in single and multiphone households, as well as a
network interface splitter.
mPhase Television.Net, Inc.
mPhase Television. Net, Inc. (mPhase TV) has established
licensing agreements with content originators thus allowing service providers to
offer subscribers a full complement of U.S. television programming. mPhase TV
has secured rights to rebroadcast television content from U.S. network and cable
broadcasters. mPhase TV can offer programming content in the U.S. to U.S.
telephone service providers seeking to deploy either of mPhase's television
platforms. This eliminates the need for service providers from having to
negotiate many separate contracts with U.S. broadcast television programmers.
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 that included 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 limited to providing the appropriate licenses and
relationships as opposed to offering a content aggregation solution. Telephone
companies purchasing content through mPhaseTV are required to build a full-scale
digital headend.
In March of 2000, mPhase provided the initial funding for
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 Internal Inc. (Alphastar) to purchase
200,000 shares of our stock for $4.00 per share. The agreement required
Alphastar to provide mPhase Television the right to transmit television
broadcasts over Alphastar's digital satellite network. On May 1, 2000, we
acquired an additional 6.5% interest in mPhase Television for an additional
$1,500,000 in cash. We report mPhaseTV as a consolidated subsidiary.
As part of its cost reduction efforts in fiscal year 2002,
mPhase renegotiated its joint venture relationship with Alphastar that
originally established mPhaseTV. Under the new arrangement, mPhaseTV terminated
its lease of the rights to use Alphastar's earth station satellite uplink and
downlink facility in Oxford, CT. Such facilities had enabled mPhaseTV to
aggregate television content from the multiple networks and content providers
eliminating the need for telecommunications service providers in the United
States from building a master headend as an additional cost to the Traverser™
DVDDS and TV+ platforms. As noted above, recent developments in technology have
significantly reduced the cost of such master headend facilities which
eliminates the need for mPhase to aggregate television content. mPhaseTV may
serve as a strategic asset for selling the mPhase's video over DSL solutions in
the U.S. by having secured the rights to transmit over DSL over a number of
television channels directly from the content providers. This eliminates the
need for a U.S. telecommunication services provider from purchasing either of
mPhase's television delivery platforms from having to assemble such rights
itself from each of the content providers. mPhase currently owns a 56%
controlling interest in mPhaseTV.
Research and Development Activities
We have designed the Traverser™ and its ancillary component
parts in conjunction with Georgia Tech Research Institute which conducts a
majority of our digital research and development for the Traverser™ line of
products. Microphase Corporation contributed the analog technology incorporated
in the design of the Traverser™, as well as providing ongoing development of
analog components for the Traverser™.
As of June 30, 2003, we had been billed approximately
$13,500,000 for research and development conducted by Georgia Tech Research
Institute (GTRC), of which approximately $1,770,480 remains outstanding. On
March 26, 1998, we entered into a license agreement with Georgia Tech which owns
the Digital Video and Data System technology. GTRC and its affiliates have
granted us the exclusive license to use and re-sell Traverser™ DVDDS worldwide.
We are obligated to pay Georgia Tech royalties of 5% on future sales of the
Traverser™DVDDS. The license agreement expires automatically when the patents
covering the invention expire. We are currently negotiating with Georgia Tech to
amend certain provisions of the agreement which would reduce the royalty in
connection with the settlement of mPhase's current account with GTRC.
On February 13, 2003 mPhase announced that the Bell Labs
division of Lucent Technologies, Inc. would help redesign a cost-reduced
features enhanced version of mPhase's Traverser™ Intelligent Network Interface
digital set top box. The initial version of the newly- designed box will cost
approximately 50% less than mPhase original set top box. The newly designed set
top box will be developed in stages and will eventually support multiple
channels of television, an electronic programming guide, video-on-demand, MPEG-2
and MPEG 4 digital quality TV, video over IP and is compatible with both CAP and
DMT modulation. mPhase has contracted to pay Lucent a total of $625,000 relating
to the redesign and cost-reduction of its set top box and has paid as of March
31, 2003 $472,955 to Lucent representing installments due based upon percentage
of completion of the purchase order. In addition, mPhase has contracted to pay
Lucent $1,000,000 for development of its broadcast digital television switch and
integration of such switch with the Lucent Stinger resulting in mPhase's new
mPhaseTV+ Platform. As of March 30, 2003 mPhase has paid Lucent $100,000 for
such product and has an accrued balance of $200,000. mPhase is obligated to pay
Lucent $100,000 per month through November of 2003 for completion of the
mPhaseTV+ Platform. Finally, mPhase has recently entered into a new Development
Agreement, dated as of September 15, 2003, with Lucent to continue development
of new features and enhanced capabilities for its TV+ platform at a cost of
$1,190,000.
Market
Currently, mPhase's target market for its television over DSL
solutions include telephone companies and telecommunications service providers
worldwide. By deploying converged voice, video and data over their existing
copper telephone infrastructure, telecommunications service providers can
increase revenue and profitability and retain valuable market share. In most
parts of the world, the telephone company is strongly positioned to be first to
market with an integrated bundle of communications services. There are over 1
billion telephone lines serving consumers around the globe compared to only
586.9 (source: Kagan World Media) million homes passed by cable. In today's
competitive telecommunications landscape, both the Traverser™ and the mPhaseTV+
platform have now become necessary solutions for all telecommunications service
providers to compete effectively in today's marketplace.
We estimate that on average, a typical telco using either
mPhase's end-to-end system, the Traverser™ DVDDS, or it's mPhaseTV+ platform
utilizing the Lucent Stinger can generate significant revenue with a payback on
its initial investment in either system within 2-3 years depending on the size
and scope of the deployment. Importantly, this relatively short payback period
is still applicable in countries where the average cost of a basic cable
television package is well below the US average. The economics of mPhase's video
over DSL platforms are such that, for example, when charging as little as $7 per
month per subscriber for a basic television package, the system operator can
expect a full return on investment within a three-year period of time.
Furthermore, over 5 years a telecommunications service provider can achieved a
significantly higher rate of return on its investment in either of our TV
platforms than would be possible with deploying voice and data alone. mPhase has
developed a detailed and highly customizable return on investment model to
assist the telco in assessing its rates of return and profitability based on
additional revenue generated by the new services.
mPhase expects to derive the majority of its revenue from the sale of its
mPhaseTV+ television over DSL platform, developed in conjunction with Lucent
Technologies, for a number of reasons:
The platform has been designed to achieve maximum cost
efficiencies. Initial versions of this product will be cost-competitive with the mPhase Traverser™ DVDDS. However, because this solution utilizes the Lucent
Stinger for transport, continued price reductions are expected. It is
anticipated that as Lucent continues to drive down the cost of the Stinger and
as further engineering efforts are completed in the Stinger to better and more
efficiently support broadcast video services, we believe the total per port cost
of the mPhaseTV+ platform will be the most cost-effective solution available on
the market.
mPhase believes its business partnership with Lucent will
help validate our products and result in greater sales. mPhase will be able to
leverage Lucent's relationships with its estimated 250 business partners around
the globe, thereby increasing exposure for its mPhaseTV+ product set
significantly.
The mPhaseTV+ platform more effectively supports the
delivery of data services than the Traverser™ DVDDS. Therefore, in markets where
large-scale data deployments will be required, the mPhaseTV+ platform brings to
mPhase a new competitive advantage. By contrast, the Traverser™ DVDDS is better
suited for deployments where the support of television services is the primary
and long-term objective, such as in commercial settings.
mPhase is currently targeting international incumbent
telephone companies and rural independent domestic local exchange carriers for
sale of its TV over DSL platforms. The Company expects to derive the majority of
its system sales abroad, specifically from telephone service providers in
Europe, Latin America, Asia and Africa. Additionally, the modular video elements
of mPhase's mPhaseTV+ platform (i.e., the BTS and INI) can be retrofitted to
existing Lucent Stinger deployments. mPhase, through the support of Lucent,
anticipates targeting many of the customers of Lucent that currently have
deployed over 4 million ports of the Stinger data and voice delivery product in
over 20 countries around the globe.
mPhase believes that foreign telco markets will adopt its TV
over DSL product solutions more rapidly than domestic service providers since
there is not generally the demand outside of the United States for robust cable
features (such as simultaneous delivery of 3 different TV channels through one
set top box) as there is in the United States. Therefore, the Company has placed
much of its initial emphasis on targeting the international telco market.
The demand for alternative television options is high in
Europe, Asia and Latin America. According to the Yankee Group, European
countries have been early adopters of video-over-DSL and alternative video
delivery technologies, deploying and testing services more aggressively than
North America. These markets possess pockets of moderate to high-income
households willing and able to purchase advanced digital services, but very few
alternatives exist. According to the Gartner Group, another industry analyst,
the number of carriers in the Europe, Middle East and African regions planning
on deploying video over DSL services has "leapt from 40 percent to almost 75% in
2002." Analysts from the Gartner Group commented that, "This is a clear sign
that carriers realize they need to move upstream with broadband value-added
services."
Cable television and digital broadcast satellite (DBS)
services are less competitive internationally than in North America. Because of
the limited expansion of cable, especially two-way digital cable and satellite
networks abroad, access to advanced communications services such as high-speed
Internet and digital television in many areas is limited to copper-based
delivery methods.
Parts of the world representing the largest opportunities for
mPhase include Latin America, Eastern Europe and parts of Africa. For instance,
multichannel television service providers in Latin America have only penetrated
18.3% of the 94.7 million television-owning households (source: Kagan World
Media). In Latin American telecommunications service providers deploying one of
mPhase's solutions for TV over DSL will be able to offer television services at
very competitive rates. Currently, multichannel television services are only
available to the top-tier consumers in Latin America as well as in other
developing parts of the world. mPhase's return on investment models indicate
that telecommunications service providers charging as little as $7 a month for
basic services can anticipate a return on investment within a very short period
of time. This attractive business model will help make digital multichannel
television service available to a large number of potential new users.
The U.S. multichannel television market is highly
competitive, because the penetration of cable services in North America is much
higher than the rest of the world and there are numerous service options for
multichannel pay TV customers, telecommunications service providers must provide
incentives for cable television subscribers to switch service providers.
However, in foreign markets, where (a) there is a high penetration of television
sets, a very limited number of broadcast television channels are received using
antennas from "through-the-air" broadcast and (b) direct-to-home satellite
providers cannot currently support the delivery of reliable, two-way data
services. In such markets we believe that a telephone company is much better
positioned to be the initial and primary provider of bundled converged services.
The following table represents the estimated number of television viewers in
select countries.
TV
*Multichannel
Households
Subscribers
(in millions)
Worldwide
994
430.55
Asia
519.3
207.6
Europe
233.3
94.8
Latin
    America
118.7
24
North
    America
112.7
104.15
*
Multichannel subscribers
includes cable and DBS subscribers
Source: Global Multichannel Markets 2002: Performance and Projections for 59
countries. Kagan World Media.
Competition in the telco market is becoming increasingly
aggressive due to changing telecommunications regulation, heightened competitive
threats from alternative technologies, such as cable and digital broadcast
satellite, and price declines in local and long distance telephony services.
Domestic telecommunications service providers face difficulty
in maintaining market share and revenue. Price declines in traditional voice
services and the proliferation of Internet telephony are impacting operating
margins. mPhase believes that the independent, rural domestic telco is the
especially vulnerable to these competitive threats and has a need to develop new
product delivery capabilities to increase revenues and margins. However,
independent telecommunications service providers are not as well capitalized as
the larger domestic regional bell operating companies and other large incumbent
service providers and therefore tend to be very cost conscious in equipment
deployment.
In areas where there is sparse cable deployment, or the cable
infrastructure is antiquated, there is an increasing demand for better quality
of service, more programming channels and additional services. The independent
telecommunications service providers operating in these areas can benefit from
the incremental revenue generated by services offered through mPhase's
TV-over-DSL platforms.
Beyond selling its solution to telephone companies, mPhase
believes it will eventually experience success in serving the global
multi-dwelling unit (MDU) market. This market consists of large residential or
multi-office complexes, hotels, and campus environments. The MDU can effectively
become its own multichannel television content distributor using either the
Traverser™ or the mPhaseTV+ solution by building a digital video head-end to
downlink broadcast television programming and installing mPhase's equipment.
mPhase is in the process of evaluating market opportunities
in North America and around the world to address commercial applications of the
Traverser™ DVDDS and TV+ platforms. However, the Company believes that
commercial sales to manufacturing or enterprise customers will only represent a
marginal source of revenue because of the limited scope and demand for internal
broadcasting networks in the commercial market.
Sales Strategy
TV over DSL products
mPhase will
pursue sales opportunities through a variety of channels, including direct sales
by the Company's internal sales team, distributors and in conjunction with
Lucent Technologies, Inc.
mPhase's most recent product offering, the mPhaseTV+ was
designed to utilize Lucent Technologies' Stinger for transport. By adding an
mPhase BTS at the central office and mPhase's standards-based digital set top
box at the customer premises, mPhaseTV+ services can be added anywhere the
Stinger is or going to be deployed. The Lucent Stinger is an already proven
solution with over 4 million ports deployed in 20 countries around the globe. In
parts of the world lacking cable infrastructure where the Stinger is deployed
represents an opportunity to retrofit these deployments with television
services. And for new deployment opportunities,
mPhase will be able to leverage the Lucent brand and the
reputation of the Stinger as a highly scaleable and cost-effective transport
medium.
mPhase has also established a reseller agreement with Lucent,
making it a part of Lucent's Global Business Partner organization. As a result
of this agreement, mPhase can sell carriers a complete solution by reselling the
Lucent Stinger along with mPhase's BTS and Traverser™ INI Set Top Box. In
addition, mPhase and Lucent are developing a joint marketing program. As part of
this program, the two companies will identify target markets where their
combined television, voice and data over DSL solution is most competitive.
Together, Lucent and mPhase will approach Lucent's established global business
partners with the mPhaseTV+ solution for further marketing to targeted
telecommunications service providers. This partnership represents a tremendous
opportunity for mPhase, as Lucent has over 250 business partners in more than 40
countries around the globe.
In markets where Lucent is directly selling into accounts deemed
to be strong potential markets, the two companies can collaborate their efforts
to bring forth a compelling product solution.
Joint Venture Opportunities
There also exist opportunities for mPhase to capture recurring
revenue from the sale and deployment of its video over DSL systems through a
joint venture business model. Under this scenario, mPhase would sell its
equipment to a joint venture company, of which mPhase retains a minority
position. This company would negotiate either a line leasing or revenue share
program with the incumbent telephone company and subsequently deploy and operate
one of mPhase's television over DSL platforms. mPhase believes a JV may provide
additional opportunities for sales to international telephone carriers that may
not have the funds to procure mPhase's television over DSL system, yet recognize
the potential business opportunity for such a platform.
Funding of the equipment and operation of the system would be
the responsibility of the JV. Member companies of the JV would include entities
interested in controlling television services such as the government and large
media groups. For example, mPhase is pursuing a JV in Turkey where the funding
partners include companies that own newspapers and television stations that are
looking to expand their revenues. Although a JV requires greater involvement
from mPhase in terms of organizing and coordinating the appropriate parties, the
long term potential benefits to mPhase are great. mPhase would not only secure
equipment sales, but would benefit from the recurring revenues from a JV engaged
in being a broadcast television service provider.
DSL Component Products
mPhase also sells a line of DSL component products including:
POTS Splitter Shelves
i
POTS Splitters, in-line microfilters, Continuity
Test Cards and Network Intelligent Device splitters. These products are
essential components to any DSL installation, regardless of the DSL equipment
vendor. The mPhase components are interoperable with Digital Subscriber Line
Access Multiplexing equipment from a broad range of DSL manufacturers. Potential
customers for the DSL component products include other DSL equipment
manufacturers, re-sellers, network integrators and telecommunications service
providers deploying DSL worldwide.
To date, mPhase has deployed over 250,000 POTS Splitter ports.
The mPhase DSL component products are sold both by mPhase directly as well as
through established distribution agreements.
The Company recognizes the current depressed market conditions
that pervade the telecommunications equipment industry. However, the Company has
begun to experience a rebound in the market and anticipates sales to increase in
the second half of calendar year 2003.
We are continuously in discussions with various original
equipment manufacturers of telecommunications equipment to identify
opportunities for joint bids for infrastructure deployment with major domestic
and international telecommunications service providers. We also continue to
market our component products directly.
Intellectual Property, 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 regarding patent protection 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 that 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 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 us falls into
two general categories, analog and digital intellectual property. We have a
pending patent application that was filed in June 1999 claiming priority to
three provisional patent applications for the analog portion of our technology
used in relation to the Traverser™ DVDDS platform.
Our DSL filter technology enables increased video clarity over copper wire,
longer transmission distances and decreased signal error rate. The intellectual
property related to the DSL filters includes:
low pass filter shelves and POTS Splitters, which combine the Traverser™ DSL
spectrum from the traditional voice service; and
ADSL filters, which are filters that conform to the worldwide
DSL standard and are utilized in the transmission of data and voice service at
up to 8 Mbps. We believe that both of these components are key to providing a
DSL signal at sufficient quality and service distances for combined video and
data delivery.
We license our digital intellectual property. We also have an
exclusive, worldwide license to manufacture and market products using the
technology developed by Georgia Tech under our contract with them. The exclusive
license with Georgia Tech is applicable for the duration of their patent
protecting the system design and other technology related to the Traverser™
DVDDS platform.
The licensed patented and patent-pending technology developed at Georgia Tech
covers the capabilities of the Traverser™ DVDDS.
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.
The digital intellectual property that we license provides
several unique aspects of the Traverser™ DVDDS. Among these 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,
or could be watching different channels with no degradation of service. The
proprietary design, which does not incorporate a Digital Subscriber Line Access
Multiplexer architecture, makes the Traverser™ DVDDS a true broadcast system
rather than a mere video delivery system.
The patent 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 covers the development of the Framer
and the Framer chip. The Framer is an Integrated Circuit which gives the
Traverser™ the capability of allocating both the downstream and upstream
bandwidth into virtually any application required. This feature allows the
Traverser™ to deliver both MPEG-2 Digital Video and Internet data simultaneously
and also allows for future applications of the Traverser™. This technology is
exclusively licensed worldwide to mPhase Technologies, Inc.The patent 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.
We also have patents pending that protect:
the software management and control of the individual
Traverser™ links, the DVDDS, and the channel changing methodology and interface
to the electronic program guide at the customer site through the Intelligent
Network Interface;
apparatus and methods of remote control of the Intelligent Network Interface;
and,
systems and methods to provide subscribers means to playback previously
recorded video content.
We purchase from GlobeSpan telecommunication rate adaptive DSL chipsets used
in the Traverser™ DVDDS.
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™ technology,
our future operations could be adversely affected.
Regulation
The Federal Communication Commission, or FCC, and various state
public utility and service commissions, regulate most of our 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 our potential
penetration into certain markets. In addition, our business and results of
operations may also be adversely affected by the imposition of certain tariffs,
duties and other import restrictions on components which we obtain from
non-domestic component suppliers. Changes in current or future laws or
regulations, in the U.S. or elsewhere, could materially adversely affect our
business.
Competition
mPhase competes with broadband equipment manufacturers including
cable and digital broadcast satellite equipment manufacturers, as well as other
equipment vendors manufacturing DSL and/or video over DSL equipment. The global
telco customer base has the ability to adopt other forms of content distribution
if it chooses to compete in the multi-channel home entertainment market.
However, mPhase believes its television platforms are attractive to a broader
range of customers of telecommunication service providers. The following
sections outline the competitive landscape for mPhase.
Direct Broadcast Satellite Services
In the US, direct broadcast satellite (DBS) providers have
experienced increased market penetration over the past few years. DBS service is
the only alternative television delivery method in rural areas where cable has
not been deployed, or antiquated analog cable is predominant. However, in some
cases, DBS service does not include local off-air channels and most DBS
operators are not able to provide competitively-priced wireless high-speed
Internet service. Technology enabling two-way, high-speed Internet access over
DBS is relatively new and we expect it will take time to reach broad market
acceptance as a cost-effective, reliable data delivery method.
Cable Television Network Operators
Although the cable industry is our indirect competitor, the
Company believes that two-way cable service provides incentive to
telecommunications service providers to explore additional services. Cable
companies pose a serious competitive threat to telephone company market share.
However, in order for cable companies to compete for high-speed Internet and
telephony customers, the cable plant must be upgraded to two-way digital cable.
Cable companies have invested large amounts of capital to upgrade dense service
population areas in the US. However, cable operators typically underserved less
densely populated regions with antiquated analog cable systems. Outside of the
U.S., very little two-way cable plants have been installed.
