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

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-K

(Mark One)

      |X|   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
            SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

                   For the fiscal year ended December 31, 2000

      |_|   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
            SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                 For the transition period from _______to_______

                          Commission file number 1-8191

                               PORTA SYSTEMS CORP.
             (Exact name of registrant as specified in its charter)

Delaware                                                     11-2203988
(State or other jurisdiction                                 (IRS Employer
of incorporation or organization)                            Identification No.)

575 Underhill Boulevard, Syosset, New York                   11791
(Address of principal executive offices)                     (Zip Code)

Registrant's telephone number, including area code:          (516) 364-9300

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, par value $.01                       American Stock Exchange
      (Title of Class)                    (Name of Exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act:

                                      None

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

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

      State aggregate market value of the voting stock held by non-affiliates of
the registrant: $3,449,620 as of March 16, 2001.

      Indicate  the  number of shares  outstanding  of each of the  registrant's
class of common stock, as of the latest  practicable  date:  9,856,056 shares of
Common Stock, par value $.01 per share, as of March 16, 2001.

                       DOCUMENTS INCORPORATED BY REFERENCE

The  registrant's  definitive proxy statement in connection with its 1999 Annual
Meeting  of  Stockholders  to be  filed  within  120  days of the  close  of the
registrant's  fiscal  year is  incorporated  by  reference  into Part III of the
Report.

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

<PAGE>

Item 1. Business

      Porta Systems Corp.  develops,  designs,  manufactures and markets a broad
range of standard and  proprietary  telecommunications  equipment and integrated
software  applications  for  sale  domestically  and  internationally.  Our core
products,  focused on ensuring  communications for service providers  worldwide,
fall into three categories:

      Computer-based  operation support systems.  Our operation support systems,
which we call our OSS systems,  focus on the access loop and are  components  of
telephone  companies'  service assurance and service delivery  initiatives.  The
Systems   primarily  focus  on  trouble   management,   line  testing,   network
provisioning,  inventory  and  assignment,  and automatic  activation,  and most
currently  single  ended  line  qualification  for the  delivery  of  xDSL  high
bandwidth  services.  We market these systems  principally to foreign  telephone
operating  companies in established and developing  countries primarily in Asia,
South and Central America and Europe.

      Telecommunications  connection and protection equipment. These systems are
used  to  connect  copper-wired   telecommunications  networks  and  to  protect
telecommunications   equipment  from  voltage  surges.   We  market  our  copper
connection  equipment and systems to telephone  operating companies and customer
premise systems providers in the United States and foreign countries.

      Signal processing equipment. These products, which we sell principally for
use  in  defense  and  aerospace   applications,   support   copper   wire-based
communications systems.

      Porta Systems Corp. is a Delaware corporation  incorporated in 1972 as the
successor to a New York corporation  incorporated in 1969. Our principal offices
are located at 575  Underhill  Boulevard,  Syosset,  New York  11791;  telephone
number, 516-364-9300.  References to Porta include its subsidiaries,  unless the
context indicates otherwise.

Forward-Looking Statements

      The  statements in this Form 10-K Annual Report that are not  descriptions
of historical facts may be forward looking  statements that are subject to risks
and  uncertainties.  In particular,  statements in this Form 10-K Annual Report,
including any material  incorporated  by reference in this Form 10-K, that state
our  intentions,  beliefs,  expectations,  strategies,  predictions or any other
statements  relating  to  our  future  activities  or  other  future  events  or
conditions  are  forward-looking  statements.   Forward-looking  statements  are
subject to risks,  uncertainties and other factors,  including,  but not limited
to, those  identified  under Risk Factors,  and those  described in Management's
Discussion and Analysis of Financial  Condition and Results of Operations and in
any other filings we make with the Securities and Exchange  Commission,  as well
as general  economic  conditions,  any one or more of which could  cause  actual
results to differ materially from those stated in such statements.

Risk Factors

      We recently  incurred net losses from our  operations,  and our losses may
continue.  We incurred a net loss of $10,176,000,  or $1.04 per share (basic and
diluted),  on sales of $51,140,000 for 2000 following a loss of $13,686,000,  or
$1.44 per share (basic and diluted) for 1999,  and our losses are  continuing at
least through the first quarter of 2001 and may continue  thereafter.  We cannot
give assurance that we will be able to operate profitably in the future.

      Our independent  auditors have included an explanatory  paragraph relating
to our ability to continue as a going  concern in their report on our  financial
statements.   Because  of  our   substantial   losses  in  2000  and  1999,  our
stockholders'  deficit of $ 10,792,000  at December  31,  2000,  and our working
capital deficit of $24,152,000 as of December 31, 2000, resulting primarily from
approximately  $27,000,000 of debt maturing in July 2001, our auditors  included
in their  report an  explanatory  paragraph  about our  ability to continue as a
going concern.


                                    1 of 24
<PAGE>

      We require substantial financing to meet our working capital requirements.
We had a working capital  deficit at December 31, 2000 of $24,152,000,  compared
to working  capital of $6,135,000 at December 31, 1999. As of December 31, 2000,
our current  liabilities  include  $20,746,000 due to our senior lender,  all of
which is due and payable on July 3, 2001, at which time our  agreement  with the
senior lender will  terminate.  At December 31, 2000, we did not have sufficient
resources to pay the senior  lender at maturity and we do not expect to generate
the necessary  cash from our  operations  to enable us to make that payment.  In
addition,  $6,144,000 of subordinated  notes were outstanding as of December 31,
2000 of which $900,000  matured on January 3, 2001 and $5,244,000 will mature on
July 3, 2001. We did not have sufficient  resources to pay the principal portion
which  matured  on  January  3,  2001  or  the  interest  which  was  due on the
subordinated  notes on  January  3,  2001,  and we failed to make the  scheduled
principal  and interest  payments on the  subordinated  debt. We cannot give any
assurance  that we will be able to either pay our  obligations  to our senior or
subordinated  lenders at their respective  maturity dates or renew our agreement
with our senior lender or enter into an agreement with a new lender. At December
31,  2000,  we were in default on a covenant  on our  agreement  with our senior
lender and the outstanding  advances from the senior lender exceeded the maximum
allowable  under the borrowing base formula since the Company's  eligible assets
were not  sufficient  to support  the  outstanding  balance  under the  combined
revolving  advance and standby letters of credit guarantee (see Note 6, Notes to
Consolidated  Financial  Statements).  The senior  lender waived the default and
permitted us to continue to maintain the over advance  through July 2, 2001.  We
cannot assure you that any future  defaults  will be waived,  in which event the
principal  and  interest  on our  obligations  to our  senior  lender may become
immediately  due and  payable.  See  "Management's  Discussion  and  Analysis of
Financial Condition and Results of Operations."

      We are heavily dependent on foreign sales.  Approximately 66% of our sales
in 2000,  62% of our sales in 1999 and 60% of our  sales for 1998,  were made to
foreign  telephone  operating  companies.  In  selling to  customers  in foreign
countries,  we are exposed to inherent risks not normally present in the case of
our  sales  to  United  States  customers,  including  extended  delays  in both
completing the  installation  and receiving the final payment from our customers
for our  Operational  Support  Systems  contracts,  and as well as further risks
relating to political and economic changes.

      We rely  heavily  on  British  Telecommunications  for most of our  sales.
During 2000, our direct sales to British  Telecommunications were $5,098,000, or
approximately  10%  of  our  sales.  Pursuant  to  our  agreement  with  Fujitsu
Telecommunications Europe LTD, which purchases telecommunications equipment from
us  for   sale   to   British   Telecommunications,   our   sales   to   Fujitsu
Telecommunications  for 2000  were  $12,051,000  or 24% of  sales.  Our  largest
customer in both 1999 and 1998 was British Telecommunications.  Sales to British
Telecommunications for 1999 were $7,825,000,  or approximately 20% of sales, and
sales in 1998 were  $15,349,000,  or 26% of sales.  Therefore,  any  significant
interruption or decline in sales to either British Telecommunications or Fujitsu
Telecommunications may have a materially adverse effect upon our operations.

      We have granted to British  Telecommunications  rights to our  technology.
Under  our   agreement   with  British   Telecommunications,   we  gave  British
Telecommunications the right to use our connection/protection technology or have
products  using  our  technology  manufactured  for it by  others.  As a result,
British  Telecommunication may have the right to use our technology and purchase
products based on our technology from others,  which may result in a significant
decline  in  our  sales  to  British  Telecommunications.  Furthermore,  we  are
currently negotiating a supply agreement with British  Telecommunication.  There
are no assurances that we will be successful in securing a new agreement.  If we
do not enter into a new agreement with British Telecommunications,  our business
may be impaired.