Telecommunications service providers around the world have the
incentive to deploy TV-over-DSL solutions either because of the threat of the
cable companies, or because of the lack of cable infrastructure. The Company
believes that its TV over DSL platforms are the most cost effective and robust
video delivery technology deployable by our primary target market of
international telecommunications service providers. Installing our platforms
will facilitate telephone companies in retaining and capturing market share, as
well as generating incremental revenue. mPhase's Traverser™ DVDDS and mPhaseTV+
solutions enable telecommunications service providers to compete effectively in
a converging services market with a "triple play" of services-digital
television, high-speed data and voice services in an attractive bundled package.
Other DSL and Video over Copper (VoC) Equipment Manufacturers
mPhase competes with vendors of DSL equipment and system
software. Companies that supply DSL technology including 2Wire, ADC telecom,
Advanced Fiber Communications, Alcatel, Broadcom, Copper Mountain, Corning Cable
System, Ericson, Fujutsu, Motorola, Minerva, ECI Telecom, Turnstone, Westell,
Teradyne, TuT Systems, Marconi Communications, NEC, Nokia, Paradyne, Samsung,
Texas Instruments, DVTel, Inc. Pace Micro Tech., Net to Net, and Myrio.
Other Video-over-DSL technologies compete with the Traverser™
DVDDS and TV+ platforms are summarized below.
Differentiating Factors
mPhase believes that it offers the most reliable, scaleable and
cost effective television over copper solutions. The mPhase TV over DSL
solutions were designed specifically to enable delivery of broadcast television
over DSL. Both the Traverser™ DVDDS and the mPhaseTV+ platform are basic
solutions for delivery of digital broadcast television over DSL without
expensive features such as interactive television, video-on-demand and
simultaneous multi channel delivery over a copper telephone line. Such features
can be added to our platforms depending upon demand. mPhase television products
are solutions for parts of the world that are in need of "just TV" rather than
costly, feature rich solutions. We believe there is a significant market that is
not currently serviced world wide for delivery of broadcast
television programming on a cost-effective basis. mPhase's streamlined solutions
are designed to be the most cost-effective in emerging international markets.
There are a number of telecommunications equipment providers
competing in the television over DSL space. For instance, a new division of
Motorola (formerly known as Next Level Communications) has secured over 100
customers predominantly in the United States. The majority of their video
deployments utilize a specific form of DSL known as VDSL (very fast digital
subscriber line). VDSL requires that telecommunications service providers
install fiber optics into the neighborhood, or close to the customer premises
because signals can only travel up to 3-4,000 feet over copper telephone wires.
As a result, compared to the mPhase solutions, the platform is significantly
more capital intensive and therefore expensive due to the cost of the
infrastructure upgrade (i.e., installing fiber optics closer to the customer
premises). Motorola has also introduced an ADSL version of its equipment, which
has a serviceable distance radius of approximately 8,000 feet. This newer
product could compete more directly with both of mPhase's TV over DSL solutions.
Motorola's Television over DSL products tend to be more feature rich and
expensive than mPhase's solutions. Motorola concentrates the majority of its
sales efforts within the US market where consumers demand a robust viewing
experience due to the penetration of fiber and cable.
Another company that sells equipment similar to mPhase is
Alcatel. Alcatel is the leading supplier of DSLAMS (digital subscriber line
access multiplexers) around the globe. Alcatel has deployed several video over
DSL trials although its largest, with Aliant Telecom in Canada, was
discontinued. Historically, Alcatel has worked with multiple equipment vendors
to create a complete, end-to-end video solution, including software providers
and set top box provider, Pace. Recently Alcatel acquired iMagicTV, adding to
its product line for delivery of television over DSL. Alcatel recently announced
upgrades to its DSLAM line or products to better support the delivery of
converged voice, video and data.
Other major competition in the DSLAM market include UT Starcom
and HUWAEI Company.
Lucent also offers another video-over-DSL solution currently
deployed at SakTel in Canada. This solution, similar to Motorola's products,
offers greater functionality and features, however is more costly in terms of
per port equipment cost than the mPhaseTV+ platform. Finally, other smaller
vendors are emerging, partnering with third party equipment vendors to create a
video-over-DSL platform. Equipment providers such as Net to Net and Paradyne are
modifying their data platforms to support the delivery of television services.
However, mPhase believes it has certain cost of equipment advantages over other
vendors making its system more economically viable for potential customers. The
Company believes that the strength of the video-centric BTS coupled with the
strength of the data-centric Lucent Stinger make its solution extremely
competitive in its target markets.
Headend Equipment Providers
As discussed earlier, mPhase does not manufacturer digital head
end gear. All customers interested in deploying an mPhase video over DSL system
must build a digital headend to receive, digitize and groom the television
signals. Through extensive lab and field testing, mPhase has established an
approved vendor list of several headend providers.
Employees
We presently have thirteen (13) full employees, two (2) of whom
are also employed by Microphase Corporation. See the description in the section
entitled "Certain Relationships and Related Transactions." Properties.
We maintain our corporate headquarters at 587 Connecticut
Avenue, Norwalk, Connecticut 06854, under a facilities agreement with Microphase.
The agreement with Microphase provides that we lease office space, lab
facilities and administrative staff on a month-to-month basis.
We also maintain an office and research facility at Georgia Tech
in Atlanta, Georgia as part of our basic ordering agreement with Georgia Tech.
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 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.
OUR MANAGEMENT
Executive Officers and Directors
Our officers and directors, and their ages, as of June 30, 2003, are as
follows:
Name
Age
Position(s)
Necdet
    F. Ergul
80
Chairman of the Board
    and Director
Ronald
    A. Durando
46
President, Chief
    Executive Officer And Director
Gustave
    T. Dotoli (2)
68
Chief Operating Officer
    and Director
Martin
    S. Smiley
56
Executive Vice
    President, Chief Financial Officer
and General Counsel
David
    L. Klimek
50
Chief Technology
    Officer and Director
Anthony
    H. Guerino, Esq. (1)(2)
58
Director
Abraham
    Biderman (1)(2)
55
Director
Michael
    P. McInerney
48
Director
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
The following is biographical information about each of our Officers and
Directors.
Necdet F. Ergul
has served as our Chairman of the Board
since October 1996 with the exception of a three-month period in 2000 when he
temporarily resigned. Mr. Ergul also currently serves as the President and Chief
Executive Officer of Microphase Corporation, a leading developer of military
electronic defense and telecommunications technology, which he founded in 1955.
He is also a Director of Janifast Ltd. 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 Technologies,
Inc. and has served as our President, Chief Executive Officer and a Director
since its inception in October 1996. In addition, Mr. Durando has been the Chief
Operating Officer of Microphase Corporation since 1994. From 1986 to 1994, he
was President and Chief Executive Officer of Nutley Securities, Inc., a
registered broker-dealer. He is also Chairman of the Board of Janifast Ltd., a
Hong Kong corporation for operational and manufacturing companies in China. Mr.
Durando is also President and Chief Executive Officer and Director of
PacketPort.com, Inc.
Gustave T. Dotoli
has served as our Chief Operating
Officer and a Director since our inception in October 1996. In addition, Mr.
Dotoli has been the Vice President of Corporate Development of Microphase
Corporation since December of 1996. Mr. Dotoli is also a Director and Vice
President Corporate Secretary of PacketPort.com, Inc. He formerly was 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 Dickinson University in 1959.
David Klimek
is a co-founder of mPhase Technologies, Inc.
and has served as our Chief Technology Officer since June 1997 and as Director
of Engineering since its inception in October 1996. Mr. Klimek joined our 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 telecommunication company, Hart Cable,
a cable television company and Diversified Golf. Mr. McInerney was 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 our board since
August 3, 2000. Mr. Biderman is Executive Vice President of Lipper & Company;
Executive Vice President, Secretary and Treasurer of The Lipper Funds; and
Co-Manager of Lipper Convertibles, L.P. Prior to joining Lipper & Company 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 us as Executive Vice President,
Chief Financial Officer and General Counsel on August 20, 2000. With over twenty
years experience as a corporate finance and securities attorney and as an
investment banker, Mr. Smiley serves as mPhase's strategic financial leader.
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.
Board Committees
Our Board of Directors has an audit committee and a
compensation committee. The audit committee approves of our independent
accountants and determines the appropriateness of their fees, reviews the scope
and results of the audit plans of the independent accountants, oversees the
scope and adequacy of our internal accounting control and record-keeping systems
and confers independently with the independent accountants. The audit committee
consists of Messrs. Biderman, and Guerino. Consistent with NASD regulations, an
audit charter was developed and adopted by the Board and the audit committee on
August 2, 2000.
The compensation committee makes recommendations to our Board
of Directors regarding our stock incentive plans and all matters of
compensation. The compensation committee consists of three (3) Directors,
Messrs. Biderman, Dotoli and Guerino.
Director Compensation
For their attendance of Board and Committee meetings, we
compensate the Directors in cash as well as in the form of stock options granted
under our Stock Incentive Plan, which grants are included in the table "Security
Ownership of Certain Beneficial Owners and Management" and the notes thereto.
Executive Compensation
The following table sets forth, for the fiscal year ended June 30, 2003 and
the two previous fiscal years, the compensation paid by us to, as well as any
other compensation paid to or earned by,
our Chief Executive Officer; and
our four most highly compensated executive officers, other
than the Chief Executive Officer, whose compensation during the fiscal year
ended June 30, 2003 was greater than $100,000 for services rendered to us in all
capacities during such year.
Summary Compensation Table
Annual Compensation
Long-Term Compensation
Name
    And
Securities
Restricted
Underlying
Stock
Options/Sars
Principal Position
Year
Salary
Bonus
Award(s)
(Shares)
(Shares)
Ronald
    A. Durando(1)(2)
2003
$234,504
-
-
450,000
Chief Executive Officer
2002
388,504
-
-
1,850,000
and President
2001
395,004
-
-
1,225,000
Gustave T. Dotoli(1)(2)
2003
193,254
-
-
350,000
Chief Operating Officer
2002
313,504
-
-
1,225,000
2001
342,917
-
-
860,000
David L. Klimek(1)
2003
90,958
-
-
75,000
Chief Technology Officer
2002
106,606
-
-
162,500
2001
175,577
-
-
110,000
Martin S. Smiley
2003
109,583
-
-
200,000
Executive VP,
    Chief
2002
l58,712
-
-
540,000
Financial Officer
2001
163,435
-
-
670,000
& General
    Counsel
Includes $7,500 stipend as a director for fiscal years ended
June 30, 2001 and June 30, 2002.
Does not include warrants to purchase 1,395,400 shares of common stock
issued Mr. Durando and Warrants to purchase 1,096,400 of common stock of Mr.
Dotoli respectively to cancel previously unpaid compensation. Such warrants
relate to $234,362 and $35,000 of unpaid cash compensation to Mr. Durando for
fiscal years 2002 and 2003 and $184,105 and $27,500 of unpaid cash compensation
to Mr. Dotoli for fiscal years 2002 and 2003, respectively the amount of which
is included as cash compensation in the above table. 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 $100,000 during any year.
STOCK OPTIONS
The following table contains information regarding options
granted in the fiscal year ended June 30, 2003 to the executive officers named
in the summary compensation table above. For the fiscal year ended June 30,
2003, mPhase granted options to acquire up to an aggregate of 1,615,000 shares
to employees and directors.
Option Grants in
    Last Fiscal Year
(Individual Grants)
Number of
% of Total
Weighted
Weighted
Securities
Options/SARS
Average
Average
Potential Realizable
    Value of
Underlying
Granted to
Exercise
Market
Assumed Annual Rates of
    Stock Price
Options/SARS
Employees
or Base
Price
Appreciation for 5 Year
    Option Term
Granted
in Fiscal
Price
on Grant
Expiration
Name
(#)
Year
($/Share)
Date
Date
0%
5%
10%
Ronald
    A.
Durando
450,000
27.9
$.40
$.31
2008
$0
$0
$44,665
Gustave T. Dotoli
350,000
21.7
.40
.31
2008
0
$0
$34,740
David Klimek
75,000
4.6
.40
.31
2008
0
$0
$7,445
Martin Smiley
200,000
12.4
.40
.31
2008
0
$0
$19,850
The following table sets forth information with respect to
the number and value of outstanding options held by executive officers named in
the summary compensation table above at June 30, 2003. During the fiscal year
ended June 30, 2002, no options were exercised. The value realized is the
difference between the closing price on the date of exercise and the exercise
price. The value of unexercised in-the-money options is based upon the
difference between the closing price of mPhase's common stock on June 30, 2003,
and the exercise price of the options.
Fiscal Year-End Option Values
Number of Securities
Value of Unexercised
Shares
Value
Underlying Unexercised
In-the-Money Options at
Acquired
Realized
Options at year end (#)
Year-End ($)
on
Name
Exercise
$
Exercisable
Unexercisable
Exercisable
Unexercisable
Ronald A. Durando
-
-
4,225,000
-
$59,000
$-
Gustave T. Dotoli
-
-
2,860,000
-
39,000
-
David Klimek
-
-
547,500
-
4,650
-
Martin Smiley
-
-
1,285,000
-
18,400
-
Employment Agreements
All employment agreements with our current management have expired and are in
the process of being renegotiated subject to approval of the Board of Directors
of the Company.
Long-Term Stock Incentive Plan
We have a Long-Term Stock Incentive Plan, under which we have
reserved for issuance 15,000,000 shares of common stock. Our shareholders
approved our 2001 Stock Incentive Plan at our annual meeting of shareholders on
May 30, 2001. The plan provides for grants of incentive stock options and
nonqualified stock options to our key employees and consultants and those key
employees and consultants of our subsidiaries.
With respect to our current plan, the compensation committee
of the Board of Directors administers and interprets our current plan. The
exercise price of common stock underlying an option may be greater, less than or
equal to fair market value. However, the exercise price of an incentive stock
option must be equal to or greater than the fair market value of a share of
common stock on the date such incentive stock option is granted. The maximum
term of an option is five years from the date of grant. In the event of a
dissolution, liquidation or change in control transaction, we may require option
holders to either exercise their options within 30 days or surrender such
options (or unexercised portion thereof).
Upon stockholder approval, the Board of Directors merged our prior Long-Term
Stock Incentive Plan into the 2001 Plan.
The purpose of the 2001 Plan is to promote our long-term
growth and profitability by providing key people with incentives to improve
stockholder value and contribute to our growth and financial success and by
enabling us to attract, retain and reward the best available people.
The maximum number of shares of common stock that we may
issue with respect to awards under the 2001 Plan is 20,000,000 shares, in
addition to the shares previously authorized for issuance under our Company
plan, but which are not issued before our current plan is merged into the 2001
Plan.
The maximum number of shares of common stock subject to
awards of any combination that may be granted under the 2001 Plan during any
fiscal year to any one individual is limited to 2,500,000 subject to the
exceptions made by the Board of Directors. These limits will be adjusted to
reflect any stock dividends, split-ups and reverse stock split, unless the Board
determines otherwise. If any award, or portion of an award, under the 2001 Plan
expires or terminates unexercised, becomes unexercisable or is forfeited or
otherwise terminated, surrendered or canceled as to any shares, or if any shares
of common stock are surrendered to us in connection with any award (whether or
not such surrendered shares were acquired pursuant to any award), or if any
shares are withheld by us, the shares subject to such award and the surrendered
or withheld shares will thereafter be available for further awards under the
2001 Plan. Those shares that are surrendered to or withheld by us, or that are
forfeited after issuance, however, will not be available for incentive stock
options.
The 2001 Plan is administered by our Board of Directors or by
a committee or committees as the Board of Directors may appoint from time to
time. The administrator has full power and authority to take all actions
necessary to carry out the purpose and intent of the 2001 Plan, including, but
not limited to, the authority to: (i) determine who is eligible for awards, and
the time or times at which such awards will be granted; (ii) determine the types
of awards to be granted; (iii) determine the number of shares covered by or used
for reference purposes for each award; (iv) impose such terms, limitations,
restrictions and conditions upon any such award as the administrator deems
appropriate; (v) modify, amend, extend or renew outstanding awards, or accept
the surrender of outstanding awards and substitute new awards (provided however,
that, except as noted below, any modification that would materially adversely
affect any outstanding award may not be made without the consent of the holder);
(vi) accelerate or otherwise change the time in which an award may be exercised
or becomes payable and to waive or accelerate the lapse, in whole or in part, of
any restriction or condition with respect to such award, including, but not
limited to, any restriction or condition with respect to the vesting or
exercisability of an award following termination of any grantee's employment or
consulting relationship; and (vii) establish objectives and conditions, if any,
for earning awards and determining whether awards will be paid after the end of
a performance period.
In the event of changes in our common stock by reason of any
stock dividend, split-up, recapitalization, merger, consolidation, business
combination or exchange of shares and the like, the administrator may make
adjustments to the number and kind of shares reserved for issuance or with
respect to which awards may be granted under the 2001 Plan, in the aggregate or
per individual per year, and to the number, kind and price of shares covered by
outstanding award.
Without the consent of holders of awards, the administrator
in its discretion is authorized to make adjustments in the terms and conditions
of, and the criteria included in, awards in recognition of unusual or
nonrecurring events affecting us, or our financial statements or those of any of
our affiliates, or of changes in applicable laws, regulations, or accounting
principles, whenever the administrator determines that such adjustments are
appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the 2001 Plan.
Participation in the 2001 Plan will be open to all of our
employees, officers, directors and other individuals providing bona fide
services to us or any of our affiliates, as the administrator may select from
time to time. All three (3) non-employee directors and approximately ten (10)
employees will be eligible to participate in the 2001 Plan.
The 2001 Plan allows for the grant of stock options, stock
appreciation rights, stock awards, phantom stock awards and performance awards.
The administrator may grant these awards separately or in tandem with other
awards. The administrator will also determine the prices, expiration dates and
other material conditions governing the exercise of the awards. We, or any of
our affiliates, may make or guarantee loans to assist grantees in exercising
awards and satisfying any withholding tax obligations arising from awards.
Because participation and the types of awards available for
grant under the 2001 Plan are subject to the discretion of the administrator,
the benefits or amounts that any participant or groups of participants may
receive if the 2001 Plan is approved are not currently determinable. For this
purpose, the benefits or amounts that participants may receive if the 2001 Plan
is approved do not include awards granted under the Prior Plan that are amended
and restated to become awards covering the same number of shares under the terms
of the 2001 Plan. These amended and restated awards are not contingent on
stockholder approval since the Prior Plan was previously approved by the
stockholders.
Our Board of Directors may terminate, amend or modify all or any provision of
the 2001 Plan at any time.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee during fiscal 2002
were Messrs. Dotoli, Mr. Biderman and Guerino. Mr. Dotoli is our Chief Operating
Officer. Neither Messrs Guerino nor Biderman is not one of our officers or
employees. None of our 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 2001 that has a director or executive officer serving on
our Board of Directors except that Mr. Dotoli is also a member of the Board of
Directors of PacketPort.com, Inc., a company in which Mr. Durando serves as
Chief Executive Officer. Mr. Ergul is a controlling shareholder and Director of
Microphase corporation (which provides certain administrative services to mPhase)
and Mr. Dotoli and Mr. Durando are Officers of Microphase., Mr. Dotoli, together
with Mr. Durando and Mr. Ergul, are controlling shareholders, officers and
directors of Janifast Ltd. Janifast Ltd. has produced components for the
Traverser™, and is expected to produce a material amount of DSL components for
us in the future.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of June 30, 2003, certain information
regarding the beneficial ownership of our shares:
by each person who is known by us to be the beneficial owner of more than
five percent (5%) of its outstanding common stock;
each of our directors;
by each executive officer named in the Summary Compensation Table; and
by all of our directors and executive officers as a group.
Name
    and Address of Beneficial Owner(1)
Number of
"Shares"
of Common
Percentage
Stock
Ownership
Beneficially
of Common
Owned
Stock(2)
Necdet
    F. Ergul(7)(9)
16,477,451
21.0%
Ronald
    A. Durando(3)(7)
15,584,548
19.9%
Gustave
    T. Dotoli(7)(10)
4,596,100
6.1%
J. Lee
    Barton(4)(6)(7)(8)
3,589,000
5.0%
David
    Klimek(7)
715,000
1.0%
Lintel,
    Inc.(6)
4,114,219
5.7%
Abraham
    Biderman(5)(7)
312,733
*
Anthony
    Guerino(7)
302,500
*
Michael
    McInerney(7)(8)
168,900
*
Martin
    Smiley(11)
3,841,050
5.2%
Microphase Corp,(12)
14,169,535
18.2%(12)
Janifast(13)
8,550,000
11.7%(13)
All
    executive Officers & Directors as a group
(eight
    people) (8)
49,701,501
53.1%
*
Less than 1%
Unless otherwise indicated, the address of each beneficial owner is 587
Connecticut Avenue, Norwalk, Connecticut 06854-1711.
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 72,086,186 shares outstanding on October 27,
2003, and, with respect to each person holding options or warrants to purchase
shares that are exercisable within 60 days after October 27, 2003, 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
6,541,250
Ronald
    A. Durando
6,142,067
Gustave
    Dotoli
3,513,067
J. Lee
    Barton
295,000
Lintel,
    Inc.
-
David
    Klimek
322,500
Martin
    Smiley
2,443,007
Michael
    McInerney
155,500
Abraham
    Biderman
307,500
Anthony
    Guerino
302,500
Includes 1,396,148 shares held by Durando Investment LLC, and 7,350,000
shares and 1,200,000 warrants held by Janifast which Mr. Durando controls and
230,000 shares owned by Karen and Ronald Durando Foundation; and 95,000 shares
owned by Durando Charitable Remainder Trust.
Includes 100,000 shares owned by Kim Barton, his wife and 100,000 shares
owned by Betty Barton, his daughter. Mr. Barton resigned from the Board of
Directors in March 2002.
Includes 5,233 shares of common stock, options and warrants for 272,500
shares of common stock. Does not include 1,103,225 shares held by Lipper & Co,
where Mr. Biderman is a director.
The address for Lintel, Inc. and J. Lee Barton, who is Chief Executive
Officer of Lintel, Inc. is 196 North Forest Avenue, P.O. Box 388, Hartwell, GA
30643.
Includes options for 25,000 shares of common stock received as compensation
for participation on the Board of Directors.
Mr. Michael P. McInerney, President of Lintel, Inc. subsidiaries, was
appointed to the Board at the 2002 Annual Shareholders meeting.
Includes 200,000 shares owned by Berrin Snyder, his daughter and 150,000
owned by Eda Peterson, his daughter. Also includes 8,244,667 shares and
3,200,000 warrants and 1,200,000 shares and warrants to purchase 1,200,000
shares issuable pursuant to the terms of a convertible note held by Microphase
Corporation, a company in which Mr. Ergul is the President and Chief Executive
Officer.
Includes 195,000 shares owned by Patricia and Gustave Dotoli Foundation;
and 30,000 shares owned by Dotoli Charitable Remainder Trust.
Includes 333,334 shares and warrants to purchase 333,334 shares issuable
pursuant to the terms of a convertible note.
Includes 8,244,667 shares and 3,200,000 warrants and 1,200,000 shares and
warrants to purchase 1,200,000 shares issuable pursuant to the terms of a
convertible note held by Microphase Corporation, the totals of which are
included in the total beneficially owned shares of Necdet F. Ergul.
Includes 7,350,000 shares and 1,200,000 warrants, the totals of which are
included in the total beneficially owned shares of Ronald A. Durando.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 retransmission accreditation to
proprietary television content that the Company plans to provide with its
flagship product, the Traverser™ within its incorporated joint venture mPhase
Television.Net, in which the Company owns a 56.5% interest.
The Company has also incurred charges for beta testing and
on-site marketing, including the display of a live working model at Hart
Telephone. In addition, the Company has entered into a supply agreement with
Hart Telephone, which is scheduled to commence upon the commercial production of
the Traverser™.
In addition the Company has tested its TV+ platform in July
of 2003 with 3 customers of Hart Telephone. 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 and COB of Janifast Limited. Mr. Durando and Mr. Dotoli are officers
of Microphase Corporation. Mr. Dotoli is also a shareholder of Janifast Limited.
Mr. Ergul, the chairman of the board of mPhase, owns a controlling interest and
is a director of Microphase Corporation and is a director and shareholder of
Janifast Limited. 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.
Transactions with Officers, Directors and their Affiliates
Directors that are significant shareholders of Janifast Limited include
Messrs Ronald A. Durando, Gustave T. Dotali, and Necdet F. Ergul.
On November 11, 2002 and November 12, 2002, the Company
issued warrants to purchase 2,491,080 shares of common stock of the Company
which were valued at $480,917 or $.193 per share with an exercise price of $.01
per share for the cancellation of unpaid compensation to two officer's of the
Company as of October 14, 2002.
In March of 2003, Messrs, Durando, Dotoli and Smiley
participated in a private placement of the company investing $20,000, $20,000
and $75,000 respectively, receiving common stock of mPhase at $.30 per share
plus 5 year warrants of mPhase to purchase a like amount of common stock at $.30
per share.
In March of 2003, Messrs. Durando the CEO and President and
Smiley the CFO and General Counsel of the Company lent the Company $30,000 and
$100,000 respectively evidenced by two promissory notes bearing interest at 12%
per annum due in September of 2003. As of June 30,2003 the Company prepaid Mr.
Durando's promissory note in full together with accrued interest. In June 2003,
Mr. Smiley agreed to extend his note until July, 2004. Also in June, 2003,
Microphase agreed to convert $360,000 of accounts payable to a note payable,
interest at 12%, due in July, 2004. The notes have provisions for prepayment by
the Company, and, at the option of the holder, provide for the conversion of
unpaid principal and interest into units valued at $.30 each, each unit
consisting of one share of the Company's common stock and a one warrant to
purchase the Company's common stock at $.30 per share for a period of 5 years.
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.
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.
Mr. Michael McInerney, an outside Director, is employed by Lintel Inc. and
Mr. Abraham Biderman was employed until September 30, 2003 by our former
investment banking firm Lipper & Company.
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.
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.
In September 2001, certain of our officers and directors
purchased an aggregate of 2,000,000 shares of common stock for an aggregate
investment of $1,000,000. Theseissuances included 1,000,000 shares to Mr. L.
Barton, a director at that time, for an investment of $500,000; 400,000 shares
to Mr. Ronald A. Durando, the Company's president and a director, for an
investment of $200,000; 400,000 shares to Mr. Gustave Dotoli , the Company's
vice-president and a director, for an investment of $200,000; and; 200,000
shares to Mr. Martin S. Smiley, the Company's vice-president, for an investment
of $100,000; and were exempt pursuant to Section 4(2) and/or Rule 506 of
Regulation D of the Act.
For consulting services rendered in connection with the joint
venture, 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.
Messrs. Biderman, McInerney and Mr. Anthony Guerino own a relatively small
amount of stock, warrants and options in mPhase Technologies, Inc.
Transactions with Microphase Corporation
mPhase's President and Chairman of the Board of the Company
are also employees of Microphase. On May 1, 1997, the Company entered into an
agreement with Microphase, whereby it will use office space as well as the
administrative services of Microphase, including the use of accounting
personnel. This agreement was for $5,000 per month and was on a month-to-month
basis. In July 1998, the office space agreement was revised to increase the rent
to $10,000 and in January 2000 to $11,050 per month. In July 2002, such amount
was increased to $12,200 per month, and as of January 1, 2003 such rent was
reduced to $10,000 per month. Additionally, in July 1998, mPhase entered into an
agreement with Microphase, whereby mPhase reimburses Microphase $40,000 per
month for technical research and development assistance. Such agreement was
amended as of January 1, 2002 to reduce such payment to $20,000 per month. Such
amount was reduced to $6,000 per month starting January 1, 2003. Microphase also
charges fees for specific projects on a project-by-project basis. During the
years ended June 30, 2001, 2002 and 2003 and for the period from inception
(October 2, 1996) to June 30, 2003, $2,128,983, $1,212,594, $648,102, and
$7,224,526, respectively, have been charged to expense or inventory under these
Agreements and is included in operating expenses in the accompanying
consolidated statements of operations. Management believes that amounts charged
to the Company by Microphase are commensurate to amounts that would be incurred
if outside third parties were used.
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 had been charged to expense
under this Agreement and is included in licensing fees in the consolidated
statement of operations. As of June 25, 1998, the Company acquired MicroTel and
as of that date this Agreement was no longer in effect.
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™ Digital Video and Data Delivery System
and DSL component products. During the years ended June 30, 2001, 2002 and 2003
mPhase recorded royalties to Microphase totaling $297,793, $78,762 and $47,304,
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 warrants to purchase 2,200,000 mPhase common stock.
During the fiscal year ended June 30, 2003 Microphase
received 4,033,333 shares of common stock plus five year warrants to purchase
1,000,000 shares of common stock of mPhase at $.30 per share in exchange for the
cancellation of accounts payable totaling $920,000. As of June 30, 2002, the
Company had $92,405 included in other liabilities-related parties in the
accompanying consolidated balance sheet and as of June 30, 2003 $360,000 in
notes payable-related parties. Additionally, at June 30, 2003, approximately
$142,000 of undelivered purchase orders remain outstanding with Microphase.
Transactions with Janifast
Janifast Ltd., a Hong Kong corporation manufacturer, which
has produced components for our prototype Traverser™ 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.
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 Ltd., for the year ended June 30, 2001, Janifast Ltd. received
1,200,000 shares of the Company's common stock. For the year ended June 30, 2002
pursuant to debt conversion agreements, Janifast Ltd. received 3,450,000 shares
of mPhase common stock and 1,200,000 warrants to purchase mPhase common stock.
During the year ended June 30,2003 Janifast Ltd. was issued 1,500,000 shares of
mPhase common stock in connection with the cancellation of $360,000 of
outstanding liabilities of mPhase, the value of which was based upon the price
of the Company's common stock on the effective date of the settlement. No gain
or loss was recognized in connection with conversions by Janifast Ltd. for the
fiscal year ended June 30, 2003. During the years ended June 30, 2001, 2002 and
2003 and the period from inception (October 2, 1996) to June 30, 2003
$8,932,378, $1,759,308 and $10,691,686 respectively, of invoices for products
and services have been charged to inventory or expense- other
liabilities-related parties as long term liabilities in the consolidated balance
sheet and as of June 30, 2003 no amounts remain payable to Janifast Ltd.
Additionally, at June 30, 2003, approximately $1,435,000 of undelivered purchase
orders remain outstanding with Janifast Ltd.
Transactions with Lintel, Inc and Affiliates
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 completion of beta testing and the commencement of production of the
Traverser™. 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. Mr. J. Lee Barton, the
president and chief executive officer of Lintel Inc., (Lintel is the parent of
Hart Telephone Company), and at that time Mr. Barton was a Director of the
Company, received a $285,000 bonus, a stock award of 140,000 shares and 100,000
options in addition to the 125,000 granted to Hart for Beta testing services in
the year ended June 30, 2000 and 120,000 options for services as a Director for
the year ended June 30, 2001.
Michael McInerney, one of our directors, is the president of
Lintel, Inc. Prior to becoming a Director of mPhase, Mr. McInerney received
options to purchase 25,000 shares of mPhase common stock for the fiscal year
ended June 30, 1999, of which 5,000 options were exercised during the fiscal
year ended June 30, 2000. Mr. McInerney received options for 23,000 shares of
common stock in the fiscal year ended June 30, 2001 and 15,000 options for
consulting and beta testing services in the fiscal year ended June 30, 2002. In
addition for the fiscal years ended June 30, 2002 and June 30, 2003 Mr.
McInerney received options and warrants to purchase a total of 62,500 shares and
for 35,000 shares of mPhase common stock, respectively.
Transactions with Other Related Parties
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 was included in
general and administrative expenses in the statement of operations for the 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 stipulated 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, 2003 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.
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 consolidated balance sheet as of June 30, 2003.
During the fiscal years ended June 30, 2001, 2002 and 2003, the joint venture
was charged $1,009,420, $64,039 and $0, respectively for fees and costs by its
joint venture partner and its affiliates.
Transactions with Strategic Vendors
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. As of
August 11, 2003 the Company is $35,000 in arrears with respect to the $5,000 per
month payment of the Promissory Note. On December 31, 2003, the Company became
in arrears with respect to $420,872 of a balloon payment on a Note payable to
its outside Law Firm, Piper & Rudnick LLC. The Company is in discussion with
respect to such law firm to extend and/or cancel all or portions of this debt.
It should be noted that Piper & Rudnick hold warrants received in March of 2001
in exchange for cancellation of certain payables. Such warrants have conversion
rights into our common stock for 2,233,490 shares that are being registered
hereunder (see Selling Shareholders list-page 65 hereof) and are cashless. Such
warrants could be exercised shares of our common stock which could then be sold
in the open market upon the effectiveness of this Registration Statement on Form
S-1 in the open market to recover our outstanding payable. See also Risk Factor
Section on Page 8 hereof.
On October 14, 2002, the Company entered into a memorandum on
intention with Georgia Tech Research Corporation (GTRC) and its affiliate,
Georgia Tech Applied Research Corporation (GTARC), which memorandum was revised
on November 12, 2002 and in October of 2003 and is subject to the approval of
the respective board of directors of the parties thereto and the exchange of
mutual releases. The memorandum provides for the settlement of any and all
amounts outstanding to GTRC and GTARC in consideration of the issuance of
warrants to purchase 5,069,242 shares of the Company's common stock at $.01 per
share (with a cashless exercise right) in exchange for cancellation of an
approximately $1.3 million portion of the Company's accounts payable. In
addition the Company would issue a term promissory note in the principal amount
of $674,235 with interest at prime+1% and varied payments through 2008 in
exchange for cancellation of an account payable by the Company in an same
amount. The non-current amount of two promissory notes plus two warrants that
were part of the proposed transaction as originally negotiated and as reflected
in the memorandum of November 12, 2002 are reflected on the balance sheet dated
June 30, 2003 as long-term debt and other liabilities for the amounts that were
expected on June 30, 2003 to be converted to the two promissory notes payable
and the warrants respectively. As of February 12, 2004 we are finalizing an
agreement to convert all of such payables, approximating $1.8 million and
including amounts reflected as Notes Payable as of June 30, 2003 and September
30, 2003, into a warrant convertible into our Common Stock on a cashless basis
of approximately $.35 per share. This agreement is still subject to final
execution of legal documentation by GTRC.
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 fiscal
year ended June 30, 2002 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. During
the twelve months ending June 30, 2003, certain strategic vendors and related
parties converted approximately $1.9 million of accounts payable and accrued
expenses into 5,923,333 shares of the
Company's common stock and warrants to purchase 3,706,800
shares of common stock of mPhase. . Such vendors include Microphase Corporation,
Janifast, Ltd., and Strategic Vendors including Piper Rudnick LLP, mPhase's
outside counsel. Conversions with related parties only consisted of the
following:
For the Six Months
Ended December 31,
For the Years Ended June 30,
(Unaudited)
Equity Conversions of Debt and Other
2001
2002
2003
2002
2003
Financial Instruments with Related Parties
Janifast
Number of shares
2,400,000
3,450,000
1,500,000
1,500,000
0
Number of warrants
0
1,200,000
0
0
0
Amount converted to equity
$1,200,000
$720,000
$360,000
$360,000
$0
Microphase Corporation
Number of shares
1,278,000
2,700,000
4,033,333
3,033,333
0
Number of warrants
0
2,200,000
1,000,000
0
0
Amount converted to equity
$639,000
$740,000
$920,000
$620,000
$0
Lintel Corporation and Affiliates
Number of shares (A)
954,000
0
0
0
0
Number of warrants
0
0
0
0
0
Amount converted to equity
$477,000
$0
$0
$0
$0
Officers
Number of shares
0
333,334
0
0
0
Number of warrants (B)
0
333,334
2,491,800
4,491,800
0
Amount converted to equity
$0
$103,000
$480,967
$480,967
$0
Joint Venture Partner and Affiliates
Number of shares
208,077
63,216
0
0
0
Number of warrants
0
0
0
0
0
Amount converted to equity
$104,038
$31,628
$0
$0
$0
Total Related Party Conversions
Number of shares
4,840,077
6,546,550
5,533,333
4,533,333
0
Number of warrants
0
3,733,334
3,491,800
4,491,800
0
Amount converted to equity
$2,420,038
$1,594,628
$1,760,967
$1,460,967
$0
(A)
    Includes Mr. L. Barton in Fiscal 2001, a former Director of the Company.
(B)
    Includes $12,206 settlement expense incurred to the Company's President and
    Vice President in connection with the exchange
    of warrants to
    purchase the company's common stock to cancel unpaid
    compensation, which is included as a reduction to gain on Settlements in
    fiscal 2003.
SELLING STOCKHOLDERS
The following table sets forth information regarding the
beneficial ownership of shares of common stock by the selling stockholders as of
the date of this prospectus, and the number of shares of common stock covered by
this prospectus. Except as otherwise noted below, none of the selling
stockholders has held any position or office, or has had any other material
relationship with us or any of our affiliates within the past three years.
The number of shares of common stock that may be actually
purchased by certain selling stockholders under the warrants and the number of
shares of common stock that may be actually sold by each selling stockholder
will be determined by such selling stockholder. Because certain selling
stockholder may purchase all, some or none of the shares of common stock which
can be purchased under the warrants and each selling stockholder may sell all,
some or none of the shares of common stock which each holds, and because the
offering contemplated by this prospectus is not currently being underwritten, no
estimate can be given as to the number of shares of common stock that will be
held by the selling stockholders upon termination of the offering. The
information set forth in the following table regarding the beneficial ownership
after resale of shares is based on the basis that each selling stockholder will
purchase the maximum number of shares of common stock provided for by the
warrants owned by the selling stockholder and each selling stockholder will sell
all of the shares of common stock owned by that selling stockholder and covered
by this prospectus.
Beneficial
Maximum Number of
NAME
Shares
Shares Being Offered
Note
ALEXANDER HASENFIELD
57,144
57,144
A-1
ALEXANDER HASENFIELD INC. PROFIT
    SHARING AND RETIREMENT PLAN
219,050
85,716
A-2
ANNESE, DAVID E.
600,000
600,000
A-3
ASPIOTES, NICHOLAS & ASPIOTES, NANCY
400,000
400,000
A-4
BETH MAYER ASSOCIATES
1,359,986
253,652
A-5
BIDERMAN, ABRAHAM
407,500
100,000
A-6
*
CHENG, TOMMY
573,250
200,000
A-7
CONGREGATION OF NEW SQUARE
400,000
400,000
A-8
CONGREGATION SHAREI CHAIM
1,338,387
1,200,000
A-9
CONGREGATION SHARIT HAPLETA
150,000
75,000
A-10
DAVID FARBER & DEBORAH FARBER JTWROS
600,000
600,000
A-11
DEVELIN, MICHAEL
125,000
125,000
A-12
DOTOLI, FRANKLIN
50,000
50,000
A-13
ERGUL, NECDET
1,516,250
100,000
A-14
**
F&N ASSOCIATES
250,269
57,144
A-15
FENMORE HOLDINGS LLC
1,428,572
1,428,572
A-16
FIRST MEDIA GROUP
75,000
75,000
A-17
FISHER, MAYER
40,000
40,000
A-18
FRIEDMAN, MORRIS
1,200,000
600,000
A-19
GASPARINI, PETER
466,000
97,500
A-20
GIDAS, PETER & GIDAS, CINDY
300,000
300,000
A-21
GOLDENBURG, LEON
600,000
600,000
A-22
GTRC
5,069,242
5,069,242
A-23
GUERINO, ANTHONY
402,500
100,000
A-24
*
HAA, INC.
666,668
333,334
A-25
HASENFIELD-STEIN, INC. PENSION TRUST
142,858
142,858
A-26
IBER INTERNATIONAL LTD.
2,742,858
1,142,858
A-27
KENTUCKY NATIONAL INSURANCE COMPANY
57,144
57,144
A-28
KLIMEK, DAVID
1,122,500
100,000
A-29
*
LALIBERTE, EMILE
50,000
50,000
A-30
LEVITANSKY, RIVKAH
600,000
600,000
A-31
MARY PARK PROPERTIES
2,943,526
1,382,858
A-32
MCINERNY, MICHAEL
255,500
100,000
A-33
*
MEDEIROS, ANA CLAUDIA
300,000
300,000
A-34
MOISHE, BAIS YAAKON
600,000
600,000
A-35
NEUBART, GARRETT S.
50,000
50,000
A-36
REB EPHRAIM CHAIM & MIRIAM RACHEL
    KLEIN CHARITABLE FOUNDATION
925,000
800,000
A-37
ROOZ, MAYER
4,000
4,000
A-38
ROSENTHAL, ELIEZER M.
600,000
600,000
A-39
ROSENTHAL, JUDY
400,000
400,000
A-40
RUTGERS CASUALTY INSURANCE COMPANY
210,716
85,716
A-41
RUTGERS ENHANCED INSURANCE COMPANY
285,716
285,716
A-42
SIMON, STEVE
150,000
150,000
A-43
STEIN, NACHUM
1,018,365
228,572
A-44
STEIN, S.
50,000
50,000
A-45
TANNENBAUM, ELLONA
100,000
100,000
A-46
TENNENHAUS, EDMUND
2,000,000
2,000,000
A-47
THOMPSON, PHIL
100,000
100,000
A-48
TOWER 50 PARTNERS L.P.
3,000,000
3,000,000
A-49
TURCHAN, THEODORE & TURCHAN, EILEEN
400,000
400,000
A-50
WEINBERGER, GEORGE
2,450,000
2,000,000
A-51
WERDIGER FAMILY FOUNDATION INC.