                                    2 of 24
<PAGE>

      We experience  difficulties with Operations Support Systems contracts.  We
experience delays in purchaser  acceptance of the Operations Support Systems and
our receipt of final  contract  payments in connection  with a number of foreign
sales.  In  addition,  we have no  steady  or  predictable  flow of  orders  for
Operations  Support  Systems and the negotiation of a contract for an operations
support  system  is  an  individualized  and  highly  technical  process.  These
contracts  typically contain  performance  guarantees by us and clauses imposing
penalties  on us if we  do  not  meet  the  contractual  in-service  dates.  The
installation,  testing and purchaser  acceptance  phases of these  contracts may
last longer than  contemplated  by the contracts and,  accordingly,  amounts due
under the contracts may not be collected for extended periods.  Furthermore, our
Operation Support Systems contracts typically contain performance  guarantees by
us and clauses imposing penalties if we do not meet "in-service" dates.

      Because  of our  small  size  and  our  financial  problems,  we may  have
difficulty  competing for business.  We compete  directly with a number of large
and small telephone  equipment  manufacturers in the United States,  with Lucent
Technologies,  Inc. continuing to be our principal United States competitor.  In
the past,  competitors  have used our  financial  difficulties  in  successfully
competing  against us. We anticipate that our loss for 2000, our working capital
deficiency and the scheduled  expiration of our financing agreement may continue
to place us in a competitive  disadvantage,  particularly in seeking  Operations
Support   Systems   contracts,   where  we   frequently   deal   with   national
telecommunications companies.

      We face  significant  competition  for both foreign and domestic sales. In
both foreign and domestic markets,  we face considerable  competition from other
United States and foreign telephone  equipment  manufacturers  most of which are
larger and have substantially  greater financial resources than us. In addition,
if we establish  facilities in foreign countries,  we face risks associated with
currency  devaluation,  difficulties  in either  converting  local currency into
dollars or  transferring  funds to the  United  States,  local tax and  currency
regulations and political instability.

      We require access to current technological developments. We rely primarily
on the  performance  and design  characteristics  of our  products and we try to
offer our  products at prices and with  warranties  that will make our  products
competitive.  Our  business  could be  adversely  affected  if we cannot  obtain
licenses  for  such  updated   technology   or  self  develop   state-of-the-art
technology.

      We rely on certain key  employees.  We may be dependent upon the continued
employment of certain key employees,  including our senior  executive  officers.
Our failure to retain such employees may have a material adverse effect upon our
business.

      We do not pay dividends on common stock. We have not paid dividends on our
common stock and do not anticipate  paying dividends in the foreseeable  future.
We presently intend to retain future earnings, if any, in order to provide funds
for use in the operation of our business and repayment of debt and, accordingly,
do not anticipate  paying cash dividends on our common stock in the  foreseeable
future.  In addition,  our agreement with our senior  secured  lender  prohibits
payment of dividends.


                                    3 of 24
<PAGE>

Products

      Operations Support Systems. We sell our OSS systems primarily to telephone
operating  companies in established and developing  countries in Asia, South and
Central America and Europe,  and to a lesser extent,  in the United States.  Our
principal OSS systems are computer-based testing,  provisioning,  activation and
trouble  management  products which include  software and capital  equipment and
typically  sell for prices  ranging  from  several  hundred  thousand to several
million dollars.

      The testing products are designed to  automatically  test for and diagnose
problems in customer  telephone  lines and to notify  telephone  company service
personnel of required  maintenance.  The associated  trouble  management  system
provides automated record keeping (including repair and disposition records) and
analyzes  these  records to enable the telephone  company to identify  recurring
problems and equipment  deterioration and to fulfill  maintenance  service level
agreement  obligations.  The  integration  of these  systems  provides a service
assurance function for telephone companies.

      A major component of the testing system is the "test head," which provides
the  access to,  and tests the  required  telephone  line.  We have  continually
developed  our test head  capability  to meet the changing  requirements  of the
customer  loop,  and have recently  introduced  our latest  advanced  technology
platform  (sixth  generation)  product,  the MKIII.  An enhanced  version of the
MKIII, the Sherlock,  will provide the capability to determine  whether customer
lines  are  xDSL  capable,   enabling   telephone   companies  to  expeditiously
characterize  their outside plant, and optimize their  responsiveness  to market
conditions.

      Our other  software  applications,  including the automated  assignment of
facilities and activation of service, form part of a telephone company's service
activation  function,  and  can be  integrated  with  the  testing  and  trouble
management  systems,  to provide a  comprehensive  access  loop  capability.  In
addition,  if requested by customers,  Porta develops  software to meet specific
customer  requirements,  including  integration  of its systems  with  telephone
company legacy or third party OSS systems.

      We  have  entered  into  a  number  of   agreements   with   suppliers  of
complementary   products  and  plans  to  offer  those   products   through  our
distribution   channels  to  our  customer  base.  Those  products  enhance  the
customers'  service  delivery  and  service  assurance  initiatives  and address
specific  operations  areas  such  as  facility  and  records  verification  and
purification, work force scheduling and task mapping, and call fraud detection.

      Our OSS  products  are  complex  and,  in most  applications,  incorporate
features designed to respond to the purchaser's operational requirements and the
particular  characteristics of the purchaser's  telephone system and operational
processes.  As a result,  the  negotiation of a contract for an OSS system is an
individualized  and highly  technical  process.  In addition,  contracts for OSS
systems frequently provide for manufacturing,  delivery,  installation,  testing
and  purchaser  acceptance  phases,  which take place over periods  ranging from
several months to a year or more. These contracts  typically contain performance
guarantees by us and clauses  imposing  penalties if "in-service"  dates are not
met.  The  installation,  testing  and  purchaser  acceptance  phases  of  these
contracts may last longer than  contemplated by the contracts and,  accordingly,
amounts due under the contracts  may not be collected for extended  periods and,
in some instances,  may not be collected.  Delays in purchaser acceptance of the
systems  and  in our  receipt  of  final  contract  payments  have  occurred  in
connection with a number of foreign sales. In addition,  we have not experienced
a steady or predictable flow of orders for OSS systems.

      Telecommunications  Connection Equipment. Our copper connection/protection
equipment and systems are used by telephone  operating  companies,  by owners of
private  telecommunications  equipment  and by  manufacturers  and  suppliers of
telephone central office and customer premises equipment.  Products of the types
comprising our telecommunications  connection equipment are included as integral
parts of all domestic and foreign telephone and telecommunications systems. Such
products are sold in a worldwide market,  which generally grows in proportion to
increases  in  the  number  of  telephone  subscribers  and  owners  of  private
telecommunications  equipment,  as well as to  increases  in  upgrades to modern
digital switching technology such as DSL, ADSL, and ISDN lines.


                                    4 of 24
<PAGE>

      Our  connection  equipment  consists of  connector  blocks and  protection
modules used by  telephone  companies to  interconnect  copper-based  subscriber
lines to switching equipment lines. The protector modules protect central office
personnel and equipment from electrical surges. The need for protection products
has increased as a result of the worldwide move to digital technology,  which is
extremely  sensitive  to damage by  electrical  overloads,  and because  private
owners of  telecommunications  equipment now have the  responsibility to protect
their    equipment   from   damage   caused   by   electrical    surges.    Line
connecting/protecting   equipment  usually  incorporates  protector  modules  to
safeguard  equipment and personnel  from injury due to power surges.  Currently,
these  products  include a variety of connector  blocks,  protector  modules and
frames used in telephone central switching offices, PBX installations,  multiple
user facilities and customer premise applications.

      We also have developed an assortment of frames for use in conjunction with
our  traditional  line  of  connecting/protecting   products.   Frames  for  the
interconnection of copper circuits are specially designed structures which, when
equipped  with  connector  blocks  and  protectors,   interconnect  and  protect
telephone lines and distribute  them in an orderly  fashion  allowing access for
repairs  and changes in line  connections.  One of our frame  products,  the CAM
frame,  is  designed  to  produce  computer-assisted  analysis  for the  optimum
placement of connections for telephone lines and connector blocks mounted on the
frame.

      Our copper connection/protection products are used by many of the Regional
Bell Operating Companies as well as by independent telephone operating companies
in the United States and owners of private  telecommunications  equipment. These
products  are also  purchased  by other  companies  for  inclusion  within their
systems. In addition, our telecommunications  connection products have been sold
to telephone operating companies in various foreign countries. This equipment is
compatible  with existing  telephone  systems both within and outside the United
States and can  generally  be used without  modification,  although we do custom
design modifications to accommodate the specific needs of our customers.

      Signal Processing  Products.  Our signal processing  products include data
bus  systems  and  wideband  transformers.  Data  bus  systems,  which  are  the
communication standard for military and aerospace systems,  require an extremely
high level of reliability and  performance.  Wideband  transformers are required
for  ground  noise  elimination  in video  imaging  systems  and are used in the
television  and  broadcast,  medical  imaging  and  industrial  process  control
industries.

      The table below shows,  for the last three fiscal years,  the contribution
made to our  sales by each of its  major  categories  of the  telecommunications
industry:

                            Sales by Product Category
                            Years Ended December 31,

                            2000                1999                  1998
                            ----                ----                  ----
                                      (Dollars in thousands)

OSS Systems           $22,296    44%       $14,254    37%       $27,318    46%

Line Connecting
/Protecting
Equipment              20,546    40%        18,189    47%        24,291    41%

Signal Processing       7,644    15%         6,328    16%         7,539    13%

Other                     654     1%           165     0%           195     0%
                      -------   ---        -------   ---        -------   ---

Total                 $51,140   100%       $38,936   100%       $59,343   100%
                      =======   ===        =======   ===        =======   ===


                                    5 of 24
<PAGE>

Markets

      We supply  equipment  and systems to telephone  companies  which  provides
improved services to ensure  communication to their customers.  In addition,  we
provide  businesses with systems which improve their internal  telecommunication
systems.

      Telephone networks in certain regions of the world, notably Latin America,
Eastern Europe and certain areas in the  Asia/Pacific  region,  were designed to
carry voice traffic and are not well suited for high-speed data transmissions or
for other forms of telecommunications that operate more effectively with digital
telecommunications   equipment  and  lines.  The  telephone  networks  in  these
countries  are also  characterized  by a very low  ratio of  telephone  lines to
population.  Countries with emerging  telecommunication networks have to rapidly
add access lines in order to increase the availability of telephone  service and
to significantly upgrade the quality of the lines already in service.

      Our OSS  systems  are  designed  to meet  many of the  needs of a  rapidly
changing  telephone  network.  OSS systems facilitate rapid change and expansion
without a comparable increase in the requirement for skilled technicians,  while
the  computerized   line  test  system  insures   increased  quality  and  rapid
maintenance and repair of subscriber local loops. The automated database,  which
computerizes  the inventory and maintenance  history of all subscriber  lines in
service, helps to keep the rapid change under control.

      During 2000,  approximately 44% of our sales consisted of OSS products and
services.

      As a telephone company expands the number of its subscriber lines, it also
requires additional connection equipment to interconnect and protect those lines
in its central  offices.  We provide a line of copper  connection  equipment for
this purpose.  Recent trends towards the transmission of high frequency  signals
on copper lines are sustaining this market.  Less developed  countries,  such as
those with emerging  telecommunications  networks or those  upgrading to digital
switching systems, provide a growing market for copper connection and protection
equipment.

      The increased  sensitivity of the newer digital  switches to small amounts
of voltage  requires the  telephone  company  which is upgrading  its systems to
digital    switching    systems   to   also    upgrade   its   central    office
connection/protection  systems in order to meet these more stringent  protection
requirements.  We supply  central office  connection/protection  systems to meet
these needs.

      During 2000, approximately 40% of our sales were made to customers in this
category.

      Our line of signal  processing  products is supplied to  customers  in the
military and aerospace  industry as well as manufacturers  of medical  equipment
and video  systems.  The  primary  communication  standard in new  military  and
aerospace systems is the MIL-STD-1553  Command Response Data Bus, an application
which requires an extremely high level of reliability and performance.  Products
are  designed to be  application  specific to satisfy the  requirements  of each
military or aerospace program.

      Our wideband  transformers  are required for ground noise  elimination  in
video imaging  systems and are used in the  television  and  broadcast,  medical
imaging and industrial  process control  industries.  If not eliminated,  ground
noise caused by poor  electrical  system  wiring or power  supplies,  results in
significant deterioration in system performance,  including poor picture quality
and process failures in  instrumentation.  The wideband  transformers  provide a
cost effective and quick solution to the problem without the need of redesign of
the rest of the system.

      During 2000, signal processing  equipment  accounted for approximately 15%
of our sales.


                                    6 of 24
<PAGE>

Marketing and Sales

      Porta  operates  through  three  business  units,  which are  organized by
product line, and with each having responsibility for the sales and marketing of
its products.

      When appropriate to obtain sales in foreign  countries,  we may enter into
business  arrangements and technology  transfer agreements covering our products
with  local   manufacturers  and  participate  in  manufacturing  and  licensing
arrangements with local telephone equipment suppliers.

      In the  United  States  and  throughout  the  world,  we  use  independent
distributors  in the marketing of all copper based products to the regional bell
operating companies and the customer premises equipment market. All distributors
marketing  copper-based  products also market directly  competing  products.  In
addition,  Porta  continues  to promote the direct  marketing  relationships  it
developed in the past with telephone operating companies.

      We  have  an  agreement  with  British  Telecommunications   covering  our
connecting/protecting  products.  This agreement which will expire on August 31,
2001  provides,  among other  things,  that we are a  non-exclusive  supplier to
British   Telecommunications  for  these  products.  British  Telecommunications
purchased  line  connecting/protecting  products  amounting to $4,261,000 (8% of
sales)  in 2000,  $6,566,000  (17% of sales) in 1999,  and  $11,345,000  (19% of
sales) in 1998.  During these years,  we also sold our products to  unaffiliated
suppliers for resale to British  Telecommunications.  Our agreement with British
Telecommunications  provides  for a cross  license  which,  in  effect,  enables
British  Telecommunications  to use certain of our  proprietary  information  to
modify or enhance products  provided to British  Telecommunications  and permits
British  Telecommunications to manufacture or engage others to manufacture those
products.  We are currently  negotiating a new multi-year agreement with British
Telecommunications.  There  are no  assurances  that we will  be  successful  in
securing  a new  agreement.  If we do not  enter  into a new  agreement  British
Telecommunications, our business could be impaired.

      Our OSS systems historically have been sold to foreign telephone operating
companies  which are  government  controlled.  Recently,  we entered into sales,
marketing and management  co-operative  agreements and strategic  alliances with
various companies.

      During 2000, we entered into a multi-year sales, marketing, and management
co-operative  agreement  with  Fujitsu  Telecommunications  to  market  Internet
infrastructure  products.  Under the  agreement,  Fujitsu  will sell and  market
Porta's advanced  Internet  infrastructure  technologies,  including ADSL Single
Ended Line Qualification  System for broadband services and the sixth generation
Sherlock  remote test unit to telecom  service  operators in the United Kingdom,
principally British Telecommunications, and certain other European countries.

      Our signal  processing  products  are sold  primarily  to US military  and
aerospace prime contractors,  and domestic original equipment  manufacturers and
end users.


                                    7 of 24
<PAGE>

      The  following  table sets forth for the last three fiscal years our sales
to customers by geographic region:

                   Sales to Customers By Geographic Region (1)

                                         Year Ended December 31,
                                         -----------------------

                             2000                 1999                 1998
                             ----                 ----                 ----
                                         (Dollars in thousands)

North America           $22,795    45%       $14,664    38%       $20,830    35%

United Kingdom           20,244    40%        15,673    40%        20,441    34%

Asia/Pacific              5,429    10%         4,159    11%         7,181    12%

Other Europe              2,482     5%         3,130     8%         3,377     6%

Latin America               146     0%         1,257     3%         7,463    13%

Middle East                  25     0%            47     0%            51     0%

Other                        19     0%             6     0%            --     0%
                        -------   ---        -------   ---        -------   ---

Total Sales             $51,140   100%       $38,936   100%       $59,343   100%
                        =======   ===        =======   ===        =======   ===

(1)   For information  regarding the amount of sales,  operating  profit or loss
      and  identifiable  assets  attributable  to  each  of  our  divisions  and
      geographic  areas,  see  Note 22 of Notes  to the  Consolidated  Financial
      Statements.