600,000
600,000
A-52
WESTROCK ADVISORS
750,000
750,000
A-53
Grand Total
40,203,001
29,027,026
* Mr. Biderman, Mr. Guerino, Mr. Klimek, and Mr. McInerny are directors of
our Company.
** Mr. Ergul, Chairman of the Board of the Company, is a majority shareholder
of Microphase Corporation.
(A-1) Includes warrants to purchase up to 28,572 shares of common stock.
(A-2) Includes
    warrants to purchase up to 42,858 shares of common stock.
(A-3) Includes warrants to purchase up to 300,000 shares of common stock.
(A-4) Includes
    warrants to purchase up to 200,000 shares of common stock.
(A-5) Includes warrants to purchase up to 126,826 shares of common stock.
(A-6) Includes options
    to purchase up to 100,000 shares of common stock.
(A-7) Includes options to purchase up to 200,000 shares of common stock.
(A-8) Includes
    warrants to purchase up to 200,000 shares of common stock.
(A-9) Includes warrants to purchase up to 600,000 shares of common stock.
(A-10) Includes
    warrants to purchase up to 75,000 shares of common stock.
(A-11) Includes warrants to purchase up to 300,000 shares of common stock.
(A-12) Includes
    options to purchase up to 125,000 shares of common stock.
(A-13) Includes options to purchase up to 50,000 shares of common stock.
(A-14) Includes
    options to purchase up to 100,000 shares of common stock.
(A-15) Includes warrants to purchase up to 28,572 shares of common stock.
(A-16) Includes
    warrants to purchase up to 714,286 shares of common stock.
(A-17) Includes no warrants or options.
(A-18) Includes
    warrants to purchase up to 20,000 shares of common stock.
(A-19) Includes warrants to purchase up to 300,000 shares of common stock.
(A-20) Includes
    options to purchase up to 97,500 shares of common stock.
(A-21) Includes warrants to purchase up to 150,000 shares of common stock.
(A-22) Includes
    warrants to purchase up to 300,000 shares of common stock.
(A-23) Includes warrants to purchase up to 5,069,242 shares of common stock.
(A-24) Includes
    options to purchase up to 100,000 shares of common stock.
(A-25) Includes warrants to purchase up to 333,334 shares of common stock.
(A-26) Includes
    warrants to purchase up to 71,429 shares of common stock.
(A-27) Includes warrants to purchase up to 571,429 shares of common stock.
(A-28) Includes
    warrants to purchase up to 28,572 shares of common stock.
(A-29) Includes options to purchase up to 100,000 shares of common stock.
(A-30) Includes
    options to purchase up to 50,000 shares of common stock.
(A-31) Includes warrants to purchase up to 300,000 shares of common stock.
(A-32) Includes
    warrants to purchase up to 691,429 shares of common stock.
(A-33) Includes options to purchase up to 100,000 shares of common stock.
(A-34) Includes
    warrants to purchase up to 150,000 shares of common stock.
(A-35) Includes warrants to purchase up to 300,000 shares of common stock.
(A-36) Includes
    warrants to purchase up to 25,000 shares of common stock.
(A-37) Includes warrants to purchase up to 400,000 shares of common stock.
(A-38) Includes
    warrants to purchase up to 2,000 shares of common stock.
(A-39) Includes warrants to purchase up to 300,000 shares of common stock.
(A-40) Includes
    warrants to purchase up to 200,000 shares of common stock.
(A-41) Includes warrants to purchase up to 42,858 shares of common stock.
(A-42) Includes
    warrants to purchase up to 142,858 shares of common stock.
(A-43) Includes options to purchase up to 150,000 shares of common stock.
(A-44) Includes
    warrants to purchase up to 114,286 shares of common stock.
(A-45) Includes options to purchase up to 50,000 shares of common stock.
(A-46) Includes no
    warrants or options.
(A-47) Includes warrants to purchase up to 1,000,000 shares of common stock.
(A-48) Includes
    options to purchase up to 100,000 shares of common stock.
(A-49) Includes warrants to purchase up to 1,500,000 shares of common stock.
(A-50) Includes
    warrants to purchase up to 200,000 shares of common stock.
(A-51) Includes warrants to purchase up to 1,000,000 shares of common stock.
(A-52) Includes
    warrants to purchase up to 300,000 shares of common stock.
(A-53) Includes warrants to purchase up to 750,000 shares of common stock.
PLAN OF DISTRIBUTION
We are registering for resale by the selling stockholders and
certain transferees a total of shares of common stock, of which shares are
issued and outstanding and up to shares are issuable upon exercise of warrants.
We will not receive any of the proceeds from the sale by the selling
stockholders of the shares of common stock, although we may receive up to
approximately $$4,546,741 upon the conversion of convertible notes and the
exercise of all of the warrants and options by the selling stockholders. We will
bear all fees and expenses incident to our obligation to register the shares of
common stock. If the shares of common stock are sold through broker-dealers or
agents, the selling stockholder will be responsible for any compensation to such
broker-dealers or agents.
The selling stockholders may pledge or grant a security
interest in some or all of the shares of common stock owned by them and, if they
default in the performance of their secured obligations, the pledgees or secured
parties may offer and sell the shares of common stock from time to time pursuant
to this prospectus.
The selling stockholders also may transfer and donate the
shares of common stock in other circumstances in which case the transferees,
donees, pledgees or other successors in interest will be the selling beneficial
owners for purposes of this prospectus.
The selling stockholders will sell their shares of common stock subject
    to the following:
all or a portion of the shares of common stock
      beneficially owned by the selling stockholders or their respective pledgees, donees, transferees or successors in interest, may be sold on
      the OTC Bulletin Board Market, any national securities exchange or
      quotation service on which the shares of our common stock may be listed or
      quoted at the time of sale, in the over-the-counter market, in privately
      negotiated transactions, through the writing of options, whether such
      options are listed on an options exchange or otherwise, short sales or in
      a combination of such transactions;
each sale may be made at market prices prevailing at the time of
      such sale, at negotiated prices, at fixed prices, or at varying prices
      determined at the time of sale;
some or all of the shares of common stock may be
      sold through one or more broker-dealers or agents and may involve crosses,
      block transactions, or hedging transactions. The selling stockholders may
      enter into hedging transactions with broker-dealers or agents, which may
      in turn engage in short sales of the common stock in the course of hedging
      in positions they assume. The selling stockholders may also sell shares of
      common stock short and deliver shares of common stock to close out short
      positions, or loan or pledge shares of common stock to broker-dealers or
      agent that in turn may sell such shares; and
in connection with such sales through one or more
      broker-dealers or agents, such broker-dealers or agents may receive
      compensation in the form of discounts, concessions or commissions from the
      selling stockholders and may receive commissions from the purchasers of
      the shares of common stock for whom they act as broker-dealer or agent or
      to whom they sell as principal (which discounts, concessions or
      commissions as to particular broker-dealers or agents may be in excess of
      those customary in the types of transactions involved). Any broker-dealer
      or agent participating in any such sale may be deemed to be an
      "underwriter" within the meaning of the Securities Act and will be
      required to deliver a copy of this prospectus to any person who purchases
      any share of common stock from or through such broker-dealer or agent. We
      have been advised that, as of the date hereof, none of the selling
      stockholders have made any arrangements with any broker-dealer or agent
      for the sale of their shares of common stock.
The selling stockholders and any broker-dealer participating
in the distribution of the shares of common stock may be deemed to be
"underwriters" within the meaning of the Securities Act, and any profits
realized by the selling stockholders and any commissions paid, or any discounts
or concessions allowed to any such broker-dealer may be deemed to be
underwriting commissions or discounts under the Securities Act. In addition, any
shares of common stock covered by this prospectus which qualify for sale
pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to this
prospectus.
If required at the time a particular offering of the shares
of common stock is made, a prospectus supplement or, if appropriate, a
post-effective amendment to the shelf registration statement of which this
prospectus is a part, will be distributed which will set forth the aggregate
amount of shares of common stock being offered and the terms of the offering,
including the name or names of any broker-dealers or agents, any discounts,
commissions and other terms constituting compensation from the selling
stockholder and any discounts, commissions or concessions allowed or reallowed
or paid to broker-dealers.
Under the securities laws of some states, the shares of
common stock may be sold in such states only through registered or licensed
brokers or dealers. In addition, in some states the shares of common stock may
not be sold unless such shares have been registered or qualified for sale in
such state or an exemption from registration or qualification is available and
is complied with. There can be no assurance that any selling stockholder will
sell any or all of the shares of common stock registered pursuant to the shelf
registration statement, of which this prospectus forms a part.
The selling stockholders and any other person participating
in such distribution will be subject to applicable provisions of the Exchange
Act and the rules and regulations thereunder, including, without limitation,
Regulation M of the Exchange Act, which may limit the timing of purchases and
sales of any of the shares of common stock by the selling stockholders and any
other participating person. Regulation M may also restrict the ability of any
person engaged in the distribution of the shares of common stock to engage in
market-making activities with respect to the shares of common stock. All of the
foregoing may affect the marketability of the shares of common stock and the ability of any person or entity to engage in
market-making activities with respect to the shares of common stock.
We will bear all expenses of the registration of the shares
of common stock including, without limitation, Securities and Exchange
Commission filing fees and expenses of compliance with state securities or "blue
sky" laws. The selling stockholders will pay all underwriting discounts and
selling commissions and expenses, brokerage fees and transfer taxes, as well as
the fees and disbursements of counsel to and experts for the selling
stockholders, if any. We will indemnify the selling stockholders against
liabilities, including some liabilities under the Securities Act, in accordance
with the registration rights agreement or the selling stockholders will be
entitled to contribution. We will be indemnified by the selling stockholders
against civil liabilities, including liabilities under the Securities Act that
may arise from any written information furnished to us by the selling
stockholders for use in this prospectus, in accordance with the related
registration rights agreement or will be entitled to contribution. Once sold
under this shelf registration statement, of which this prospectus forms a part,
the shares of common stock will be freely tradable in the hands of persons other
than our affiliates.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 150,000,000 shares
of common stock, without par value. As of April 23, 2004, approximately 85
million shares of our common stock are issued and outstanding and held by
approximately 11,000 stockholders of record. Of the shares of our issued and
outstanding common stock, shares are covered by this prospectus. In addition
shares or our common stock authorized but unissued as of the date of this
prospectus will be issued on exercise of warrants held by certain selling
stockholders.
The following description of our capital stock is a summary
of the material terms of such stock. It does not purport to be complete and is
subject in all respects to the provisions of our Certificate of Incorporation
and our Bylaws, copies of which have been filed as exhibits to the registration
statement of which this prospectus is a part and to applicable New Jersey law.
Common Stock
Each holder of our common stock is entitled to one vote for
each share held of record on all matters submitted to a vote of stockholders.
Cumulative voting for the election of Directors is not provided for in our
Certificate of Incorporation, which means that the holders of a majority of the
shares of common stock voted elects the Directors then standing for election.
The holders of outstanding shares of common stock are entitled to receive
dividends out of assets legally available for dividends, at such appropriate
times and in such amounts as our Board of Directors decides. The common stock is
not entitled to preemptive rights or other subscription rights and is not
subject to conversion or redemption. Upon liquidation, dissolution or winding up
of our affairs, the holders of common stock will be entitled to share ratably in
all assets remaining after the payment of liabilities. Shares of common stock
shall be transferred only on our books upon surrender to us or a duly appointed
transfer agent of the certificate or certificates properly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer.
Common Stock Warrants
This prospectus also covers shares of common stock
purchasable pursuant to outstanding warrants and options. The exercise price of
these warrants range from $.01 to $1.05. These warrants and options have
expiration terms ranging from 2005 to 2008.
Filling Vacancies on the Board
The Certificate of Incorporation provides that any vacancy on
the Board that results from an increase in the number of Directors during the
interim between annual meetings or special meetings of shareholders may be
filled by the Board. These provisions could temporarily prevent any shareholder
from obtaining majority representation on the Board by enlarging the Board and
filling the new directorships with its own nominees.
New Jersey Shareholders Protection Act
There are provisions of New Jersey law, and our Certificate
of Incorporation and Bylaws, that may have an anti-takeover effect. These
provisions are designed to protect shareholders against coercive, unfair or
inadequate tender offers and other abusive tactics and to encourage any person
contemplating a business combination with us to negotiate with our Board of
Directors for the fair and equitable treatment of all shareholders.
New Jersey has adopted a type of anti-takeover statute known
as the New Jersey Shareholders Protection Act. Subject to numerous
qualifications and exceptions, the statute prohibits an interested shareholder
of a corporation from effecting a business combination with the corporation for
a period of five years unless the corporation's board approved the combination prior to the
shareholder becoming an interested shareholder. In addition, but not in
limitation of the five-year restriction, if applicable, corporations covered by
the New Jersey statute may not engage at any time in a business combination with
any interested shareholder of that corporation unless the combination is
approved by the board prior to the interested shareholder's stock acquisition
date, the combination receives the approval of two-thirds of the voting stock of
the corporation not beneficially owned by the interested shareholder, or the
combination meets minimum financial terms specified by the statute. An
"interested shareholder" is defined to include any beneficial owner of 10% or
more of the voting power of the outstanding voting stock of the corporation and
any affiliate or associate of the corporation who within the prior five year
period has at any time owned 10% or more of the voting power. The term "business
combination" is defined broadly to include, among other things:
the merger or consolidation of the corporation with the interested
shareholder or any corporation that after the merger or consolidation would be
an affiliate or associate of the interested shareholder,
the sale, lease, exchange, mortgage, pledge, transfer or other disposition to
an interested shareholder or any affiliate or associate of the interested
shareholder of 10% or more of the corporation's assets, or
the issuance or transfer to an interested shareholder or any affiliate or
associate of the interested shareholder of 5% or more of the aggregate market
value of the stock of the corporation.
The effect of the statute is to protect non-tendering,
post-acquisition minority shareholders from mergers in which they will be
"squeezed out" after the merger, by prohibiting transactions in which an
acquirer could favor itself at the expense of minority shareholders. The New
Jersey statute generally applies to corporations that are organized under New
Jersey law, have either their principal executive offices or significant
business operations located in New Jersey, and have a class of stock registered
or traded on a national securities exchange or registered with the Securities
and Exchange Commission pursuant to Section 12(g) of the Securities Exchange Act
of 1934.
LEGAL MATTERS
The validity of the common stock we are offering pursuant to
this prospectus will be passed upon by Martin S. Smiley General Counsel to the
Company. Mr. Smiley beneficially owns an aggregate of 3,841,050 shares of common
stock and 0 shares are being registered as part of this prospectus.
EXPERTS
The financial statements and schedules included in this
prospectus and elsewhere in the registration statement, to the extent and for
the periods indicated in their reports, have been audited or reviewed, as the
case may be, by Rosenberg Rich Baker Berman & Company and audited or reviewed,
as the case may be, by Arthur Andersen, LLP and Schuhalter, Coughlin & Suozzo,
PC, independent public accountants, and are included in reliance upon the
authority of said firms as experts in giving said reports. Prior to the date of
this prospectus, Arthur Andersen was indicted in connection with its rendering
of services to another company. Therefore, Arthur Andersen withdrew from
practice before the SEC effective prior to the date hereof and many of the
accountants at Arthur Andersen have left their current jobs or have been
searching for a new place of employment. Based on these factors, after
reasonable efforts, including numerous phone calls, we were unable to contact
our former audit partner at Arthur Andersen and therefore were unable to obtain
Arthur Andersen's consent to the inclusion of their report dated October 12,
2001. Accordingly, we have dispensed with the requirement to file their consent
in reliance upon Rule 437a of the securities act. Because Arthur Andersen has
not consented to the inclusion of their report in this prospectus, you will not
be able to recover against Arthur Andersen under Section 11 of the securities
act for any untrue statements of a material fact contained in the financial
statements audited by Arthur Andersen or any omissions to state a material fact
required to be stated therein. As of June 30, 2003, Schuhalter, Coughlin &
Suozzo, PC, owns approximately 417,600 shares of common stock directly and
indirectly; options to purchase 245,000 shares of common stock and warrants to
purchase 315,800 shares of common stock, of which of such shares are being
registered pursuant to this prospectus. All of such securities owned by
Schuhalter, Coughlin & Suozzo, PC, other than 146,800 shares of common stock
which it has acquired on the open market subsequent to April 2001, were issued
to Schuhalter, Coughlin & Suozzo, PC in consideration for non-audit consulting
services and/or satisfaction of payables related to non-audit consulting
services and were issued after Schuhalter, Coughlin & Suozzo, PC was no longer
our independent public accountants.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We are subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). In accordance
with the Exchange Act, we file reports, proxy statements and other information
with the Securities and Exchange Commission. Our reports, proxy statements and
other information filed with the SEC may be inspected and copied at the public
reference facilities maintained by the SEC at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. Copies of such material also may be obtained at
prescribed rates from the Public Reference Branch of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549-1004. Please call the SEC at 1-800-SEC-0330
for further information on the public reference rooms. The SEC maintains a web
site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC.
You may request a copy of these filings, at no cost by writing or
    telephoning us at the following address:
mPhase Technologies, Inc.
587 Connecticut
                Avenue
Norwalk, Connecticut 06854-0566
Attention: General
                Counsel
(203) 831-2242
You should rely only on the information incorporated by
reference or provided in this prospectus or any prospectus supplement. We have
not authorized anyone else to provide you with different information. The
selling security holders will not make an offer of the shares of our common
stock in any state where the offer is not permitted. You should not assume that
the information in this prospectus or any prospectus supplement is accurate as
of any date other than the date on the front of those documents.
mPHASE
    TECHNOLOGIES, INC.
INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS
Report of
    Rosenberg Rich Baker Berman & Company
F-1
Report of Arthur
    Andersen LLP
F-2
Report of
    Schuhalter, Coughlin & Suozzo, PC
F-3
Consolidated
    Balance Sheets as of June 30, 2002, June 30, 2003 and December 31, 2003
F-4
(Unaudited)
Consolidated
    Statements of Operations for the years ended June 30, 2001, 2002, 2003, and
    for the
F-5
period from
    inception (October 2, 1996) through June 30, 2003
Unaudited
    Consolidated Statements of Operations for the six months ended December 31,
    2002 and
F-6
2003, and for the
    period from inception (October 2, 1996) through December 31, 2003
Consolidated
    Statements of Changes in Stockholders' Equity (Deficit) for the period from
    inception
F-7-12
(October 2, 1996)
    to June 30, 1998 and for each of the six years in the period ended June 30,
    2003
Unaudited
    Consolidated Statement of Changes in Shareholders' Deficit for the six
    months ended
F-13
December 31, 2003
Consolidated
    Statements of Cash Flows for the years ended June 30, 2001, 2002 and 2003,
    and for
F-14
the period from
    inception (October 2, 1996) through June 30, 2003
Unaudited
    Consolidated Statements of Cash Flows for the six months ended December 31,
    2002
F-15
and 2003, and for
    the period from inception (October 2, 1996) through December 31, 2003
Notes to
    Consolidated Financial Statements
F-16
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, 2003 and 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 each of the
two years in the period ended June 30, 2003 and for the period from inception
(October 2, 1996) to June 30, 2003. 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, 2001. Such amounts are included in the cumulative from inception to
June 30, 2003 totals of the statements of operations, changes in stockholders'
equity (deficit) and cash flows and reflect total net loss of 83 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 audits 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, 2003 and 2002 and the results of their operations
and their cash flows for each of the two years in the period ended June 30, 2003
and for the period from inception to June 30, 2003, 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 stockholders 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.
Rosenberg Rich Baker Berman & Company
Bridgewater, NJ
September 10, 2003
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.
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, 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.
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.
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.
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's 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, PC
Raritan, New Jersey
January 28, 1999
mPHASE
    TECHNOLOGIES, INC.
(A DEVELOPMENT
    STAGE COMPANY)
CONSOLIDATED
    BALANCE SHEETS
June 30,
December
31,
2002
2003
2003
(unaudited)
ASSETS
Current assets:
Cash and cash
    equivalents
$47,065
$396,860
$319,923
Accounts
    receivable, net of bad debt reserve of $2,906 and $0, respectively
273,780
287,135
182,136
Stock
    subscription receivable
-
110,000
175,000
Inventory
3,342,716
2,103,328
1,488,451
Prepaid expenses
    and other current assets
830,589
100,329
69,911
Total current
    assets
4,494,150
2,997,652
2,235,421
Property and
    equipment, net
1,742,186
581,890
240,067
Patents and
    licenses, net
685,349
184,857
129,924
Other assets
20,830
17,250
17,250
Total assets
$6,942,515
$3,781,649
$2,622,661
LIABILITIES AND
    STOCKHOLDERS' EQUITY (DEFICIT)
Current
    liabilities:
Accounts payable
$2,819,245
$2,352,961
$2,731,266
Accrued expenses
673,065
885,735
430,016
Due to related
    parties
35,000
187,372
584,902
Notes payable,
    current
353,339
762,735
822,804
Deferred revenue
214,180
214,180
214,180
Notes payable,
    related parties
-
-
460,000
Total current
    liabilities
4,094,829
4,402,983
5,243,169
Notes payable,
    net of current portion
1,014,218
586,303
-
Other liabilities
1,211,249
1,561,249
2,085,484
Other
    liabilities, related parties
665,068
-
-
Notes payable,
    related parties
-
460,000
-
COMMITMENTS AND
    CONTINGENCIES (Note 13)
STOCKHOLDERS'
    EQUITY (DEFICIT):
Common Stock,
    stated value $.01, 150,000,000 shares authorized;
608,075
714,535
748,615
60,807,508,
    71,453,521 and 71,961,525 (unaudited), shares issued and
outstanding,
    respectively
Additional
    paid-in capital
100,751,28
104,081,04
105,135,24
4
9
0
Deferred
    compensation
(23,923)
-
-
Deficit
    accumulated during development stage
(101,366,2
(108,016,4
(110,581,8
86)
97)
74)
Unrecognized
    capital losses
(4,026)
-
-
Less-treasury
    stock, 13,750 shares, at cost
(7,973)
(7,973)
(7,973)
Total
    stockholders' equity (deficit)
(42,849)
(3,228,886)
(4,705,992)
Total liabilities
    and stockholders' equity
$6,942,515
$3,781,649
$2,622,661
The
    accompanying notes are an integral part of these consolidated balance
    sheets.
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF
      OPERATIONS
From
Inception
For the Years Ended June 30,
(October 2,
1996)
2001
2002
2003
to June 30,
2003
TOTAL NET REVENUES
$10,524,134
$2,582,446
$1,581,639
$14,967,695
COSTS AND EXPENSES:
Cost of Sales (See also Note 11 Related Party Transactions)
5,804,673
2,415,129
1,493,394
9,844,952
Research and development (including non-cash stock
10,779,570
3,819,583
3,538,305
34,347,079
related charges of $0, $267,338, $385,495 and $2,045,669,
respectively) (See also Note 11 Related Party Transactions)
General and administrative (including non-cash stock
17,321,614
7,038,923
2,683,534
74,877,136
related charges of $7,398,455, $2,994,111, $748,840 and
$46,090,349, respectively)(See also Note 11 Related Party
Transactions)
Depreciation and amortization
660,372
670,183
515,417
2,767,029
Total costs and expenses
34,566,229
13,943,818
8,230,650
121,836,196
Loss from operations
(24,042,095)
(11,361,372)
(6,649,011)
(106,868,501)
OTHER INCOME (EXPENSE):
Gain on extinguishments
-
142,236
61,226
203,462
Minority interest loss in consolidated subsidiary
-
-
-
20,000
Loss from unconsolidated subsidiary
-
-
-
(1,466,467)
Loss on sale of securities
-
-
(11,258)
(11,258)
Interest income (expense), net
43,361
(26,225)
(51,168)
106,267
Total other income (expense)
43,361
116,011
(1,200)
(1,147,966)
NET
      LOSS
$(23,998,734)
$(11,245,361)
$(6,650,211)
$(108,016,497)
Unrealized holding (loss) gain on securities
-
(4,026)
4,026
-
COMPREHENSIVE LOSS
$(23,998,734)
$(11,249,387)
$(6,646,185)
$(108,016,497)
LOSS PER COMMON SHARE, basic and diluted
$(0.72)
$(.23)
$(.10)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, basic and diluted
33,436,641
49,617,280
65,217,088
mPHASE
    TECHNOLOGIES, INC.
(A DEVELOPMENT
    STAGE COMPANY)
CONSOLIDATED
    STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended
October 2,
December 31,
1996
(Date
    of
Inception) to
December 31,
2002
2003
2003
REVENUES
$771,837
$3,780,137
$18,747,831
COSTS AND
    EXPENSES
Cost of Sales
744,030
3,289,937
13,134,889
Research and
    development
including
    non-cash stock related charges of $262,500, $0 and
1,556,142
1,454,899
35,801,977
$2,045,669,
    respectively)
General and
    Administrative
(including
    non-cash stock related charges of $484,358, $307,245 and
1,624,178
1,518,411
76,395,547
$46,172,894,
    respectively)
Depreciation and
    amortization
259,381
74,082
2,841,111
TOTAL COSTS AND
    EXPENSES
4,183,731
6,337,329
128,173,524
LOSS FROM
    OPERATIONS
(3,411,894)
(2,557,192)
(109,425,693)
OTHER INCOME
    (EXPENSE)
Gain on
    extinguishments
40,724
23,087
226,549
Minority interest
    loss in consolidated subsidiary
-
-
20,000
Capital losses
(16,077)
-
(1,466,467)
Loss from
    unconsolidated subsidiary
-
-
(11,258)
Interest Income
    (expense), net
(34,149)
(31,272)
74,995
TOTAL OTHER
    INCOME (EXPENSE)
(9,502)
(8,185)
(1,156,181)
NET LOSS
$(3,421,396)
$(2,565,377)
$(110,581,874)
LOSS PER COMMON
    SHARE, basic and diluted
$(.06)
$(.04))
WEIGHTED AVERAGE
    COMMON
SHARES
    OUTSTANDING, basic and diluted
63,397,799
72,251,251
The
    accompanying notes are an integral part of these consolidated financial
    statements.
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 SIX YEARS
IN
    THE PERIOD ENDED JUNE 30, 2003
Common Stock
TOTAL
$ .01
Additional
STOCKHOLDERS'
Stated
Treasury
Paid-In
Deferred
Accumulated
EQUITY
Shares
Value
Stock
Capital
Compensation
Deficit
(DEFICIT)
BALANCE,
1,140,427
$11,404
$-
$459,753
$-
$(537,707)
$(66,550)
OCTOBER 2, 1996
(date of
    inception)
Issuance of
    common
6,600,000
66,000
-
(537,157)
-
537,707
66,550
stock of Tecma
Laboratories,
    Inc.,
for 100% of the
Company
Issuance of
    common
594,270
5,943
-
752,531
-
-
758,474
stock, in private
placement, net of
offering costs of
$138,931
Net loss
-
-
-
-
-
(781,246)
(781,246)
BALANCE, JUNE
8,334,697
$83,347
$-
$675,127
$-
$(781,246)
$(22,772)
30, 1997
Issuance of
    common
999,502
9,995
-
791,874
-
-
801,869
stock with
    warrants,
in private
    placement,
net of offering
    costs
of $84,065
Issuance of
    common
300,000
3,000
-
147,000
-
-
150,000
stock for
    services
Issuance of
    common
250,000
2,500
-
122,500
-
-
125,000
stock in
    connection
with investment
    in
unconsolidated
subsidiary
Repurchase of
-
-
(7,973)
-
-
-
(7,973)
13,750 shares of
common stock
Issuance of
    common
1,095,512
10,955
-
659,191
-
-
670,146
stock with
    warrants
in private
    placement,
net of offering
    costs
of $121,138
Issuance of
    common
100,000
1,000
-
(1,000)
-
-
-
stock for
    financing
services
Issuance of
    common
2,500,000
25,000
-
1,685,000
-
-
1,710,000
stock in
consideration for
100% of the
    common
stock of
    Microphase
Telecommunications,
Inc.
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.
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 SIX YEARS
IN THE PERIOD
    ENDED JUNE 30, 2003
Common Stock
TOTAL
$ .01
Additional
STOCKHOLDERS'
Stated
Treasury
Paid-In
Deferred
Accumulated
EQUITY
Shares
Value
Stock
Capital
Compensation
Deficit
(DEFICIT)
BALANCE,
13,579,711
$135,797
$(7,973)
$4,079,692
$-
$(5,122,305)
$(914,789)
JUNE 30, 1998
Issuance of
3,120,000
31,200
-
2,981,800
-
-
3,013,000
common stock with
warrants in
    private
placements, net
    of
offering costs of
$107,000
Issuance of
1,599,332
15,993
-
8,744,873
-
-
8,760,866
common stock for
services
Issuance of
642,000
6,420
-
1,553,227
-
-
1,559,647
common stock with
warrants in
    private
placement, net of
offering costs of
$45,353
Issuance of
4,426,698
44,267
-
10,343,167
-
-
10,387,434
common stock in
private
    placement,
net of offering
costs of $679,311
Issuance of stock
-
-
-
7,129,890
-
-
7,129,890
options for
    services
Issuance of
-
-
-
16,302
-
-
16,302
warrants for
services
Deferred employee
-
-
-
-
(140,000)
-
(140,000)
stock option
compensation
Net loss
-
-
-
-
-
(22,838,344)
(22,838,344)
BALANCE,
23,367,741
$233,677
$(7,973)
$34,848,951
$(140,000)
$(27,960,649)
$6,974,006
JUNE 30, 1999
The
    accompanying notes are an integral part of these consolidated financial
    statements.
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 SIX YEARS
IN THE PERIOD
    ENDED JUNE 30, 2003
Common Stock
TOTAL
$ .01
Additional
STOCKHOLDERS'
Stated
Treasury
Paid-In
Deferred
Accumulated
EQUITY
Shares
Value
Stock
Capital
Compensation
Deficit
(DEFICIT)
BALANCE,
23,367,741
$233,677
$(7,973)
$34,848,951
$(140,000)
$(27,960,649)
$6,974,006
JUNE 30, 1999
Issuance of
75,000
750
-
971,711
-
-
972,461
common stock and
options in
settlement
Issuance of
4,632,084
46,321
-
5,406,938
-
-
5,453,259
common stock
upon exercise of
warrants and
options
Issuance of
1,000,000
10,000
-
3,790,000
-
-
3,800,000
common stock in
private
    placement,
net of cash
    offering
costs of $200,000
Issuance of
1,165,500
11,655
-
9,654,951
-
-
9,666,606
common stock in
private
    placement,
net of cash
    offering
costs of $466,480
Issuance of
1,164,215
11,642
-
8,612,265
-
-
8,623,907
common stock for
services
Issuance of
    options
-
-
-
9,448,100
-
-
9,448,100
for services
Deferred employee
-
-
-
1,637,375
(1,637,375)
-
-
stock option
compensation
Amortization of
-
-
-
-
551,707
-
551,707
deferred employee
stock option
compensation
Net loss
-
-
-
-
-
(38,161,542)
(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.
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 SIX YEARS
IN THE PERIOD
    ENDED JUNE 30, 2003
Common Stock
TOTAL
$ .01
Additional
STOCKHOLDERS'
Stated
Treasury
Paid-In
Deferred
Accumulated
EQUITY
Shares
Value
Stock
Capital
Compensation
Deficit
(DEFICIT)
BALANCE,
31,404,540
$314,045
$(7,973)
$74,370,291)
$(1,225,668)
$(66,122,191)
$7,328,504
JUNE 30, 2000
Issuance of
320,000
3,200
-
324,300
-
-
327,500
common stock
upon exercise of
options
Issuance of
4,329,850
43,298
-
7,766,547
-
-
7,809,845
common stock with
warrants in
    private
placements, net
    of
cash offering
    costs
of $512,195
Issuance of
450,000
4,500
-
1,003,125
-
-
1,007,625
common stock for
services
Issuance of
    options
-
-
-
5,849,585
-
-
5,849,585
and warrants for
services
Deferred employee
-
-
-
607,885
(607,885)
-
-
stock option
compensation
Amortization of
-
-
-
-
1,120,278
-
1,120,278
deferred employee
stock option
compensation
Issuance of
4,840,077
48,402
-
2,371,637
-
-
2,420,039
common stock in
settlement of
    debt
to directors and
related parties
Net Loss
-
-
-
-
-
(23,998,734)
(23,998,734)
BALANCE,
41,344,467
$413,445
$(7,973)
$92,293,370
$(713,275)
$(90,120,925)
$1,864,642
JUNE 30, 2001
The
    accompanying notes are an integral part of these consolidated financial
    statements.
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 SIX YEARS
IN THE PERIOD ENDED JUNE 30,
    2003
TOTAL
$ .01
Additional
STOCKHOLDERS'
Stated
Treasury
Paid-In
Deferred
Accumulated
Comprehensive
EQUITY
Shares
Value
Stock
Capital
Compensation
Deficit
Loss
(DEFICIT)
BALANCE
41,344,467
$413,445
$(7,973)
$92,293,370
$(713,275)
$(90,120,925)
$-
$1,864,642
JUNE 30, 2001
Sale of Common
6,980,643
69,807
-
1,903,943
-
-
-
1,973,750
stock with
warrants in
private
placement
Issuance of
2,976,068
29,760
-
1,169,241
-
-
-
1,199,001
Common stock
for services
Issuance of
-
-
-
1,877,937
-
-
-
1,877,937
options and
warrants for
services
Cancellation of
-
-
-
(140,802)
140,802
-
-
-
unearned options
to former
employees
Amortization of
-
-
-
-
548,550
-
-
548,550
deferred
employee stock
option
compensation
Issuance of
7,492,996
74,930
-
2,663,728
-
-
-
2,738,658
common stock
and warrants in
settlement of
debt to related
parties and
strategic vendors
Sale of Common
2,000,000
20,000
-
980,000
-
-
-
1,000,000
stock to certain
Officers and
Directors in
private
placement
Issuance of
13,334
133
-
3,867
-
-
-
4,000
Common stock
upon exercise of
options
Net Loss
-
-
-
-
-
(11,245,361)
-
(11,245,361)
Other
-
-
-
-
-
-
(4,026)
(4,026)
comprehensive
loss
BALANCE,
60,807,508
$608,075
$(7,973)
$100,751,284
$(23,923)
$(101,366,286)
$(4,026)
$(42,849)
JUNE 30, 2002
The accompanying
    notes are an integral part of these consolidated financial statements.
mPHASE TECHNOLOGIES, INC.
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 SIX YEARS
IN
    THE PERIOD ENDED JUNE 30, 2003
TOTAL
Additional
STOCKHOLDERS'
$ .01
Treasury
Paid-In
Deferred
Accumulated
Comprehensive
EQUITY
Shares
Stated Value
Stock
Capital
Compensation
Deficit
Loss
(DEFICIT)
BALANCE JUNE 30, 2002
60,807,508
$608,075
$(7,973)
$100,751,284
$(23,923)
$(101,366,286)
$(4,026)
$(42,849)
Issuance of
    common
4,296,680
42,967
-
1,121,351
-
-
-
1,164,318
stock with
    warrants
in private
    placement
Issuance of
    common
426,000
4,260
-
107,985
-
-
-
112,245
stock for
    services
Issuance of
    options
-
-
-
274,100
-
-
-
274,100
and warrants for
services
Amortization of
-
-
-
-
23,923
-
-
23,923
deferred employee
stock option
compensation
Issuance of
    common
5,923,333
59,233
-
1,826,329
-
-
-
1,885,562
stock and
    warrants
in settlement of
    debt
to related
    parties and
strategic vendors
Net loss
-
-
-
-
-
(6,650,211)
-
(6,650,211)
Other
-
-
-
-
-
-
4,026
4,026
comprehensive
income
BALANCE, JUNE
71,453,521
$714,535
$(7,973)
$104,081,049
$-
$(108,016,497)
$-
$(3,228,886)
30, 2003
The
    accompanying notes are an integral part of these consolidated financial
    statements.
mPHASE
    TECHNOLOGIES, INC.
(A DEVELOPMENT
    STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS'
    DEFICIT (UNAUDITED)
Total
Additional
Shareholders
$.01 Stated
Treasury
Paid-in
Accumulated
(Deficit)
Shares
Value
Stock
Capital
Deficit
Equity
Balance June 30,
71,453,521
$714,535
$(7,973)
$104,081,049
$(108,016,497)
$(3,228,886)
2003
Issuance of
1,983,337
19,834
-
611,194
-
631,028
common stock with
warrants in
    private
placements
Issuance of
924,667
9,246
-
238,154
-
247,400
common stock for
services
Issuance of
500,000
5,000
-
145,000
-
150,000
common stock
pursuant to
exercise of
warrants
Issuance of
-
-
-
59,843
-
59,843
warrants to
purchase common
stock for
    services
Net loss
-
-
-
-
(2,565,377)
(2,565,377)
Balance, December
74,861,525
$748,615
$(7,973)
$105,135,240
$(110,581,874)
$(4,705,992)
31, 2003
The
    accompanying notes are an integral part of these consolidated financial
    statements.
mPHASE TECHNOLOGIES, INC.
(A
    DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Inception
(October
For
    the Years Ended June 30,
2,
    1996)
to
    June 30,
2001
2002
2003
2003
CASH FLOWS FROM
    OPERATING ACTIVITIES:
Net loss
$(23,998,734)
$(11,245,361)
$(6,650,211)
$(108,016,497)
Adjustments to
    reconcile net loss to net cash used in
operating
    activities:
Depreciation and
    amortization
1,235,213
1,653,346
1,425,952
5,594,140
Book value of
    fixed assets disposed
61,414
-
-
74,272
Loss on
    unconsolidated subsidiary
-
-
-
1,466,467
Provision for
    doubtful accounts
29,218
2,906
-
32,124
Impairment of
    note receivable
212,500
20,250
-
232,750
Loss on
    securities
-
-
11,258
11,258
Gain on
    Extinguishments
-
(142,236)
(61,226)
(203,462)
Non-cash common
    stock, common stock option and warrant expense
7,398,455
3,261,449
1,134,335
48,144,097
Changes in
    operating assets and liabilities:
Accounts
    receivable
(170,466)
15,748
(13,355)
(319,259)
Inventory
(4,303,895)
961,179
1,449,628
(1,893,088)
Prepaid expenses
    and other current assets
88,280
173,649
(29,652)
(596,449)
Production
    advances-related parties
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
2,802,008
(340,057)
174,939
4,157,395
Accrued expenses
(5,394)
332,819
273,986
1,812,571
Deferred revenue
-
214,180
-
214,180
Due to related
    parties:
Microphase
709,832
864,555
721,544
2,295,949
Janifast
1,272,709
907,450
99,841
2,280,000
Officers
(412,400)
312,504
246,835
559,339
Accrued expense,
    Lintel
477,000
-
-
477,000
Due to Others
59,566
25,794
-
211,972
Net cash used in
    operating activities
(13,685,053)
(2,735,405)
(1,212,546)
(43,615,241)
CASH FLOWS FROM
    INVESTING ACTIVITIES:
Investment in
    patents and licensing rights
(148,127)
(74,649)
-
(375,720)
Purchase of
    property and equipment
(705,577)
(31,445)
(73,305)
(2,537,105)
Net cash used in
    investing activities
(853,704)
(106,094)
(73,305)
(2,912,825)
CASH FLOWS FROM
    FINANCING ACTIVITIES:
Net proceeds from
    private placement of common stock and
8,137,345
2,977,750
1,090,474
46,507,918
exercise of
    options and warrants
Repurchase of
    treasury stock at cost
-
-
-
(7,973)
Advances from
    Microphase
-
-
527,840
527,840
Proceeds from
    notes payable officers
-
-
130,000
130,000
Repayment of
    notes payable - officers
-
-
(30,000)
(30,000)
Repayment of
    notes payable
-
(120,191)
(82,668)
(202,859)
Net cash provided
    by financing activities
8,137,345
2,857,559
1,635,646
46,924,926
Net increase
    (decrease) in cash
(6,401,412)
16,060
349,795
396,860
CASH AND CASH
    EQUIVALENTS, beginning of period
6,432,417
31,005
47,065
-
CASH AND CASH
    EQUIVALENTS, end of period
$31,005
$47,065
$396,860
$396,860
The
    accompanying notes are an integral part of these consolidated financial
    statements.
mPHASE TECHNOLOGIES, INC.