      In selling to customers in foreign countries, there are inherent risks not
normally  present  in the case of sales to United  States  customers,  including
increased  difficulty in  identifying  and  designing  systems  compatible  with
purchasers'  operational   requirements;   extended  delays  under  OSS  systems
contracts  in the  completion  of testing and  purchaser  acceptance  phases and
difficulty in our receipt of final  payments and political and economic  change.
In  addition,  to the  extent  that  Porta  establishes  facilities  in  foreign
countries,  the  Company  faces  risks  associated  with  currency  devaluation,
inability to convert  local  currency into dollars,  local tax  regulations  and
political instability.

Manufacturing

      Our computer-based  testing products include proprietary testing circuitry
and computer  programs,  which provide  platform-independent  solutions based on
UNIX or UNIX compatible operating systems. The testing products also incorporate
disk data storage, teleprinters,  minicomputers and personal computers purchased
by us. These products are installed and tested by us at our customers' premises.

      At present,  our  manufacturing  operations  are  conducted at  facilities
located in Glen Cove, New York and Matamoros,  Mexico. From time to time we also
use  subcontractors to augment various aspects of our production  activities and
periodically  explore the  feasibility  of  conducting  operations at lower cost
manufacturing  facilities  located  abroad.  In  selling  to  foreign  telephone
companies, we may be required to provide local manufacturing  facilities and, in
conjunction  with these  facilities,  we may grant the facility a license to our
proprietary technology.


                                    8 of 24
<PAGE>

Source and Availability of Components

      We generally  purchase the standard components used  in the manufacture of
our products  from a number of suppliers.  Porta  attempts to assure itself that
the components  are available from more than one source.  We purchase all of our
MKIII  test  units  from  two  suppliers.   We  purchase  the  majority  of  our
workstations   and  servers  used  in  its  OSS  systems  from  Compaq  Computer
Corporation. However, we could use other computer equipment in our systems if we
were unable to purchase  Compaq  products.  Other  components,  such as personal
computers and line printers used in connecting with our electronic products, are
readily available from a number of sources.

Significant Customers

      During  2000,   our  five  largest   customers   accounted  for  sales  of
$28,323,000,  or approximately  55% of sales, and, during 1999, our five largest
customers accounted for sales of $19,700,000, or approximately 51% of sales. Our
largest  customer in 2000 with sales of  $12,051,000,  or  approximately  24% of
sales  was  Fujitsu  Telecommunications.  A  significant  amount of sales of our
products   for  use  by   British   Telecommunications   were  sold  to  Fujitsu
Telecommunications,  as purchasing  agent for British  Telecommunications.  As a
result, most of the sales to Fujitsu  Telecommunications were for use by British
Telecommunications. Our largest customer in 1999 was British Telecommunications.
Direct sales to British Telecommunications were $5,098,000, or 10% of sales, for
2000 and $7,825,000,  or 20% of sales, for 1999. Any significant interruption or
decline in sales to Fujitsu Telecommunications or British Telecommunications may
have a materially  adverse effect upon our operations.  During 2000,  sales to a
Mexican  telephone  company were $5,507,000,  or approximately  11% of sales. No
other customers account for 10% or more of our sales for either year.

      The former Bell operating companies continue to be the ultimate purchasers
of a significant portion of our products sold in the United States,  while sales
to foreign  telephone  operating  companies  constitute the major portion of our
foreign sales. Our contracts with these customers  require no minimum  purchases
by such  customers.  Significant  customers for the signal  processing  products
include  major US aerospace  companies,  the  Department of Defense and original
equipment  manufacturers  in the medical imaging and process  control  equipment
industries.  We  sell  both  catalog  and  custom  designed  products  to  these
customers. Some contracts are multi-year procurements.

Backlog

      At December 31, 2000, our backlog was approximately  $10,000,000  compared
with  approximately  $23,800,000  at December 31, 1999. Of the December 31, 2000
backlog,  approximately  $7,600,000  represented  orders from foreign  telephone
operating  companies.  We expect to ship  substantially  all of our December 31,
2000 backlog during 2001.

Intellectual Property Rights

      We own a number of domestic  utility and design  patents and have  pending
patent  applications  for these  products.  In addition,  we have foreign patent
protection for a number of our products.

      From  time to time we  enter  into  licensing  and  technical  information
agreements   under  which  we  receive  or  grant  rights  to  produce   certain
subcomponents  used in our products.  These agreements are for varying terms and
provide for the payment or receipt of royalties or technical license fees.

      While we consider  patent  protection  important to the development of our
business,  we believe that our success depends  primarily upon our  engineering,
manufacturing and marketing skills. Accordingly, we do not believe that a denial
of any of our pending patent  applications,  expiration of any of our patents, a
determination  that any of the patents which have been granted to us are invalid
or the  cancellation  of any of our  existing  license  agreements  would have a
material adverse effect on our business.


                                    9 of 24
<PAGE>

Competition

      The telephone equipment market in which we do business is characterized by
intense  competition,  rapid  technological  change  and a  movement  to private
ownership of  telecommunications  networks. In competing for telephone operating
company  business,  the purchase  price of equipment  and  associated  operating
expenses  have  become  significant  factors,  along  with  product  design  and
long-standing equipment supply relationships. In the customer premises equipment
market,  we are  functioning  in a  market  characterized  by  distributors  and
installers of equipment and by price competition.

      We compete  directly with a number of large and small telephone  equipment
manufacturers in the United States,  with Lucent  Technologies  continuing to be
our principal United States competitor.  Lucent's greater  resources,  extensive
research   and   development   facilities,    long-standing   equipment   supply
relationships with the operating companies of the regional holding companies and
history of  manufacturing  and marketing  products  similar in function to those
produced  by  us  continue  to  be  significant   factors  in  our   competitive
environment.

      Currently,  Lucent  and a  number  of  companies  with  greater  financial
resources than us produce, or have the design and manufacturing  capabilities to
produce, products competitive with our products. In meeting this competition, we
rely primarily on the engineered  performance and design  characteristics of our
products  to  comparable  performance  or  design,  and  endeavors  to offer our
products at prices and with warranties that will make our products compete world
wide.

      In  connection  with  overseas  sales  of our  line  connecting/protecting
equipment,  we have met with  significant  competition  from  United  States and
foreign  manufacturers of comparable equipment and we expect this competition to
continue.  In  addition to Lucent,  a number of our  overseas  competitors  have
significantly greater resources than we do.

      We compete  directly  with a limited  number of  substantial  domestic and
international  companies  with respect to our sales of OSS  systems.  In meeting
this  competition,  we  rely  primarily  on the  features  of our  line  testing
equipment, our ability to customize systems and endeavor to offer such equipment
at prices and with warranties that make them competitive.

      In addition to the quality and price of the products  being  offered,  the
financial  stability of a supplier,  especially for OSS contracts,  is a crucial
element.  Because  these  contracts  require the supplier to spend  considerable
funds before the project is completed and require ongoing  maintenance  service,
potential  customers consider the financial stability of the supplier as a major
consideration in awarding a contract. Our financial position,  combined with our
recent losses,  our working capital  deficiency and the scheduled  expiration of
our financing  agreement with our senior  lender,  may place us at a competitive
disadvantage in seeking new business and new orders for existing customers.

Research and Development Activities

      Porta spent  approximately  $5,800,000 in 2000,  $6,100,000  in 1999,  and
$6,500,000 in 1998 on its research and development activities.  All research and
development was company sponsored and is expensed as incurred.

Employees

      As of February 24, 2001, we had 419 employees of which 79 were employed in
the United States,  253 in Mexico,  45 in the United Kingdom,  5 in Poland, 3 in
Chile,  3 in  China,  and 31 in  Korea  (in  connection  with our  Korean  joint
venture). We believe that our relations with our employees are good, and we have
never  experienced a work stoppage.  Our employees are not covered by collective
bargaining agreements, except for our hourly employees in Mexico who are covered
by a collective bargaining agreement that expires on December 31, 2002.


                                    10 of 24
<PAGE>

Executive Officers

Name and Position                                                         Age
-----------------                                                         ---

William V. Carney                                                          63
Chairman of the Board and Chief Executive Officer

Michael A. Tancredi                                                        71
Senior Vice President, and Secretary and Treasurer

Edward B. Kornfeld                                                         57
Senior Vice President -- Operations and Chief Financial Officer

Prem G. Chandran                                                           48
Senior Vice President

David Rawlings                                                             57
Senior Vice President

      All of Porta's  officers  serve at the pleasure of the board of directors.
Messrs. Carney and Tancredi are also members of the board of directors. There is
no family relationship between any of the executive officers listed above.