(A
    DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
October 2,
1996
(Date
    of
Six
    Months Ended
Inception) to
December 31,
December  31,
2002
2003
2003
CASH FLOWS FROM
    OPERATING ACTIVITIES:
Net Loss
$(3,421,396)
$(2,565,377)
$(110,581,874)
Adjustments to
    reconcile net loss to net cash used in operating activities:
Depreciation and
    amortization
753,433
402,257
5,996,397
Book Value of
    fixed assets disposed
16,077
-
74,272
Provision for
    doubtful accounts
-
-
32,124
Gain on debt
    extinguishments
(40,725)
(23,087)
(226,549)
Loss on
    unconsolidated subsidiary
-
-
1,466,467
Impairment of
    note receivable
-
-
232,750
Loss on
    securities
-
-
11,258
Non-cash charges
    relating to issuance of common stock, common stock
790,608
307,245
48,451,342
options and
    Warrants
Changes in assets
    and liabilities:
Accounts
    receivable
(68,859)
104,999
(214,260)
Inventories
630,237
614,876
(1,278,212)
Prepaid expenses
    and other current assets
69,324
30,418
(566,203)
Other non-current
    assets
2,695
-
-
Accounts payable
-
401,394
4,558,788
Accrued expenses
(15,229)
(419,559)
1,393,184
Due to/from
    related parties
Microphase
495,566
313,226
2,609,175
Janifast
107,204
534,887
2,814,888
Officers
60,048
(450,583)
108,756
Lintel
-
-
477,000
Others
-
-
211,972
Receivables from
    Subsidiary
-
-
(150,000)
Deferred revenue
-
-
214,180
Net cash used in
    operating activities
(621,017)
(749,304)
(44,364,545)
CASH FLOW FROM
    INVESTING ACTIVITIES:
Payments related
    to patents and licensing rights
-
-
(375,720)
Purchase of fixed
    assets
-
(5,500)
(2,542,605)
Net Cash
    (used)/provided by investing activities
-
(5,500)
(2,918,325)
CASH FLOW FROM
    FINANCING ACTIVITIES:
Proceeds from
    issuance of common stock and exercises of options and
-
679,867
47,187,785
warrants
Payments of notes
    payable
(39,425)
(2,000)
(204,859)
Advances from
    related party
623,290
-
627,840
Repurchase of
    treasury stock at cost
-
-
(7,973)
Net cash provided
    by financing activities
583,865
677,867
47,602,793
Net increase
    (decrease) in cash
(37,152)
(76,937)
319,923
CASH AND CASH
    EQUIVALENTS, beginning of period
47,065
396,860
-
CASH AND CASH
    EQUIVALENTS, end of period
$9,913
$319,923
$319,923
The accompanying
    notes are an integral part of these consolidated financial statements.
mPHASE TECHNOLOGIES, INC.
(A Development Stage
              Company)
Notes to Consolidated Financial Statements
June 30, 2003
(Unaudited for the Periods Ended December 31, 2002 and 2003)
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™ 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™ Digital Video and Data Deliver System ("Traverser™").
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) for $20,000. The Company acquired an additional
interest in the joint venture of 6.5% in April of 2000 for $20,000. 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 legacy Traverser™
DVDDS and TV+ products for delivery of broadcast television over ADSL and
associated DSL component products which include POTS splitters and a line of
intelligent POTS splitter 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, 2003, the Company had incurred development
stage losses totaling $108,016,497, and at June 30, 2003 had a stockholders'
deficit of $3,228,886. At June 30, 2003, the Company had $396,860 of cash and
cash equivalents and $287,135 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
2004 and continue its development and commercialization efforts. Management's
plans in this regard include, but are not limited to, the following:
During the fiscal year ended June 30, 2003, the Company
converted certain payables and accrued expenses with officers, related parties
and strategic vendors aggregating approximately $1.9 million into 5,923,333
restricted shares of the Company's common stock and 5 year warrants to purchase
an additional 3,706,800 restricted shares of the Company's common stock.
In addition, in October of 2002, GTRC, a Company research and
development vendor, executed a Memorandum of Intention to convert a total of
approximately $1.8 million in payables to promissory notes and equity.
Management estimates that the Company will need additional
minimum capital of $2.0 million by June 30, 2004 to continue its operations
either through revenues from sales, external independent or related party
funding, further expense reductions or some combination thereof. 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.
However, the Company has no definitive agreements to provide funding at this
time. 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 field trials which would lead to
commercial sales of its broadcast television platform products. The Company has
had an upturn in sales of its POTS splitter products since the close of its
fiscal year ended June 30, 2003, including sales to one customer of
approximately $1.6 million through August 21, 2003.
Management believes that actions presently being taken to
complete the Company's development stage through the commercial roll-out of its
broadcast television platforms 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, and 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.
Stock Based Compensation
Financial Accounting Statement No. 123, Accounting for Stock
Based Compensation, encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. The Company has
adopted the "disclosure only" alternative described in SFAS 123 and SFAS 148,
which require pro forma disclosures of net income and earnings per share as if
the fair value method of accounting had been applied.
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.
During the second quarter of fiscal 2004, the Company adopted
the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based
Compensation
, for
stock-based employee compensation, effective as of the beginning of the fiscal
year. Under the modified prospective method of adoption selected by the Company,
stock-based employee compensation cost recognized in 2003 is the same as that
which would have been recognized had the fair value recognition provisions of
Statement 123 been applied to all awards granted after October 1, 1995. The
following table illustrates the effect on net income and earnings per share as
if the fair value based method has been applied to all outstanding and unvested
awards in each period.
Six months ended December 31,
2003
2002
Net loss, as
    reported
$(2,565,377)
$(3,421,396)
Add: Stock-based
    employee compensation expense included in reported net income,
-
23,923
net of related
    tax effects
Deduct: Total
    stock-based employee compensation expense determined under fair
-
(204,885)
value based
    method for all awards, net of related tax effects
Pro forma net
    loss
$(2,565,337)
$(3,602,358)
Loss per share:
Basic and
    diluted-as reported
$(.04)
$(.06)
Basic and
    diluted-pro forma
$(.04)
$(.06)
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. These securities are included in
Prepaid Expenses and Other Current Assets for presentation purposes. 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.
The Company had revenue from two customers of 31% and 25% during the fiscal year
ended June 30, 2003.
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. Generally 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 the year ended June 30, 2001, there was no
difference between the Company's net income and comprehensive income. For the
years ended June 30, 2002 and 2003 the items of comprehensive income include
unrealized gains and losses on investments the Company had classified as
available for sale.
Long-lived Assets
The Company accounted for long-lived assets for the years
ended June 30, 2001 and 2002 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 reviewed 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.
In August 2001, the FASB issued Statement No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets," ("FAS 144"), which became
effective for the Company July 1, 2002 for the fiscal year ended June 30, 2003.
The Company assesses long-term assets for impairment under SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. Under SFAS No.
144, the Company reviews long-term assets for impairment whenever events or
circumstances indicate that the carrying amount of those assets may not be
recoverable. The Company also assesses these assets for impairment based on
their estimated future cash flows.
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.
Amortization expense was $460,121, $471,629 and $468,495 for
the years ended June 30, 2001, 2002, and 2003, and amortization expense (unaudited)
for the six months ended December 31, 2002 and 2003 was $275,385 and $54,934,
respectively.
The impairment test for the Company's patents and license
rights resulted in the Company concluding that no impairment in addition to
amortization previously recorded was necessary during the year ended June 30,
2003.
Inventories
Inventory consists mainly of the Company's POTS Splitter Shelf and Filters.
Inventory is comprised of the following:
June
    30,
December
21,
2002
2003
2003
(unaudited)
Raw materials
$266,748
$131,797
$121,991
Work in Progress
1,045,679
728,537
672,634
Finished goods
3,273,644
1,729,344
1,180,176
Total
4,586,071
2,589,678
1,974,801
Less: Reserve for
    obsolescence
(1,243,355)
(486,350)
(486,350)
$3,342,716
$2,103,328
$1,488,451
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, and the amounts recorded as other liabilities
and other liabilities-related parties approximate their fair values based on
current rates at which the Company could borrow funds with similar maturities.
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 anti-dilutive.
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, 2003,
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 nominal and through June 30, 2003, an additional amount of $10,000 has been
added to reserve for future warranty costs which the Company estimates aggregate
$40,000 at this time.
Recent Accounting Pronouncements
In April 2002, the FASB issued SFAS No. 145 "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." This statement rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt," and an amendment of that statement, SFAS
No. 44, "Accounting for Intangible Assets of Motor Carriers," and SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This
statement amends SFAS No. 13, "Accounting for Leases," to eliminate
inconsistencies between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. Also, this statement
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. Provisions of SFAS No. 145 related to the rescission of SFAS No. 4
were effective for the Company on November 1, 2002 and provisions affecting SFAS
No. 13 were effective for transactions occurring after May 15, 2002. The
adoption of SFAS No. 145 did not have a material impact on our financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." This statement covers
restructuring type activities beginning with plans initiated after December 31,
2002. Activities covered by this standard that are entered into after that date
will be recorded in accordance with the provisions of SFAS No. 146. The adoption
of SFAS No. 146 did not have a significant impact on our consolidated financial
position or results of operations.
In December 2002, the FASB issued SFAS 148, "Accounting for
Stock-Based Compensation- Transition and Disclosure," which provides alternative
methods of transition for a voluntary change to fair value based method of
accounting for stock-based employee compensation as prescribed in SFAS 123,
"Accounting for Stock-Based Compensation." Additionally, SFAS 148 required more
prominent and more frequent disclosures in financial statements about the
effects of stock-based compensation. The provisions of this Statement are
effective for fiscal years ending after December 15, 2002, with early
application permitted in certain circumstances. The Company has adopted the
disclosure provisions in our consolidated financial statements as disclosed
above under Stock Based Compensation.
In November 2002, the FASB issued Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 requires a
company, at the time it issues a guarantee, to recognize an initial liability
for the fair value of obligations assumed under the guarantee and elaborates on
existing disclosure requirements related to guarantees and warranties. The
initial recognition requirements of FIN 45 are effective for guarantees issued
or modified after December 31, 2002 and adoption of the disclosure requirements
are effective for the Company during the first quarter ending January 31, 2003.
The adoption of FIN 45 did not have a significant impact on our consolidated
financial position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46
("FIN 46"), "Consolidation of Variable Interest Entities, an Interpretation of
ARB No. 51." FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity investors in
the entity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
FIN 46 is effective for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual
period beginning after June 15, 2003. The adoption of FIN 46 did not have a
significant impact on our consolidated financial position or results of
operations.
In May 2003, the FASB issued SFAS Statement No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity". This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). This statement is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003, except for
mandatorily redeemable financial instruments of nonpublic entities, if
applicable. It is to be implemented by reporting the cumulative effect of a
change in an accounting principle for financial instruments created before the
issuance date of the Statement and still existing at the beginning of the
interim period of adoption. The adoption of this statement is not expected to
have a significant impact on the Company's results of operations or financial
position.
Statement of
    Cash Flow Supplemental Information
Year
    Ending
6
    Months Ending
June
    30,
December 31
2002
2003
2002
2003
(unaudited)
Interest paid
$21,760
$14,512
$6,684
$6,000
Taxes paid
$-
$-
$-
$250
Schedule of
    Non-Cash Investing and Financing Activities:
Conversion of
    accounts payable and accrued expenses to
$2,738,658
$1,931,788
$1,133,756
$-
equity
Conversion of
    accounts payable and accrued expenses to
$1,487,747
$360,000
$-
$-
notes payable
Research and
    development fixed assets transferred to work
$-
$210,239
$-
$-
in process
    inventory
Investments in
    Patents and Licenses paid with equity
$43,750
$-
$-
$-
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 had included
the $37,500 in long-term assets 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 and has maintained the same balance for the Note throughout the
fiscal year ended June 30, 2003. The Company has included the $17,250 in
long-term assets in the accompanying consolidated balance sheets for the years
ended June 30, 2002 and 2003.
6. Property and Equipment
Property and equipment, at cost, consist of the following:
June 30,
December
31,
2002
2003
2003
(unaudited)
Equipment
$3,593,418
$2,572,031
$2,577,531
Office and
    marketing equipment
482,464
482,464
482,464
4,075,882
3,054,495
3,059,995
Less-Accumulated
    depreciation
(2,333,696)
(2,472,605)
(2,819,928)
$1,742,186
$581,890
$240,067
Depreciation expense for the years ended June 30, 2001, 2002,
and 2003, was $775,092, $1,181,717, and $957,457, respectively, of which
$501,676, $983,163 and $442,040, respectively, is included in research and
development expense. Depreciation expense for the six months ended December 30,
2002 and 2003 (unaudited) was $703,640 and $347,323 respectively, of which
$49,052 and $328,175, respectively, is included in research and development
expense.
7. Accrued Expenses
Accrued expenses consist of the following:
June 30,
December
31,
2002
2003
2003
(unaudited)
Lucent Projects
    (Note 13)
$81,250
$370,795
$-
Other General
    Expenses
591,815
514,940
430,016
$673,065
$885,735
$430,016
Accrued expenses representing accrued general and
administrative expenditures were $430,016 at December 31, 2003. At December 31,
2003 unpaid invoices for expenses for research and development expenses incurred
with Lucent Technologies, Inc. totaling $420,000 were included in accounts
payable.
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 was included in
general and administrative expenses in the accompanying statement of operations
for the 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 stipulated 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, 2003 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.
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 andits affiliates $35,000, which is included in
amounts due to related parties in the accompanying consolidated balance sheet.
During the fiscal years ended June 30, 2001, 2002 and 2003, the joint venture
was charged $1,009,420, $64,039 and $0, respectively for fees and costs by its
joint venture partner and its affiliates.
9. Long Term Debt
Long-debt is comprised of the following:
June 30,
December
31,
2002
2003
2003
(unaudited)
Settlement
        Agreements:
Accounts
        payable expected to be converted to Note payable to GTRC
150,000
150,000
100,000
bearing 7%
        interest, amortized in equal monthly payments of $4,167 and
a lump sum
        payment of $75,000 due twelve months from issuance (see
also
        - Note
        13-Commitments and Contingencies)
Accounts
        payable expected to be converted to Note payable to GTRC
474,235
474,235
-
bearing 7%
        interest, amortized in average monthly payments totaling $0
in 2004,
        $39,568 in 2005, $56,085 in 2006 $60,140 in 2007, $64,488 in
2008, and a
        lump sum payment of $253,954 due at maturity in September
2008 (see
        also - Note 13-Commitments and Contingencies)
Note payable
        to law firm bearing 8% interest, monthly installments of
415,887
405,022
405,022
$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
Note payable
        to vendor bearing 8% interest due in weekly payments of
237,169
210,558
210,558
$5,000
        including accrued interest. These payments commenced in
January 2002
        and continue until June 2004
Note payable
        to vendor non interest bearing average monthly payments
90,266
79,765
79,765
of $4,167 in
        2003 and $3,660 in 2004. These payments commenced in
April 2002
        and continue until May 2004
Note payable,
        vendor, interest at 8%, with average monthly payments of
-
29,458
27,459
$2,000
        through March, 2004
Total
1,367,557
1,349,038
822,804
Less: Current portion
(353,339)
(762,735)
(822,804)
Long-term Debt, non-current portion
$1,014,218
$586,303
$0
At June 30, 2003 total maturities of long-term debt are as
follows:
2004
$762,735
2005
151,637
2006
56,085
2007
60,140
2008
64,487
2009
    and thereafter
253,954
Total
$1,349,038
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
issued, 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 the cumulative loss 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 issued 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 issued
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. 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 issued 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
issued, 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 issued 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
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 issued 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 issued
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 amounted to $1,007,625 and the balance of
$121,091 was based upon the fair market value of the common stock on the date of
the grant, and was charged to operations for the year ended June 30, 2002.
Effective June 30, 2001 the Company issued
4,840,077 shares of the Company's common stock in settlement of debt totaling
$2,420,039 to directors and related parties, based upon the fair market value of
the common stock issued which approximated the debt settled on the measurement
date of September 6, 2001, such date was determined pursuant to EITF00-1 as to
when all contingent terms of the conversion agreement were met. These shares are
reflected as outstanding as of June 30, 2001, pursuant to AV560 and SFAS128.
In July 2001, the Company issued 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 in 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 as follows:
Conversions Concurrent with Private
Placements
Included in this total for the year ended
June 30, 2002, related parties and strategic vendors converted debt aggregating
approximately $1,020,000 and $96,000 respectively into:
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 (2,200,000 units with Microphase for $660,000 and 1,200,000 units with
    Janifast for $360,000); and
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, were issued to strategic
    vendors.
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.
Conversions, Settlements and Gain on
Extinguishments
In addition this total for the year ended
June 30, 2003 includes 4,873,333 shares of common stock and warrants to purchase
2,656,800 shares of the Company's common stock which were issued as follows;
2,750,000 shares of common stock were issued to related
    parties, the value of which was based upon the price of the Company's common
    stock on the measurement date, such date was determined pursuant to EITF00-1
    as to when all contingent terms of conversion agreements were met, in which
    no gain or loss was recognized on the conversion of $440,000 of debt; and
1,022,996
    shares of common stock were issued to 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, and, two warrants to purchase 2,233,490
    shares of the Company's common stock were 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 $1,182,658 of such liabilities
    which, together with gains from cash settlements of $27,960 resulted in an
    aggregate gain on extinguishments of $142,236.
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).
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 valued at $504,657 based upon the
fair market value of the Company's common stock on the date of the grant using
the Black-Scholes option premium model. These totalled $1,703,658 and the
Company recorded a charge to operations of $955,668 for the year ended June 30,
2002 and the balance of $747,990 was charged to operations for the year ended
June 30, 2003.
During the year ended June 30, 2003, the
Company issued 426,000 valued at 112,245 and warrants, valued at $203,150 based
upon the fair market value of the Company's common stock on the date of the
grant using the Black-Scholes option pricing model. The Company recorded these
changes, totaling $318,395, to operations for the year ended June 30, 2003.
During the fiscal year ended June 30,
2003, the Company converted certain payables and accrued expenses with officers,
related parties and strategic vendors aggregating approximately $1.9 million
into 5,923,333 restricted shares of the Company's common stock and 5 year
warrants to purchase an additional 3,706,800 restricted shares of the Company's
common stock, of which 5,533,333 shares of common stock and 3,491,800 warrants
were issued in settlement of $1,748,756 of debt to related parties as follows:
Conversions Concurrent with Private
Placements
Included in this total for the year ended
June 30, 2003, related parties and strategic vendors converted debt aggregating
approximately $300,000 and $15,000 respectively into:
1,000,000 shares and 5 year warrants to purchase at $.30 a
    share 1,000,000 shares of mPhase common stock by Microphase, a related
    party, which converted $300,000 of
50,000 shares and
    5 year warrants to purchase at $.30 a share 50,000 shares of mPhase common
    stock by a strategic vendor which converted $15,000 of Such conversions were
    upon the same terms of a concurrent private placement of common stock by the
    Company and no gain or loss was recognized in connection with these
    conversions.
Conversions, Settlements and Gain on Extinguishments
In addition, this total for the year ended
June 30, 2003 includes 4,873,333 shares of common stock and warrants to purchase
2,656,800 shares of the Company's common stock which were issued as follows;
During the year ended June 30, 2003, these included
    transactions with related parties whereby the Company and the counter
    parties respective board of director's approved, entering 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
    accounts payable through September 30, 2002. Such approval was received by
    the respective boards of directors authorizing conversions of such payables
    effective September 30, 2002 resulting in the conversion of $620,000 on and
    $360,000 on of liabilities due to Microphase corporation, and Janifast Ltd
    into 3,033,000 shares and 1,500,000 shares of stock, respectively. The value
    attributable to the shares was based upon the market price of the Company's
    common stock on the measurement date, such date was determined pursuant to
    EITF00-1, as to when all the contingent terms of the conversion agreements
    were met, in which no gain or loss was recognized on the conversion of
    $980,000 of debt, and
Also included in
    such conversions during the year ended June, 30 2003, were transactions
    whereby the Company converted $525,967 of liabilities due to the Company's
    president, vice president and a sales manager who are also concurrently
    employed by Microphase, for unpaid management compensation and sales
    commissions due from mPhase into warrants to purchase up to a total of
    2,656,500 shares of the Company's common stock. The aggregate value of such
    warrants was estimated using the Black Scholes options pricing model,
    pursuant to EITF 96-18, having an approximate value of $.21 per share, or
    $538,173. The Company recorded a settlement expense of approximately $12,206
    with respect to these three individuals.
Strategic vendors
    converted $117,486 of payables into 340,000 shares of the Company's common
    stock on the measurement date the value of which was based upon the price of
    the Company's common stock on the effective date of settlement with each
    party. This resulted in a gain of $37,383, which, when combined with all
    conversions and gains from cash settlements of $36,049 for the fiscal year
    2003, resulted in a net gain on extinguishments in the statements of
    operations of $61,226 for the year ended June 30, 2003.
As a result of the preceding, during the
three years ended June 30, 2003, extinguishments, cancellations and conversions
of debt for issuance of the Company's common stock to related parties is
summarized in Note 11 and amounts relating to strategic investors is summarized
as follows:
Equity Conversions of Debt with Strategic Vendors
For the Six Months
Ended
For the Years Ended June 30,
December 31,
2001
2002
2003
2002
2003
(Unaudited)
Strategic
    Vendors
Number of shares
0
999,662
390,000
340,000
0
Number of warrants
0
870,000
215,000
0
0
Amount converted to equity
$0
$529,503
$198,032
$117,486
$0
Gain on Extinguishment of Debt
$0
$142,236
$73,432
$40,125
$0
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.