      Mr.  Carney was elected as Chairman  of the Board of  Directors  and Chief
Executive  Officer in 1996 and has served as a director since 1970.  Previously,
Mr. Carney had served as Secretary from 1970 to 1996, Senior Vice President from
1989 to 1996 and Chief Technical  Officer from 1990 to 1996. He was elected Vice
Chairman in January  1988. He was Senior Vice  President-Mechanical  Engineering
from January 1988 to November  1989 and was Senior Vice  President-Manufacturing
from March 1984 to February  1985,  Senior Vice  President-Operations  from June
1977 to February 1984 and Vice President from 1970 to June 1977.

      Mr.  Tancredi was elected  Senior Vice President and Secretary in 1996. He
has been  Treasurer  since April 1978 and Director  since 1970. He had served as
Vice President between March 1984 to October of 1996. He was Vice President from
April 1978 to February 1984 and Comptroller from April 1971 to March 1978.

      Mr.  Kornfeld was elected a Senior Vice  President-Operations  in 1996. He
has served as Vice  President-Finance and Chief Financial Officer of the Company
since  October  1995.  For more than five years  prior to his  election  to this
position,  Mr.  Kornfeld  held  positions  with  several  technology  companies,
including Excel Technology Inc. (Quantronix Corp.) and Anorad Corporation.

      Mr.  Chandran was elected Senior Vice President in May 1999.  Prior to his
appointment as Senior Vice  President,  Mr.  Chandran was Vice  President  since
December  1995 and  Assistant  Vice  President  of  Engineering  from 1991 until
December 1995.

      Mr.  Rawlings was elected Senior Vice President in May 1999.  Prior to his
appointment as Senior Vice  President,  Mr.  Rawlings was Vice  President  since
March 1996 and  Assistant  Vice  President of Research and  Development - Copper
products since from 1992 until March 1996.


                                    11 of 24
<PAGE>

Item 2. Properties

      We currently lease approximately  20,400 square feet of executive,  sales,
marketing and research and  development  space in Syosset,  New York;  and 7,000
square feet of office space used for software  development located in Charlotte,
North Carolina.  We also own a 31,000 square foot manufacturing and research and
development  facility located in Glen Cove, New York. These facilities represent
substantially all of our office, plant and warehouse space in the United States.
The Syosset,  New York lease expires  December 2005,  and the  Charlotte,  North
Carolina  lease  expires  in  November  2004.  The  aggregate  annual  rental is
approximately $435,000.

      Our wholly-owned  United Kingdom  subsidiary leases  approximately  34,300
square foot facility in Coventry,  England,  which facility comprises all of our
office,  plant and warehouse  space.  The lease  expires in 2019.  The aggregate
annual rental is approximately $225,000.

      Our wholly-owned  Mexican  subsidiary owns an approximately  40,000 square
foot manufacturing facility in Matamoros, Mexico.

      In March 2001, we entered into a contract to sell our Glen Cove,  New York
facility for $1,850,000. All personnel will be relocated to other locations.

      We believe our properties are adequate for our needs.

Item 3. Legal Proceedings

      In March 2000, we suspended (with pay) Messrs.  Ronald Wilkins and Michael
Bahlo, two of our executive officers, from their positions pending completion of
our  investigation  of certain matters that had come to our attention.  Prior to
the completion of this  investigation,  however,  these two executives  accepted
positions  with  another  company and thereby  voluntarily  resigned  from their
positions with us. In February 2001, these two executives, together with a third
former  executive  officer,  Mr. Michael Lamb,  who similarly  resigned from his
position  with us,  filed suit in the  Supreme  Court for the State of New York,
County of New York,  entitled Ronald Wilkins,  Michael Bahlo and Michael Lamb v.
Porta Systems Corp.,  Index No 600677/01.  The complaint  asserts various claims
against  us based on the  allegation  that each of these  three  executives  was
improperly  terminated from his employment without cause, and seeks compensatory
damages,  liquidating  damages and attorney's fees. The Company believes that it
has valid  defenses to the claims and  intends to defend this action  vigorously
and to assert counterclaims against these former executives.

      In September 2000, we and BMS Corporation each disputed the performance by
the other party of its obligation under certain settlement agreements which were
entered into in June 2000.  BMS commenced an  arbitration  proceeding  which was
settled in January 2001 with the  execution of amended  agreements.  The amended
agreement included,  among other things, an extended payment schedule, with each
such payment being secured by our  confession of judgment held in escrow by BMS.

      In July 1996,  an action was commenced  against Porta and certain  present
and former  directors  in the Supreme  Court of the State of New York,  New York
County by certain  stockholders  and warrant holders of Porta who acquired their
securities in connection with the acquisition by Porta of Aster Corporation. The
complaint  alleges breach of contract against Porta and breach of fiduciary duty
against  the  directors  arising out of an alleged  failure to register  certain
restricted  shares and warrants  owned by the  plaintiffs.  The complaint  seeks
damages of $413,000;  however,  counsel for the plaintiff has advised Porta that
additional  plaintiffs  may be added  and,  as a result,  the  amount of damages
claimed may be substantially  greater than the amount presently  claimed.  Porta
believes that the  defendants  have valid  defenses to the claims.  Discovery is
proceeding,  although  there has been no  significant  activity  in this  matter
subsequent to December 31, 1999.

Item 4. Submission of Matters to a Vote of Securities Holders

      During the fourth  quarter of 2000,  there were no matters  required to be
submitted to a vote of security holders of the Company.


                                    12 of 24
<PAGE>

                                     Part II

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

      Our common stock is traded on the American Stock Exchange,  Inc. under the
symbol PSI. The  following  table sets forth,  for 1999 and 2000,  the quarterly
high and low sales prices for our common stock on the  consolidated  transaction
reporting systems for American Stock Exchange listed issues.

                                                      High              Low
                                                      ----              ---

1999     First Quarter                               $2.50             $1.75
         Second Quarter                               2.19              1.50
         Third Quarter                                1.88              0.63
         Fourth Quarter                               1.25              0.63

2000     First Quarter                               $4.88             $0.81
         Second Quarter                               3.63              1.56
         Third Quarter                                2.00              0.88
         Fourth Quarter                               1.00              0.38

      We did not declare or pay any cash  dividends  in 2000 or 1999.  It is our
present policy to retain earnings, if any, to finance the growth and development
of the business,  and therefore,  we do not anticipate  paying cash dividends on
its common stock in the foreseeable future. In addition,  Porta's agreement with
its senior lender prohibits it from paying cash dividends on its common stock.

      As of March 16, 2001, Porta had  approximately  983 stockholders of record
and the closing price of our common stock was $0.35.

      During  2000,   we  issued   unregistered   securities  in  the  following
transactions:  (i) 100,000  5-year  warrants to purchase  shares of common stock
exercisable at $2.00 which were  subsequently  re-priced at an exercise price of
$1.00,  (ii)  127,500  3-year  warrants  to  purchase  shares  of  common  stock
exercisable  at $3.00,  and (iii) 15,000 5-year  warrants to purchase  shares of
common stock  exercisable at $1.81.  All sales were exempt from the registration
requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2)
or 4(6)  thereunder or Rule 506 of the  Securities and Exchange  Commission.  No
fees were paid to any placement  agent or underwriter in connection  with any of
these sales.