(see also - Note 11 - Related Party Transactions)
During the six months ending December 31,
2003, the Company granted 924,667 shares of its common stock and warrants to
purchase 249,667 shares of its common stock to consultants for services
performed valued at $307,243. During the six months ended December 31, 2003, the
Company issued 333,337 shares of its common stock together with a like amount of
5 year warrants, at an exercise price $.30 per share, in a private placement and
500,000 shares of its common stock pursuant to the exercise of warrants
generating net proceeds to Company of $250,000. In December of 2003, the Company
issued 1,550,000 shares of its common stock together with a like amount of 5
year warrants to purchase one share each of the Company's common stock, with an
exercise price of $.35 per share, in a private placement generating net proceeds
of $517,500, $175,000 of which was collected in January, 2004. An advisor of the
Company was issued 100,000 shares for assisting in this transaction.
Additionally, during the six months ending
December 31, 2003, a note payable in the amount of $360,000 to Microphase
Corporation was executed in exchange for the cancellation of a like amount of
accounts payable to Microphase on September 25, 2003 which matures on July 25,
2004. Additionally, a note payable to Martin Smiley, CFO and General Counsel of
mPhase, in the amount of $100,000 was extended from September 25, 2003 to July
24, 2004. Both liabilities carry an interest rate of 12% payable quarterly in
arrears. Each note is convertible into Common Stock of mPhase at the rate of
$.30 per share through July 25, 2004. Upon conversion, each note holder will be
granted warrants to purchase an equivalent amount of mPhase Common Stock at $.30
per share for a period of five years from the date of conversion.
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, 2001, 2002, 2003 pursuant to the terms of both plans,
which include incentive stock options and non-qualified stock options, is set
forth on the below:
Weighted
Average
Number of
Exercise
Options
Price
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
Granted
625,000
.30
Exercised
-
-
Canceled/Expired
(2,565,000)
(1.00)
Outstanding at
    June 30, 2003
17,167,000
$1.24
Exercisable at
    June 30, 2003
17,092,006
$1.28
Granted (unaudited)
-
-
Exercised (unaudited)
-
-
Cancelled/Expired (unaudited)
(2,726,000)
$(3.27)
Outstanding at December 31, 2003 (unaudited)
14,441,000
$.94
Exercisable at December 31, 2003 (unaudited)
14,441,000
$.94
The fair value of options granted in 2001
and 2002 and options and compensatory warrants granted in 2003 was estimated as
of the date of grant using the Black-Scholes stock option pricing model, based
on the following weighted average assumptions: annual expected return of 0%,
annual volatility of 113% in 2001, 125.4% in 2002 and 144.4% in 2003 based upon
a risk-free interest rate ranging from 2.4% to 5.8% and expected option life of
3 years.
The per share weighted average fair value
of stock options granted during 2001, 2002 and 2003 was $1.16, $.26, and $.21,
respectively. The per share weighted average remaining life of the options
outstanding at June 30, 2001, 2002, and 2003 is 3.66, 3.29 and 2.80 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 and certain
compensating warrants granted to employees at fair market value. Had
compensation expense for stock options granted under the Plan and certain
warrants granted to employees in 2003, been determined based on fair value at
the grant dates, mPhase's net loss for the years ended June 30, 2001, 2002 and
2003.
June 30
2001
2002
2003
Net Loss:
As reported
$23,998,734
$11,245,361
$6,650,211
Proforma
$25,243,270
$11,673,091
$6,866,271
Net Loss Per
    Share:
As reported
$(.72)
$(.23)
$(.10)
Pro forma
$(.75)
$(.24)
$(.11)
For the year ended June 30, 2001, mPhase
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.
For the year ended June 30, 2002, the
Company recorded non-cash charges and deferred compensation totaling $927,420
and $0, respectively, in connection the grant of 1,505,000 options and 48,068
shares of its common stock and 48,068 warrants to employees and 5,065,000
options to consultants 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, 2003, the
Company recorded non-cash charges and deferred compensation totaling $70,950 and
$0, respectively, in connection with the grant of 625,000 options to employees
and consultants and the Company recorded non-cash charges of $203,150 in
connection with the grant of 1,690,000 compensating warrants 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 option and warrants issued to
employees and Black-Scholes stock option pricing calculations for options and
warrants issued to consultants.
The following summarizes information about stock options
outstanding at June 30, 2003:
Range of
Weighted
Exercise Price
Average
Weighted
Weighted
Remaining
Average
Average
Number
Contractual
Exercise
Number
Exercise
Outstanding
Life
Price
Exercisable
Price
$0 - $.50
6,947,500
3.7
$.37
6,872,506
$.37
$.51 - $1.50
6,075,500
2.4
$.89
6,075,500
$.89
$1.50 - $16.38
4,144,000
1.9
$3.59
4,144,000
$3.59
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 issued warrants to purchase 400,000 shares of common
stock at an exercise price of $1.00 per share. The warrants were to expire five
years from the date of grant. These warrants were exercised during the year
ended June 30, 2000 generating proceeds 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 were to 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 were outstanding
with a weighted average exercise price of $2.93.
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 were outstanding
with a weighted average exercise price of $1.05.
During the year ended June 30, 2003, the
Company issued 4,701,696 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 $.30, for five years, in connection with private
placements. Also, during the year ended June 30, 2003, the Company granted
1,690,000 5 year warrants to employees and consultants for services performed
with an exercise price of $.40 per share of common stock and 3,706,800 warrants
to creditors, including related parties (see Note 11), in connection with the
conversion of outstanding liabilities.
As of June 30, 2003, 31,777,735 warrants remain
outstanding with a weighted average exercise price of $.84.
The following summarizes information about warrants issued
pursuant to various financing transactions and for services through June 30,
2003.
Range of Exercise
    Price
Number
Weighted
Weighted
Outstanding
Average
Average
and
Remaining
Exercise
Exercisable
Contractual
Price
Life
$0 - $.30
22,826,010
4.0
$0.24
$.40 - $.50
2,060,000
4.7
$0.42
$1.25 - $2.50
1,244,000
2.0
$2.00
$1.25 - $2.50
5,647,725
2.7
$3.14
Reserved Shares
The Company has reserved approximately
3,160,000 shares issuable upon provisions of convertible notes to related
parties, which provide for, at the option of the holder's of $460,000 of notes
payable, the conversion of unpaid principal and interest into units valued at
$.30 each, each unit consisting of one share of the Company's common stock and a
one warrant to purchase the Company's common stock at $.30 per share for a
period of 5 years.
11. 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 retransmission
accreditation to proprietary television content that the Company plans to
provide with its flagship product, the Traverser™ within its incorporated joint
venture mPhase Television.net, in which the Company owns a 56.5% interest.
The Company has also incurred charges for
beta testing and on-site marketing, including the display of a live working
model at Hart Telephone. In addition, the Company has entered into a supply
agreement with Hart Telephone, which is scheduled to commence upon the
commercial production of the legacy Traverser™ DVDDS television platform. 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).
Microphase Corporation
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. In July 2001, the agreement was revised to
$11,340 a month. In July, 2002 this was increased to $12,200 per month and as of
January 1, 2003 such rent was reduced to 10,000 per month. Additionally, in July
1998, mPhase entered into an agreement with Microphase, whereby mPhase
reimburses Microphase $40,000 per month for technical research and development
assistance. Such agreement was amended as of January 1, 2002 to reduce such
payment to $20,000 per month. Microphase also charges fees for specific projects
on a project-by-project basis. During the years ended June 30, 2001, 2002, and
2003 and for the period from inception (October 2, 1996) to June 30, 2003,
$2,128,983, $1,212,594, $648,102 and $7,224,526, respectively, have been charged
to expense or inventory under these Agreements and is included in operating
expenses in the accompanying consolidated statements of operations.
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 had been charged to expense under this Agreement and is included in
licensing fees in the consolidated statement of operations. As of June 25, 1998,
the Company acquired MicroTel and as of that date this Agreement was no longer
in effect.
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 legacy Traverser™ Digital Video
and Data Delivery System and its DSL component products. During the years ended
June 30, 2001, 2002 and 2003 mPhase recorded royalties to Microphase totaling
$297,793, $78,762 and $47,304, 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 and for the year ended June 30,
2002, in consideration for a direct investment of $100,000 and pursuant to debt
conversion agreements canceling $740,000 of liabilities of the Company,
Microphase received 2,900,000 shares of mPhase common stock and 2,200,000
warrants to purchase mPhase common stock, as discussed in Note 10. For the
fiscal year ended June 30, 2003 Microphase received 4,033,333 shares of common
stock, such shares included 3,033,333 shares that the value of which was based
upon the price of the Company's common stock on the effective date of
settlement, plus 1,000,000 shares and 1,000,000 five year warrants to purchase
shares of common stock of mPhase at $.30 per share whereby such conversions were
upon the same terms of a concurrent private placement of common stock by the
Company. No gain or loss was recognized in connection with conversions by
Microphase for fiscal 2003 in exchange for the cancellation of accounts payable
totaling $920,000. As of June 30, 2002 and 2003, the Company had $0 and $61,789
current accounts payable to Microphase, which are included in amounts due to
related parties as current liabilities in the accompanying consolidated balance
sheet. As of June 30, 2002, the Company had $92,405 included in other
liabilities-related parties and as of June 30, 2003 had $360,000 included in
notes payable-related parties as long term liabilities in the accompanying
consolidated balance sheet. Additionally, at June 30, 2003, approximately
$142,000 of undelivered purchase orders remain outstanding with Microphase.
Janifast
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 for that period.
There were no such advances during the years ended June 30, 2002 and 2003.
Pursuant to debt conversion agreements between the Company and Janifast, for the
year ended June 30, 2001 Janifast received 1,200,000 shares of mPhase common
stock canceling liabilities of $600,000, and for the year ended June 30, 2002
Janifast received 3,450,000 shares of mPhase common stock and 1,200,000 warrants
to purchase mPhase common stock for the cancellation of $720,000 of liabilities,
as discussed in Note 10. During the year ended June 30,2003 Janifast was issued
1,500,000 shares of mPhase common stock in connection with the cancellation of
$360,000 of outstanding liabilities of mPhase, the value of which was based upon
the price of the Company's common stock on the effective date of settlement. No
gain or loss was recognized in connection with conversions by Janifast for
fiscal 2003. During the years ended June 30, 2001, 2002 and 2003 and the period
from inception (October 2, 1996) to June 30, 2003 $8,932,378, $1,759,308,
$178,959 and $10,691,686, respectively, of invoices for products and services
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 as long term
liabilities in the accompanying consolidated balance sheet and as of June 30,
2003 no amounts remain payable to Janifast. Additionally, at June 30, 2003,
approximately $1,435,000 of undelivered purchase orders remain outstanding with
Janifast.
Other
Related Parties
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.
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 was 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™. 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 was
included in research and development expenses in the statement of operations for
the year ended June 30, 2000. Mr. J. Lee Barton, the president and chief
executive officer of Lintel Inc., (Lintel is the parent of Hart Telephone
Company), and at that time Mr. Barton was a Director of the Company, received a
$285,000 bonus, a stock award of 140,000 shares and 100,000 options in addition
to the 125,000 granted to Hart for Beta testing services in the year ended June
30, 2000 and 120,000 options for services as a Director for the year ended June
30, 2001.
A member of mPhase's Board of Directors as
of June 30, 2003 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
years ended June 30, 2002 and 2003 he received 62,500 options and 35,000
warrants, respectively, for services as a director.
Charges and
    Expenses with Related Parties
For the Six Months
Ended December 31,
For the Years Ended June 30,
(Unaudited)
2001
2002
2003
2002
2003
Charges incurred
    with Janifast
included in:
Cost of sales and
    ending inventory
$8,932,378
$1,759,308
$178,959
$132,465
$1,816,019
Total Janifast
$8,932,378
$1,759,308
$178,959
$132,465
1,816,019
Charges incurred
    with Microphase Corp.
included in:
Cost of sales and
    ending inventory
$335,777
$200,440
$86,468
$62,319
$22,948
(Including
    Royalties)
Research and
    development
1,660,606
876,074
428,434
240,000
54,000
General and
    administrative
132,600
136,080
133,200
73,200
15,000
Total Microphase
    Corp.
$2,128,983
$1,212,594
$648,102
$253,980
$91,948
Charges incurred
    with Lintel & Affiliates
included in:
Research and
    development
$192,000
$0
$0
$0
$0
General and
    administrative
285,000
0
0
0
0
Total Lintel &
    Affiliates
$477,000
$0
$0
$0
$0
Charges incurred
    with Joint Venture
Partners &
    Affiliates
included in:
Research and
    development
$949,420
$64,039
$0
$0
$0
General and
    administrative
60,000
0
0
0
0
Total Joint
    Venture Partner & Affiliates
1,009,420
64,039
0
0
0
Total Charges
    with Related Parties
included in:
Cost of sales and
    ending inventory
$9,268,155
$1,959,748
$265,427
$194,784
$1,838,967
Research and
    development
2,802,026
940,113
428,434
240,000
54,000
General and
    administrative
477,600
136,080
133,200
73,200
15,000
Total Charges
    with Related Parties
$12,547,781
$3,035,941
$827,061
$507,984
$1,907,967
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.
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, have 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. As of August 11, 2003 the Company has an arrearage of $35,000
with respect to the payments on the promissory note. As of December 5, 2003 the
Company has an arrearage of $50,000 with respect to the payments on the
promissory note.
During the year ended June, 30 2003, the
Company converted $525,967 of liabilities due for unpaid management compensation
and sales commissions due from mPhase, including $480,967 due to the Company's
president and vice president and $45,000 due to a sales manager who is also
concurrently employed by Microphase, into warrants to purchase up to a total of
2,491,800 shares of the Company's common stock which, pursuant to EITF 96-18,
have an approximate value of $.21 per share. The Company recorded a settlement
expense of approximately $12,206, which is included as a reduction to gain on
settlements in the statements of operations for the year ended June 30, 2003.
In March of 2003, Messrs, Durando, Dotoli
and Smiley participated in a private placement of the company investing $20,000,
$20,000 and $75,000 respectively, receiving common stock of mPhase at $.30 per
share plus 5 year warrants of mPhase to purchase a like amount of common stock
at $.30 per share. In March of 2003, Messrs Durando and Smiley lent to mPhase
$30,000 and $100,000 respectively at 12% interest pursuant to two promissory
notes originally due in September of 2003. In June 2003, Mr. Durando was repaid
and Mr. Smiley agreed to extend his note until July, 2004. Also in June, 2003,
Microphase agreed to convert $360,000 of accounts payable to a note payable,
interest at 12%, due in July, 2004. The notes have provisions for prepayment by
the Company and at the option of the holder, provide for the conversion of
unpaid principal and interest into units valued at $.30 each, each unit
consisting of one share of the Company's common stock and a one warrant to
purchase the Company's common stock at $.30 per share for a period of 5 years.
Generally, as summarized below, the
Company has offered conversion of debts to related parties on substantially the
same terms as concurrent private placements (typically in $.30 units, such units
including both shares of common stock and warrants to purchase a like amount of
common stock) in addition to conversion of debts pursuant to terms of concurrent
private placements financial instruments which, pursuant to EITF 00-19, have
been settled with the Company's common stock as conditioned by benchmarks,
generally coinciding with the Company's negotiations to settle any and all
obligations with Georgia Tech Research and its affiliate (see also Note - 13) as
follows:
Equity Conversions of Debt and Other Financial Instruments with Related
    Parties
For the Three Months
Ended December 31,
For the Years Ended June 30,
(Unaudited)
2001
2002
2003
2002
2003
Janifast
Number of shares
2,400,000
3,450,000
1,500,000
1,500,000
0
Number of warrants
0
1,200,000
0
0
0
Amount converted to equity
$1,200,000
$720,000
$360,000
$360,000
$0
Microphase Corporation
Number of shares
1,278,000
2,700,000
4,033,333
3,033,333
0
Number of warrants
0
2,200,000
1,000,000
0
0
Amount converted to equity
$639,000
$740,000
$920,000
$620,000
$0
Lintel Corporation and Affiliates
Number of shares
(A)
954,000
0
0
0
0
Number of warrants
0
0
0
0
0
Amount converted to equity
$477,000
$0
$0
$0
$0
Officers
Number of shares
0
333,334
0
0
0
Number of warrants
(B)
0
333,334
2,491,800
2,491,800
0
Amount converted to equity
$0
$103,000
$480,967
$480,967
$0
Joint Venture Partner and Affiliates
Number of shares
208,077
63,216
0
0
0
Number of warrants
0
0
0
0
0
Amount converted to equity
$104,038
$31,628
$0
$0
$0
Total Related Party Conversions
Number of shares
4,840,077
6,546,550
5,533,333
4,533,333
0
Number of warrants
0
3,733,334
3,491,800
2,491,800
0
Amount converted to equity
$2,420,038
$1,594,628
$1,760,967
$1,460,967
$0
(A)
    Includes Mr. L. Barton in Fiscal 2001, a former Director of the Company.
(B) Includes $12,206 settlement expense incurred to the Company's President
    and Vice President in connection with the exchange of warrants to purchase
    the company's common stock to cancel unpaid compensation, which is included
    as a reduction to gain on Settlements in fiscal 2003.
12. Income Taxes
No provision has been made for corporate
income taxes due to cumulative losses incurred. At June 30, 2003, mPhase has
operating loss carryforwards of approximately $61.7 million and $61.2 million to
offset future federal and state income taxes respectively, which expire at
various times from 2016 through 2023. 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.
At June 30, 2003 the Company has net
deferred income tax assets of approximately $23.6 million comprised principally
of the future tax benefit of net operating loss carryforwards, which represents
an increase of $1.7 million for the fiscal year ended June 30, 2003. A full
valuation reserve has been recorded against such assets due to the uncertainty
as to their future realizability.
13. Commitments and Contingencies
mPhase has entered into various agreements
with Georgia Tech Research ("GTRC") and its affiliate, Georgia Tech Applied
Research Corporation, ("GTARC"), pursuant to which the Company 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, 2001, 2002, and 2003 totaled $3,814,300, $450,000, and
$100,000 respectively, and $13,524,300 from the period from inception through
June 30, 2003. During the year ended June 30, 2003, the Company and GTRC and its
affiliate, GTARC, on October 14, 2002, entered into a Memorandum of Intention to
exchange warrants and promissory notes for all amounts outstanding and to
exchange mutual Releases. Such agreement is subject to final documentation
approved by the board of directors of both companies.
If and when sales commence utilizing its legacy DVDDS
digital broadcast television platform, mPhase will be obligated to pay to GTRC a
royalty up to 5% of product sales, as defined.
As of June 30, 2002, mPhase became
obligated to pay Lucent Technologies, Inc. $100,000 per month through and
including the first of each month from July 1, 2003 through and including
November 1, 2003 for the development of its cost-reduced set-top box and TV+
digital broadcast television platform. Additionally, the Company engages Lucent
on a project-by-project basis for research and development of technical product
related enhancements. The amount incurred by the Company with Lucent for
assistance with respect to its research and development activities during the
years ended June 30, 2002, and 2003 totaled $156,250 and $1,112,500,
respectively, and $1,268,500 from the period from inception through June 30,
2003.
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,
nor does it anticipate any actions which would result in liabilities in excess
of amounts recorded in these financial statements.
SCHEDULE II
Item 14B. Valuation and Qualifying Accounts
mPHASE TECHNOLOGIES, INC.
VALUATION AND QUALIFYING
      ACCOUNTS
Years Ended June 30, 2003,
      2002 and 2001
(In Thousands)
Additions
Description
Balance at
Charged to
Charged to
beginning
costs and
other
Balance at
of year
expenses
accounts
Deductions
end of year
Year ended June
      30, 2003
Allowance for
      doubtful accounts (deducted
$3
0
0
(3)
$0
from accounts
      receivable)
Allowance for
      obsolescence (deducted from
$1,243
302
(1,059)
$486
inventory, at
      cost)
Year ended June
      30, 2002
Allowance for
      doubtful accounts (deducted
$29
3
0
(29)
$3
from accounts
      receivable)
Allowance for
      obsolescence (deducted from
$315
928
0
0
$1,243
inventory, at
      cost)
Year ended June
      30, 2001
Allowance for
      doubtful accounts (deducted
$0
29
0
0
$29
from accounts
      receivable)
Allowance for
      obsolescence (deducted from
$0
315
0
0
$315
inventory, at
      cost)
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 YEAR ENDED JUNE 30, 2001. THIS
  REPORT ON PAGE F-2 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 FORM S-1, 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.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following sets forth the estimated expenses payable in
connection with the preparation and filing of this Registration Statement:
Securities and
    Exchange Commission Registration Fee
$1,700
NASD Filing Fee
-
Nasdaq Listing
    Fee
-
Printing Expenses
$2,000
Accounting Fees
    and Expenses
$12,500
Legal Fees and
    Expenses
$25,000
Transfer Agent's
    and Registrar's Fees and Expenses
-
Miscellaneous
    Expenses
-
Total
$41,200
Item 14. Indemnification of Directors and Officers
Our Certificate of Incorporation, as amended, and Bylaws
provide that we shall indemnify any Director, officer, employee or agent of ours
to the full extent permitted by the New Jersey Business Corporations Act.