Item 6. Selected Financial Data

      The following  table sets forth certain  selected  consolidated  financial
information.  All share and per share data have been  restated to give effect to
the one for five reverse  stock split which became  effective on August 2, 1996.
For further  information,  see the Consolidated  Financial  Statements and other
information  set forth in Item 8 and  Management's  Discussion  and  Analysis of
Financial Condition and Results of Operations set forth in Item 7:


                                    13 of 24
<PAGE>

<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                                                  -----------------------

                                                         2000             1999             1998             1997             1996
                                                         ----             ----             ----             ----             ----
                                                                          (In thousands, except per share data)

<S>                                                    <C>              <C>              <C>              <C>              <C>
Income Statement Data:

Sales                                                  $ 51,140         $ 38,936         $ 59,343         $ 62,230         $ 57,987
Operating income (loss)                                  (5,153)          (9,709)           4,566            6,101            3,982

Debt conversion expense                                      --               --             (945)         (11,458)              --

Income (loss) before discontinued
  operations and extraordinary item                     (10,176)         (13,686)             451           (7,021)           1,252

Net income (loss)                                       (10,176)         (13,686)             527           (6,899)           5,174

Basic per share amounts:
    Continuing operations                              $  (1.04)        $  (1.44)        $   0.05         $  (2.26)        $   0.57
    Net income (loss)                                  $  (1.04)        $  (1.44)        $   0.06         $  (2.22)        $   2.37

Diluted per share amounts:
    Continuing operations                              $  (1.04)        $  (1.44)        $   0.04         $  (2.26)        $   0.23
    Net income (loss)                                  $  (1.04)        $  (1.44)        $   0.05         $  (2.22)        $   0.94

Cash dividends declared                                      --               --               --               --               --

Number of shares used in
  calculating net income (loss)
  per share-basic                                         9,763            9,489            9,281            3,111            2,184

Number of shares used in
  calculating net income (loss)
  per share-diluted                                       9,763            9,489            9,785            3,111            5,528

Balance Sheet Data:

Total assets                                           $ 34,174         $ 43,448         $ 52,136         $ 51,000         $ 51,660

Long-term debt excluding current
  maturities                                           $    376         $ 21,902         $ 17,238         $ 18,858         $ 45,804

Stockholders' equity (deficit)                         $(10,792)        $ (1,387)        $ 11,984         $  6,813         $(19,702)
</TABLE>


                                    14 of 24
<PAGE>

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

      Our  consolidated  statements  of  operations  for the three  years  ended
December 31, 2000, 1999 and 1998,  respectively,  as a percentage of sales is as
follows:

                                                    Years Ended December 31,

                                                  2000        1999        1998
                                                  ----        ----        ----

Sales                                              100%        100%        100%
Cost of sales                                       70%         74%         59%
                                                  ----        ----        ----
Gross Profit                                        30%         26%         41%
Selling, general and
   administrative expenses                          28%         35%         22%
Research and development expenses                   12%         16%         11%
                                                  ----        ----        ----
Operating income (loss)                            (10%)       (25%)         8%
Interest expense                                    (9%)        (9%)        (6%)
Other                                               (1%)         1%          2%
Debt conversion expense                             --          --          (2%)
                                                  ----        ----        ----
Income (loss) from continuing
  operations before income
  taxes and minority interest                      (20%)       (33%)         2%
Income tax expense (benefit)
  and minority interest                             --           2%          1%
                                                  ----        ----        ----

Net income (loss)                                  (20%)       (35%)         1%
                                                  ====        ====        ====


                                    15 of 24
<PAGE>

Results of Operations

Years Ended December 31, 2000 and 1999

      Our sales for 2000 were  $51,140,000  compared to  $38,936,000 in 1999, an
increase of $12,204,000 (31%). The increase in revenue is attributed principally
to  completion  of  contracts  from our OSS  division,  although  all  divisions
achieved increased revenues in 2000 as compared to 1999.

      OSS  sales  for  2000  were   $22,296,000,   compared  to  1999  sales  of
$14,254,000,  an increase of $8,042,000  (56%).  During 2000, OSS sales resulted
primarily from the  completion of OSS  contracts,  which were secured during the
latter part of 1999. We expect to complete  revenue  recognition  from these OSS
contracts  in 2001.  Sales of OSS systems  are not made on a recurring  basis to
customers,  but are the result of extended  negotiations  that frequently  cover
many months and do not always result in a contract.  In addition,  OSS contracts
may include conditions  precedent,  such as the customer obtaining  financing or
bank  approval,  and the contracts are not effective  until the  conditions  are
satisfied.

      Line   connection/protection    equipment   sales   for   2000   increased
approximately  $2,357,000 (13%) from $18,189,000 in 1999 to $20,546,000 in 2000.
The  improved  sales  level  reflected  an increase in volume of sales to United
States  and  Mexican  customers,  which were  offset by a  decrease  in sales to
customers in the United Kingdom.

      Signal  processing   revenue  for  2000  compared  to  1999  increased  by
$1,316,000 (21%) from $6,328,000 to $7,644,000.  The increase in sales primarily
reflects  accommodations  made to customers where requested delays in deliveries
in 1999 of orders were shipped during 2000.

      Gross margin  increased  from 26% in 1999 to 30% in 2000.  The increase in
gross  margin is  primarily  attributed  to the higher  sales  volume in the OSS
division.  However,  the  increase  in  revenue  was still not  satisfactory  in
completely  eliminating the inefficiency  resulting from our inability to absorb
our fixed expenses associated with the OSS contracts over our revenue base. This
improvement  in gross  margin was  slightly  offset by a lower  gross  margin in
connection/protection  products  in 2000  compared  to 1999  due to  changes  in
product mix.

      Selling,  general and  administrative  expenses increased by $970,000 (7%)
from  $13,603,000 in 1999 to $14,573,000 in 2000. The increase from 1999 to 2000
primarily  reflects  higher than  anticipated  professional  legal  expenses due
primarily to litigation involving us, particularly  litigation and settlement of
a dispute with a vendor.

      Research  and  development   expenses  decreased  by  $260,000  (4%)  from
$6,090,000 in 1999 to $5,830,000 in 2000. The decreased expense in 2000 resulted
from the  completion  during  2000 of certain  efforts to develop  new  products
primarily related to the OSS business.

      As a result of the above,  we had an operating  loss of $5,153,000 in 2000
versus operating loss of $9,709,000 in 1999. The reduced operating loss for 2000
reflects continued profitability in our line connection/protection equipment and
signal  processing  divisions,  and a reduction of the operating loss in our OSS
division from $10,650,000 in 1999 to $6,201,000 in 2000.

      Interest  expense for 2000 increased by $929,000 from  $3,571,000 for 1999
to $4,500,000 in 2000. This change is attributable primarily to increased levels
of borrowing  from the Company's  senior  lender and non cash  interest  expense
associated  with the  issuance  and  re-pricing  of warrants  held by the senior
lender and  subordinated  note holders (See Notes to Financial  Statements 6 and
8).


                                    16 of 24
<PAGE>

Results of Operations (continued)

      During 2000, we requested the early  termination  of our  obligations to a
number of current and former executive  officers  regarding the funding of split
dollar life insurance  policies in order to obtain  approximately  $1,200,000 of
premiums paid by us into the policies.  Due to the early termination,  we agreed
to forfeit approximately  $600,000 of premiums and terminate our interest in the
policies which amount was charged to other expenses during 2000.

      As the result of the foregoing,  the 2000 net loss was $10,176,000,  $1.04
per share (basic and diluted),  compared with a net loss of  $13,686,000,  $1.44
per share (basic and diluted) for 1999.

Years Ended December 31, 1999 and 1998

      Our sales for 1999 were  $38,936,000  compared to  $59,343,000  in 1998, a
decrease of $20,407,000 (34%). The decrease in revenue is attributed principally
to shortfalls from our OSS division,  although all divisions sustained decreased
revenues in 1999 as compared to 1998.

      OSS  sales  for  1999  were   $14,254,000,   compared  to  1998  sales  of
$27,318,000,  a decrease of $13,064,000 (47%). Sales of OSS systems are not made
on a recurring basis to customers,  but are the result of extended  negotiations
that  frequently  cover many months and do not always  result in a contract.  In
addition,  OSS contracts  may include  conditions  precedent,  such as obtaining
financing  or bank  approval,  and the  contracts  are not  effective  until the
conditions  are satisfied.  During 1999,  OSS sales resulted  primarily from the
completion of OSS contracts,  which were in effect at the beginning of the year.
Our major new OSS contracts  were signed during the fourth  quarter of 1999, and
had no effect  on our  revenue  for  1999.  These  new  contracts,  which  total
$17,000,000   are  with  the  Philippines   Long  Distance   Telephone  Co.  for
approximately  $5,000,000,   and  Fujitsu   Telecommunications  Europe  LTD  for
approximately  $12,000,000.  We recognized  substantially all revenue from these
new OSS contracts in 2000.

      Line   connection/protection    equipment   sales   for   1999   decreased
approximately  $6,102,000 (25%) from $24,291,000 in 1998 to $18,189,000 in 1999.
The  decline  reflected  a  reduction  in volume of sales to United  States  and
Mexican  customers,  which  were  not  offset  by an  increase  in  sales to new
customers.

      Signal  processing   revenue  for  1999  compared  to  1998  decreased  by
$1,211,000 (16%) from $7,539,000 to $6,328,000.  The decrease in sales primarily
reflects  customer  requested  delays in  deliveries in 1999 of orders which are
expected to be shipped during 2000.

      Cost of sales for the year ended  December  31, 1999,  as a percentage  of
sales compared to 1998, increased from 59% to 74%. The increase in cost of sales
and  the  resulting   decline  in  gross  margin  is  primarily   attributed  to
inefficiency  resulting from the inability to absorb fixed  expenses  associated
with the OSS contracts over a substantially lower revenue base.

      Selling,  general and  administrative  expenses increased by $524,000 (4%)
from $13,079,000 in 1998 to $13,603,000 in 1999. The increase relates  primarily
to additional accounts  receivable reserve  requirements on OSS contracts in the
Far East of approximately $1,000,000,  offset by reductions in various operating
expenses.

      Research  and  development   expenses  decreased  by  $420,000  (6%)  from
$6,510,000 in 1998 to $6,090,000 in 1999. The decreased expense in 1999 resulted
from the completion of certain efforts to develop new products primarily related
to the OSS business including the MKIII test head during 1999.


                                    17 of 24
<PAGE>

Results of Operations (continued)

      As a result of the above,  we had an operating  loss of $9,709,000 in 1999
versus operating  income of $4,566,000 in 1998.  Although we sustained a decline
in sales in all of our product lines,  our decreased  operating income for 1999,
when compared to 1998,  was primarily the result of lower levels of revenue from
OSS combined with the reduced margin on OSS business and the accounts receivable
reserve on OSS contracts.

      Interest  expense for 1999 decreased by $179,000 from  $3,750,000 for 1998
to  $3,571,000  in 1999.  The  decrease  in  interest  expense  is  attributable
primarily to the completion of non-cash  interest  expenses  associated with the
issuance of warrants  to our senior  lender.  This  decrease  was  substantially
offset by additional interest on the increased outstanding principal balance and
waiver fee for  non-compliance  of the interest  coverage covenant to the senior
lender.

      Other  income  for 1998  included  approximately  $240,000  from the final
settlement  of an  insolvency  procedure  involving the purchaser of our Israeli
operations,  which  was sold in 1992,  and  $400,000  from the  settlement  of a
lawsuit against a former vendor.

      During 1998, we recorded debt conversion  expenses of $945,000 as a result
of the  exchange of zero coupon  notes into common  stock.  The debt  conversion
expense  represents the  difference  between the original  conversion  price per
share of $6.55 and the reduced conversion price per share of $3.65.

      During   1998,   we  recorded  an   extraordinary   gain  from  the  early
extinguishment of its Debentures of $76,000.

      For 1999, we recorded an income tax expense of $873,000, which includes an
$811,000 increase in deferred tax asset valuation  allowance and tax expenses of
$62,000.  For 1998, income tax expenses of $606,000 primarily  represents income
taxes payable by our UK and Chilean subsidiaries.

      As the result of the foregoing,  the 1999 net loss was $13,686,000,  $1.44
per share basic and diluted,  compared  with net income of  $527,000,  $0.06 per
share basic and $0.05 per share diluted, for 1998.

Liquidity and Capital Resources

      At  December  31,  2000 we had  cash and cash  equivalents  of  $2,366,000
compared with  $3,245,000 at December 31, 1999. Our working  capital deficit was
$24,152,000  at December 31, 2000  compared to working  capital of $6,135,000 at
December 31, 1999. The decline in working  capital was primarily a result of the
classification  of our  senior  debt and  subordinated  debt from  long-term  to
current  liabilities.  During 2000,  we used  $2,901,000  of cash to support our
operations.  Our principal  source of funds during 2000 was borrowings  from our
senior lender.

      We had senior debt  outstanding  of $20,746,000 as of December 31, 2000 of
which  $150,000 was a non-interest  bearing note,  $10,160,000  was  outstanding
against the revolving line of credit, and $10,436,000 was a term loan agreement.
The agreement  requires a quarterly loan  amortization of $400,000.  Porta had a
revolving  line of credit and a letter of credit  facility of  $11,000,000 as of
December 31, 2000 which decreased to $9,000,000 on January 2, 2001. During 2000,
we borrowed  $5,010,000 and repaid  $1,782,000 to the senior secured lender,  of
which $182,000 was provided from the proceeds of the sale of our UK facility.

      Our loan and security  agreement  with our senior  secured  lender expires
July 3, 2001.  Pursuant to this  agreement,  $1,160,000 of the revolving line of
credit matured on January 2, 2001.


                                    18 of 24
<PAGE>

Liquidity and Capital Resources (continued)

      On January 2, 2001, we did not have the  resources to make the  $1,160,000
payment.  On March 13, 2001,  our senior  lender agreed to allow us to defer the
repayment of  borrowings  related to the  increased  maximum,  defer all monthly
facility  fees and the April 1, 2001  principal  payment of  $400,000  until the
earlier of the termination of the agreement on July 3, 2001 or the sale by us of
one or more of our divisions.  The senior  lender,  as a condition to the above,
prohibited  us from making any  payments  on  indebtedness  to any  subordinated
creditors except to pay accounts payable in the ordinary course of business.

      In addition, we were not in compliance with the interest coverage covenant
and borrowing  base coverage  under the agreement and obtained a waiver from our
senior lender through July 2, 2001.

      As of December  31,  2000,  we had  remaining  outstanding  $376,000 of 6%
Debentures, net of original issue discount of $9,000, which mature July 2, 2002.
The face amount of the  outstanding  6% Debentures  was  $385,000.  The interest
accrued  on the 6%  Debentures  is  payable  on  July 1 of each  year  and as of
December  31, 2000 was $12,000.  At December  31,  2000,  we were current on our
interest obligations.

      As of December 31, 2000, we had  outstanding  $6,144,000  of  subordinated
notes.  As a result of an agreement with the holders of 85% of these notes,  the
maturity date of the notes was extended to July 3, 2001.  As a result,  notes in
the  principal  amount of  $900,000  were due  January  3, 2001 and notes in the
principal  amount of  $5,244,000  become due July 3,  2001.  We did not have the
resources  to pay the  $900,000  of  subordinated  debt on  January  2, 2001 and
approximately  $440,000  of  interest  which was due on January 2, 2001.  We are
engaged in  preliminary  discussions  with the  holders of certain  subordinated
notes with respect to the possible extension of the notes or the exchange of the
notes for equity in Porta.

      Our cash  availability  during  2001 and  thereafter  may be affected by a
number of factors.  At December 31,  2000,  we had no cash  available  under our
credit  facility and we had borrowed more than the amount  available to us under
our  borrowing  base.  To the extent that credit is not  available,  we may have
difficulty performing our obligations under our contracts, which could result in
the  cancellation  of  contracts  or the loss of future  business.  In addition,
$1,160,000  of senior  debt and  $900,000  of  subordinated  debt  became due in
January 2001 and $24,830,000 of senior and subordinated  debt will become due in
July 2001.  Under the default  provisions of the loan  agreement with our senior
lender,  a  default  on the  subordinated  notes can  trigger  a default  in our
obligations  to the senior  lender.  We do not presently have the ability to pay
these debts and, if we cannot  obtain either an extension on the maturity of the
debts or an alternative  financing source or raise funds from the sale of one of
our  divisions,  we may be unable to meet these  financial  obligations.  We are
continuing  to  negotiate  with our senior  lender with  respect to an extension
beyond the July 3, 2001 maturity of our current facility.

      We are seeking to address our need for  liquidity by seeking to extend our
agreement with our senior lender, negotiate an agreement with the holders of the
subordinated debt which would result in a deferral of our payment obligations or
a conversion of the debt to equity or a  combination,  and a sale of one or more
of our divisions.  Although we have been engaged in negotiations with respect to
the sale of one of our divisions, these negotiations were terminated without our
entering into any agreement.  Although we are continuing to explore the possible
sale of one or more of our  divisions,  we  cannot  assure  you  that we will be
successful in these  efforts.  Because of our present stock price,  it is highly
unlikely  that we will be able to raise  funds  through  the sales of our equity
securities,   and  our  financial   condition  prevents  us  from  issuing  debt
securities.  In the event that we are unable to extend our debt  obligations and
sell one or more of our divisions,  we cannot assure you that we will be able to
continue in operations.  In addition,  our auditors  included in their report an
explanatory paragraph about our ability to continue as a going concern.