Under Section 14A:3-5 of the New Jersey
Business Corporation Act, we have the power to indemnify any person, against his
expenses and liabilities in connection with any proceeding, whether civil or
criminal, who is or was a Director, officer, employee or agent, provided that
such person acted in good faith and with reasonable business prudence. Should
the proceeding involve criminal liability, the Director, officer, employee or
agent shall be indemnified if he reasonably believed that his conduct was not
unlawful. Should the Director, officer, employee or agent be liable to us,
indemnification shall not be provided unless the court in such proceeding
determines that, in light of all surrounding circumstances of the case, such
Director, officer, employee or agent is reasonably entitled to expenses as the
court deems proper. Additionally, we shall indemnify any Director, officer,
employee or agent against expenses should such Director, officer, employee or
agent be successful on the merits in any proceeding referred to in this
paragraph.
Our determination as to whether the Director, officer,
employee or agent should be indemnified shall be made:
by way of a majority vote of a quorum of the Board of Directors who were
    not parties to or otherwise involved in the proceeding;
or if such quorum is not obtainable, or, even if
    obtainable and directed by such quorum or by a majority vote of the
    disinterested Directors, by independent legal counsel in a written opinion;
    or
by our stockholders if directed by a resolution of the Board of
    Directors or of the stockholders.
We shall not indemnify any Director,
officer, employee or agent if a judgment or other final adjudication establishes
that his acts or omissions (a) were in breach of his duty of loyalty to us or
our shareholders, (b) were not in good faith or involved a knowing violation of
law, or (c) resulted in receipt by the Director, officer, employee or agent of
an improper personal benefit.
We may purchase and maintain insurance on
behalf of any person who is or was a Director, officer, employee or agent of
ours, whether or not we would have the power to indemnify such corporate agent
against expenses and liabilities under the provisions of Section 14A:3-5 of the
New Jersey Business Corporation Act.
Item 15. Recent Sales of Unregistered Securities
The following securities were issued by us
within the past three years and were not registered under the Securities Act of
1933, as amended (the "Act"). Each of the transactions is claimed to be exempt
from registration under the Act, pursuant to either Rule 506 of Regulation D of
the Act in connection with private placements or Section 4(2) of the act in
connection with respect to services perfomed.
During the year ended June 30, 1999, we
issued 1,599,332 shares of common stock to employees and consultants for
services performed. We recognized a charge to operations of $8,760,866, based
upon the fair market value of the shares.
In April 1999, we issued 642,000 shares of
our common stock and warrants to purchase up to 642,000 shares of our common
stock at a combined price of $2.50 per share and warrant pursuant to Rule 506 of
Regulation D of the Act for an aggregate of $1,605,000 in cash.
In June and July 1999, we issued 4,426,698 shares of our
common stock at $2.50 per share pursuant to Rule 506 of Regulation D of the Act
for an aggregate of $11,066,745 in cash.
On July 26, 1999, 400,000 warrants previously issued
pursuant to Section 4(2) of the Act for services performed were converted into
352,239 shares of common stock in a cashless exercise.
In June 1999, we also issued 400,000
warrants pursuant to Section 4(2) of the Act for services performed, each to
purchase one share of common stock at an exercise price of $1.00 per share which
expire in June 2004. During the year ended June 30, 2000 these warrants to
purchase 400,000 shares of common stock were exercised generating proceeds of
$400,000.
In December 1999 and January 2000, we
sold, pursuant to Rule 506 of Regulation D of the Act, 1,000,000 shares of
common stock at a price of $4.00 per share, for an aggregate of $4,000,000. In
connection with the private placement, we issued 200,000 and 50,000 warrants to
purchase common stock for services rendered pursuant to Section 4(2) of the Act.
The warrants had an exercise price of $4.00 and $5.00, respectively.
During February 2000, warrants were issued
pursuant to Section 4(2) of the Act for services performed to purchase 200,000
and 50,000 shares of common stock and were also exercised, at an exercise price
of $4.00 and $5.00, respectively, generating additional proceeds of $1,050,000.
In May 2000, we issued 1,040,625 shares of our common
stock at $8.00 per share pursuant to Rule 506 of Regulation D of the Act for an
aggregate of $8,325,000 in cash.
In September 2000, we issued 510,000
shares of our common stock at $5.00 per share pursuant to Rule 506 of Regulation
D of the Act for an aggregate of $2,550,000 in cash and in connection therewith
38,250 shares of common stock for services rendered pursuant to Section 4(2) of
the Act.
During the year ended June 30, 2000, we issued 1,164,215
shares of common stock to employees and consultants pursuant to Section 4(2) of
the Act for services performed.
On November 30, 2000, we granted 150,000 shares of common
stock for services rendered pursuant to Section 4(2) of the Act.
During the quarter ended December 31, 2000, we granted
30,000 warrants to a consultant for services performed pursuant to Section 4(2)
of the Act.
During the six month period ended December
31, 2000, we issued 320,000 shares of our common stock following the exercise of
options and warrants resulting in gross proceeds of $327,500 and granted
1,035,000 options to employees and 1,572,000 options to consultants for services
performed pursuant to Section 4(2) of the Act.
In January 2001, we granted 102,000 shares of common stock
for services rendered pursuant to Section 4(2) of the Act.
In January 2001, we granted 250,000 shares of common stock
for services rendered pursuant to Section 4(2) of the Act.
On January 26, 2001 and February 9, 2001
we raised approximately $4,685,000 in cash through the issuance of 2,342,500
shares of our common stock and a like amount of warrants to purchase one share
each of our common stock at an exercise price of $3.00 and a term of four years
pursuant to Rule 506 of Regulation D of the Act. The Company issued 162,600
warrants to purchase one share each of our common stock at an exercise price of
$3.00 and a term of four years to consultants in connection with these private
placements.
On April 3, 2001 we issued warrants to
purchase 1,550,625 shares of common stock at an exercise price of $3.00 per
share expiring on April 3, 2005 to accredited investors, who, as consideration
for consent to certain additional issuances, in May 2000, were issued 1,040,625
shares of our common stock at $8.00 per share pursuant to Rule 506 of Regulation
D of the Act and in September 2000, were issued 510,000 shares of our common
stock at $5.00 per share pursuant to Rule 506 of Regulation D of the Act.
On April 16, 2001, we issued warrants to
purchase 250,000, 250,000 and 500,000 shares of common stock at respective
exercise prices of $5.00, $2.50 and $1.25 per share in connection with
consulting services rendered pursuant to Section 4(2) of the Act.
On May 7, 2001, we issued 300,000 shares
of common stock and warrants to purchase 150,000 shares of common stock at an
exercise price of $5.00 per share expiring on May 7, 2006 in connection with
consulting services rendered pursuant to Section 4(2) of the Act.
On May 25, 2001, we issued 587,000 shares
of our common stock and a like amount of warrants at an exercise price of $3.00
per share and a term of five years pursuant to Rule 506 of Regulation D of the
Act for approximately $587,000 in cash.
On July 18, 2001, we issued 575,000 shares
of our common stock and a like amount of warrants at an exercise price of $3.00
per share and a term of five years pursuant to Rule 506 of Regulation D of the
Act for approximately $575,000 in cash.
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 pursuant to Section 3(a)(9) of the Act. These issuances included
2,400,000 shares for the conversion of $1,200,000 of liabilities by Janifast;
1,278,000 shares for the conversion of $639,000 of liabilities by Microphase;
954,000 shares for the conversion of $477,000 of liabilities by Lintel
Corporation and its affiliates at that time including Mr. L. Barton, a Director
of the Company at that time; and 208,077 shares for the conversion of $104,038
of liabilities by the Company's Joint venture partner-Alpha-Star and Affiliates.
In September 2001, certain of our officers
and directors purchased an aggregate of 2,000,000 shares of common stock for an
aggregate investment of $1,000,000. These issuances included 1,000,000 shares to
Mr. L. Barton, a director at that time, for an investment of $500,000; 400,000
shares to Mr. Ronald A. Durando, the Company's president and a director, for an
investment of $200,000; 400,000 shares to Mr. Gustave Dotoli , the Company's
vice-president and a director, for an investment of $200,000; and 200,000 shares
to Mr. Martin S. Smiley, the Company's vice-president, for an investment of
$100,000; and were exempt pursuant to Section 4(2) and/or Rule 506 of Regulation
D of the Act.
In December 2001 and January 2002, we
issued 6,797,643 shares of common stock and a like amount of warrants at an
exercise price of $.30 per share for a term of five (5) years pursuant to Rule
506 of Regulation D of the Act for approximately $2,000,000 in cash. This
issuance was exempt pursuant to Section 4(2) and/or Rule 506 of Regulation D of
the Act.
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 as follows:
During December 2001, the Company converted $660,000 of
    liabilities due to Microphase and $360,000 of liabilities due to Janifast
    into 2,200,000 and 1,200,000, respectively, shares of the Company's 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 pursuant to debt
    conversion agreements pursuant to Section 3(a)(9) of the Act and 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, were issued to
    strategic vendors pursuant to Section 3(a)(9) of the Act.
During the quarter ended March 31,2002 the Company
    converted $96,000 of liabilities due to Strategic Vendors into 320,000
    shares of the Company's 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 pursuant to debt conversion agreements pursuant to Section 3(a)(9)
    of the Act.
Effective March 31, 2002, the Company converted $420,872
    of liabilities due to Piper Rudnick LLP, outside legal counsel to mPhase
    pursuant to Section 3(a)(9) of the Act 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.
    Additionally, 1,022,996 shares of common stock were issued to 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 strategic vendor, to
    settle $761,786 of liabilities pursuant to Section 3(a)(9) of the Act. The
    conversion of $1,182,658 of such liabilities which, together with gains from
    cash settlements of $27,960 resulted in an aggregate gain on extinguishments
    of $142,236.
Effective for June 30 2002, the Company converted
    $360,000 of liabilities due to Microphase and $80,000 of liabilities due to
    Janifast into 2,250,000 and 500,000 shares of the Company's common stock,
    respectively, pursuant to debt conversion agreements pursuant to Section
    3(a)(9) of the Act.
During the year ended June 30, 2003, we
issued 4,296,680 shares of Common Stock at $.30 per share plus 5 year warrants
to purchase 4,296,680 shares of Common Stock at $.30 per share in a Private
Placement pursuant to Rule 506 of Regulation D of the Act, generating net
proceeds to the company of approximately $1,164,000.
From August 2001 to June 2002, we issued
an aggregate of 2,976,068 shares of common stock to consultants for an aggregate
of $1,202,997. We also issued an aggregate of 2,675,000 warrants to consultants
for an aggregate of $1,040,000.
During the year ended June 30, 2003, the
Company issued 426,000 shares of its common stock valued at $112,245 and
1,690,000 warrants, valued at $203,150 based upon the fair market value of the
Company's common stock on the date of the grant using the Black-Scholes option
pricing model. The Company recorded these charges, totaling $318,395 to
operations for the year ended June 30, 2003. Each transaction was pursuant to
Section 4(2) of the Act.
During the fiscal year ended June 30,
2003, the Company converted certain payables and accrued expenses with officers,
related parties and strategic vendors pursuant to Section 4(2) and to Section
3(a)(9) of the Act aggregating approximately $1.9 million into 5,923,333
restricted shares of the Company's common stock and 5 year warrants to purchase
an additional 3,706,800 restricted shares of the Company's common stock. Of
these 5,533,333 shares of common stock and 3,491,800 warrants were issued in
settlement of $1,748,756 of debt to related parties as follows:
The conversion of $620,000 on and $360,000 on of
    liabilities due to Microphase corporation, and Janifast Ltd into 3,033,000
    shares and 1,500,000 shares of stock, respectively. The value attributable
    to the shares was based upon the market price of the Company's common stock
    on the measurement date, such date was determined pursuant to EITF00-1, as
    to when all the contingent terms of the conversion agreements were met, in
    which no gain or loss was recognized on the conversion of $980,000 of debt.
Also included in such conversions during the year ended
    June, 30 2003, were transactions whereby the Company converted $525,967 of
    liabilities; $269,362 due to the Company's president, $211,605 due to the
    vice president and $45,000 due to the a sales manager who is also
    concurrently employed by Microphase, for unpaid management compensation and
    sales commissions due from mPhase into warrants to purchase up to a total of
    2,656,500 shares of the Company's common stock. The aggregate value of such
    warrants was estimated using the Black-Scholes options pricing model,
    pursuant to EITF 96-18, having an approximate value of $.21 per share, or
    $538,173. The Company recorded a settlement expense of approximately $12,206
    with respect to the Company's president and vice president.
Strategic vendors converted $117,486 of payables into
    340,000 shares of the Company's common stock on the measurement date the
    value of which was based upon the price of the Company,'s common stock on
    the effective date of settlement with each party. This resulted in a gain of
    $37,383, which, when combined with all conversions and the gains from cash
    settlements of $36,049 for the fiscal year 2003, resulted in a net gain on
    extinguishments in the statements of operations of $61,226 for the year
    ended June 30, 2003.
In August of 2003, the Company issued
333,334 shares of its common stock together with a like amount of warrants in a
private placement pursuant to Rule 506 of Regulation D of the Act, generating
net proceeds of $100,000 which was collected during the three month period ended
on September 30, 2003.
During the six months ending December 31,
2003, the Company granted 924,667 shares of its common stock and warrants to
purchase 249,667 shares of its common stock to consultants for services
performed value at $307,243 and charged to operations during the period. Each
transaction was pursuant to Section 4(2) of the Act.
During the three months ended December 31,
2003, the Company issued 500,000 shares of its common stock pursuant to warrants
previously issued to purchase said shares pursuant to Rule 506 of Regulation D
of the Act for an aggregate of $150,000 in cash.
In December of 2003, the Company issued to
five accredited investors 2,300,000shares of its common stock together with a
like amount of 5 year warrants to purchase one share each of the Company's
common stock, with an exercise price of $.35 per share, in a private placement
pursuant to Rule 506 of Regulation D of the Act generating net proceeds of
$805,000, $175,000 of which was collected in January, 2004. An advisor of the
Company was issued 100,000 shares for assisting in this transaction.
In January of 2004, the Company issued to
twenty-three accredited investors 7,160,720 shares of its common stock together
with a like amount of 5 year warrants to purchase one share each of the
Company's common stock, with an exercise price of $.35 per share, in a private
placement pursuant to Rule 506 of Regulation D of the Act generating net
proceeds of $2,506,250, all of which was collected in January, 2004.
In March and April of 2004, the Company
issued to six accredited investors 1,811,429 shares of its common stock together
with a like amount of 5 year warrants to purchase one share each of the
Company's common stock, with an exercise price of $.35 per share, in a private
placement pursuant to Rule 506 of Regulation D of the Act generating net
proceeds of $634,000, all of which was collected in March and April, 2004. Two
advisors of the company were issued 128,826 shares of its common stock together
with a like amount of 5 year warrants to purchase one share each of the
Company's common stock, with an exercise price of $.35 per share for assisting
in this transaction.
Item 16. Exhibits and
Financial Statements
Exhibit
Number
Description
2.1*
Exchange of Stock
    Agreement and Plan of Reorganization dated January 15, 1997
(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)).
Exhibit
Number
Description
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)).
4.3**
Form of Warrant.
4.4**
Warrant issued to
    Piper Rudnick LLP.
4.5**
Warrant issued to
    Piper Rudnick LLP.
4.6**
Form of
    Subscription Agreement, dated December 15, 2001.
5.1
Opinion of Martin
    S. Smiley, General Counsel to the Company.
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)).
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)).
Exhibit
Number
Description
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(a)*
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)).
10.12(b)*
Distribution
    Agreement effective May 15, 2002 by and between Corning Cable
System and the
    Company.
10.13*
Development
    Agreement between Lucent Technologies, Inc. and mPhase
Technologies,
    Inc., effective as of December 1, 2002, relating to Video Services
Switch and
    Statement of Work, dated December 9, 2002.***
10.14*
Purchase Order
    between the Company and Lucent Technologies, Inc., dated
December 15,
    2002, for cost reduction of the mPhase Traverser INI™ set box.***
10.15*
Co-Branding
    Agreement, dated as of January 21, 2003, between the Company and
Lucent
    Technologies, Inc.
10.16*
Systems
    Integrator Agreement, dated as of April 4, 2003, between the Company and
Lucent
    Technologies, Inc.***
10.17*
Development
    Agreement between Lucent Technologies, Inc. and mPhase
Technologies,
    Inc., relating to Broadcast Television Switch (BTS) effective as of
September 15,
    2003.***
10.18*
Development
    Agreement effective February 3, 2004 between Lucent Technologies,
Inc. and mPhase
    Technologies, Inc. for development of micro fuel cell
NanoTechnology.***
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
    Schuhalter, Coughlin & Suozzo, LLC.
23.5
Consent of
    Rosenberg Rich Baker Berman and Company.
24.1**
Power of Attorney
    (included as a part of the signature page of the initial filing of this
Registration
    Statement).
---
* Incorporated by reference.
** Previously filed.
*** Portions of such documents have been omitted pursuant to Rule 406 of the
Securities Act of 1933, or Rule 424(b) of the Securities Exchange Act of 1934.
Omitted portions of documents have been separately filed with the Securities and
Exchange Commission.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
To file, during any period in which offers or sales are being made, a
    post-effective amendment to this registration statement:
To include any prospectus required by Section 10(a)(3) of the
      Securities Act of 1933;
To reflect in the prospectus any facts or events
      arising after the effective date of this registration statement (or the
      most recent post-effective amendment thereof) which, individually or in
      the aggregate, represent a fundamental change in the information set forth
      in this Registration Statement. Notwithstanding the foregoing, any
      increase or decrease in volume of securities offered (if the total dollar
      value of securities offered would not exceed that which was registered)
      and any deviation from the low or high end of the estimated maximum
      offering range may be reflected in the form of prospectus filed with the
      Commission pursuant to Rule 424(b) promulgated under the Securities Act of
      1933 if, in the aggregate, the changes in volume and price represent no
      more than a 20% change in the maximum aggregate offering price set forth
      in the Calculation of Registration Fee" table in this Registration
      Statement;
To include any material information with respect to the
      plan of distribution not previously disclosed in this registration
      statement or any material change to such information in this Registration
      Statement.
Provided, however, that paragraphs
(a)(1)(i) and (a)(1)(ii) shall not apply if the information required to be
included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to section 13 or section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference in
this registration statement.
That, for the purpose of determining any liability under
    the Securities Act of 1933, each such post-effective amendment shall be
    deemed to be a new registration statement relating to the securities offered
    therein, and the offering of such securities at that time shall be deemed to
    be the initial bona fide offering thereof.
To remove from registration by means of a post-effective
    amendment any of the securities being registered which remain unsold at the
    termination of the offering.
Insofar as indemnification for liabilities arising under
    the Securities Act may be permitted to directors, officers, and controlling
    persons of the registrant pursuant to the foregoing provisions, or
    otherwise, the registrant has been advised that in the opinion of the
    Securities and Exchange Commission such indemnification is against public
    policy as expressed in the Securities Act and is, therefore, unenforceable.
    In the event that a claim for indemnification against such liabilities
    (other than the payment by the Registrant of expenses incurred or paid by a
    director, officer, or controlling person of the registrant in the successful
    defense of any action, suit or proceeding) is asserted by such director,
    officer or controlling person in connection with the securities being
    registered, the registrant will, unless in the opinion of counsel the matter
    has been settled by controlling precedent, submit to a court of appropriate
    jurisdiction the question of whether such indemnification by it is against
    public policy as expressed in the Securities Act and will be governed by the
    final adjudication of each issue.
SIGNATURES
Pursuant to the requirements of the
Securities Act of 1933, as amended, the registrant has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Norwalk, State of Connecticut, on the 26nd day
of April, 2004.
mPHASE TECHNOLOGIES, INC.
B
/s/ Ronald A.
      Durando
y:
Ronald A.
      Durando
President and
      Chief Executive Officer
Pursuant to the requirements of the Securities Act of
1933, this Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
Signature
Title
Date
*
Chairman of the Board of Directors
April 26, 2004
Necdet F. Ergul
*
President, Chief Executive Officer
April 26, 2004
and Director (Principal Executive Officer)
Ronald A. Durando
/s/ Martin S. Smiley
Executive Vice President of Finance,
April 26, 2004
Chief Financial Officer, and General Counsel
Martin S. Smiley
(Principal Financial and Accounting Officer)
*
Director
April 26, 2004
Michael P. McInerney
*
Director
April 26, 2004
Anthony H. Guerino
*
Chief Operating Officer and Director
April 26, 2004
Gustave T. Dotoli
*
Chief Technology Officer and Director
April 26, 2004
David L. Klimek
*
Director
April 26, 2004
Abraham Biderman
By:
/s/ Martin S. Smiley
Martin S. Smiley
Attorney-in-fact