                                    19 of 24
<PAGE>

Item 7A. Quantitative and Qualitative Disclosure About Market Risk.

      Although we conduct operations  outside of the United States,  most of our
contracts  and sales are dollar  denominated.  A portion of the revenue from our
United Kingdom  operations  and the majority of our United Kingdom  expenses are
denominated  in  Sterling.  Any   Sterling-denominated   receipts  are  promptly
converted into United States  dollars.  We do not engage in any hedging or other
currency  transactions.  For 2000, the currency  translation  adjustment was not
significant in relation to our total revenue.

Item 8. Financial Statements and Supplementary Data.

      See Exhibit I

Item 9. Changes In and Disagreements With Accountants On
        Accounting and Financial Disclosure.

      Not Applicable

                                    Part III

Item 10, 11, 12, and 13.

      The information called for by Item 10 (Directors and Executive  Officers),
Item  11  (Executive  Compensation),  Item 12  (Security  Ownership  of  Certain
Beneficial  Owners  and  Management),  and Item 13  (Certain  Relationships  and
Related  Transactions)  is  incorporated  herein by reference from the Company's
definitive  proxy  statement for the Annual Meeting of  Shareholders to be filed
with the  Securities  and Exchange  Commission not later than 120 days after the
close of the year ended December 31, 2000.

                                     Part IV

Item 14. Exhibits, Financial Statements Schedules and Reports
         on Form 8-K.

(a)   Document filed as part of this Annual Report on Form 10-K:

      (i)   Financial Statements.

            See Index to Consolidated Financial Statements under Item 8 hereof.

      (ii)  Financial Statement Schedules.

            None

      Schedules  not listed  above have been  omitted for the reasons  that they
were  inapplicable  or not required or the information is given elsewhere in the
financial statements.

      Separate  financial  statements of the registrant  have been omitted since
restricted  net  assets of the  consolidated  subsidiaries  do not exceed 25% of
consolidated net assets.

(b)   Reports on Form 8-K

      None.


                                    20 of 24
<PAGE>

(c)   Exhibits

Exhibit No.       Description of Exhibit
-----------       ----------------------

   3.1            Certificate  of  Incorporation  of the Company,  as amended to
                  date,  incorporated  by  reference  to  Exhibit  4 (a)  of the
                  Company's  Annual  Report  on Form  10-K  for the  year  ended
                  December 31, 1991.

   3.2            Certificate   of   Designation   of  Series  B   Participating
                  Convertible  Preferred  Stock,  incorporated  by  reference to
                  Exhibit 3.2 of the  Company's  Annual  Report on Form 10-K for
                  the year ended December 31, 1995.

   3.3            By-laws of the Company,  as amended to date,  incorporated  by
                  reference  to Exhibit 3.3 of the  Company's  Annual  Report on
                  Form 10-K for the year ended December 31, 1995.

   4.1            Amendment  dated  as of  December  16,  1993  to  the  Warrant
                  Agreement  among the Company,  Aster  Corporation and Chemical
                  Bank as successor to  Manufacturers  Hanover  Trust Company as
                  Warrant Agent, incorporated by reference to Exhibit 4.2 of the
                  Company's  Annual  Report  on Form  10-K  for the  year  ended
                  December 31, 1993.

   4.2            Form of Rights Amendments,  dated as of March 22, 1989 between
                  the Company and Manufacturers Hanover Trust Company, as Rights
                  Agent, incorporated by reference to the Company's Registration
                  Statement on Form 8-A dated April 3, 1989.

   4.3            Amendment  No. 1 to  Rights  Agreement,  dated  July 28,  1993
                  between  the Company and The Chase  Manhattan  Bank  (formerly
                  known  as   Chemical   Bank,   as   successor   by  merger  to
                  Manufacturers   Hanover   Trust   Company)  as  Rights  Agent,
                  incorporated  by  reference  to  the  Company's   Registration
                  Statement on Form 8-A/A filed August 4, 1993.

   4.4            Amendment No. 2 to Rights  Agreement,  dated December 24, 1997
                  between  the Company and The Chase  Manhattan  Bank  (formerly
                  known  as   Chemical   Bank,   as   successor   by  merger  to
                  Manufacturers   Hanover   Trust   Company)  as  Rights  Agent,
                  incorporated  by reference to Exhibit  4.2.2 of the  Company's
                  Annual  Report on Form 10-K for the year  ended  December  31,
                  1997.

   4.5            Amended and Restated Loan and Security  Agreement  dated as of
                  November  28, 1994,  between the Company and Foothill  Capital
                  Corporation,  incorporated  by  reference  to Exhibit 2 to the
                  Company's Current Report on Form 8-K dated November 30, 1994.

   4.6            Amendment  Number One dated  February  13, 1995 to the Amended
                  and Restated Loan and Security  Agreement dated as of November
                  28, 1994 between the Company and Foothill Capital Corporation,
                  incorporated  by  reference  to Exhibit  4.7 of the  Company's
                  Annual  Report  on Form 10K for the year  ended  December  31,
                  1995.

   4.7            Amendment  Number Two dated  March 30, 1995 to the Amended and
                  Restated Loan and Security  Agreement dated as of November 28,
                  1994  between the Company and  Foothill  Capital  Corporation,
                  incorporated  by reference to Exhibit  4.7.2 of the  Company's
                  Annual  Report  on Form 10K for the year  ended  December  31,
                  1995.


                                    21 of 24
<PAGE>

Exhibits (continued)

Exhibit No.       Description of Exhibit
-----------       ----------------------

   4.8            Amended and Restated  Secured  Promissory  Note dated February
                  13,  1995,  incorporated  by  reference  to Exhibit 4.9 of the
                  Company's  Annual  Report  on  Form  10K for  the  year  ended
                  December 31, 1995.

   4.9            Deferred  Funding Fee Note dated November 28, 1994 made by the
                  Company in favor of Foothill Capital Corporation, incorporated
                  by reference to Exhibit 5 to the Company's  Current  Report on
                  Form 8-K dated November 30, 1994.

   4.10           Amendment  Number  Three  to  Amended  and  Restated  Loan and
                  Security  Agreement dated March 12, 1996,  between the Company
                  and Foothill Capital Corporation, incorporated by reference to
                  Exhibit 4.11 of the  Company's  Annual  Report on Form 10K for
                  the year ended December 31, 1995.

   4.11           Warrant to Purchase Common Stock of the Company dated November
                  28, 1994 executed by the Company in favor of Foothill  Capital
                  Corporation,  incorporated  by  reference  to Exhibit 6 to the
                  Company's Current Report on Form 8-K dated November 30, 1994.

   4.12           Lockbox  Operating  Procedural  Agreement dated as of November
                  28, 1994 among Chemical Bank, the Company and Foothill Capital
                  Corporation,  incorporated  by  reference  to Exhibit 7 to the
                  Company's Current Report on Form 8-K dated November 30, 1994.

   4.13           Amendment  No. Five dated as of November 30, 1997,  to Amended
                  and Restated  Loan and  Security  agreement  between  Foothill
                  Capital  Corp.   ("Foothill")   and  the  Company,   including
                  amendments to the warrants held by Foothill,  incorporated  by
                  reference  to  Exhibit  4.23 of the  Company's  Form 8-K dated
                  January 2, 1998.

   4.14           Amendment  No. Six dated as of August 1, 1998 to  Amended  and
                  Restated Loan and Security  agreement between Foothill Capital
                  Corp. ("Foothill") and the Company,  incorporated by reference
                  to Exhibit 4.24 of the  Company's  Annual  Report on Form 10-K
                  for the year ended December 31, 1998.

   4.15           Amendment  No.  Seven  dated as of December 1, 1998 to Amended
                  and Restated  Loan and  Security  agreement  between  Foothill
                  Capital Corp.  ("Foothill")  and the Company,  incorporated by
                  reference to Exhibit 4.25 of the  Company's  Annual  Report on
                  Form 10-K for the year ended December 31, 1998.

   4.16           Amendment  No. Eight dated as of April 10, 2000 to Amended and
                  Restated Loan and Security  agreement between Foothill Capital
                  Corp. ("Foothill") and the Company.

   4.17           Amendment  No.  Nine dated as of June 9, 2000 to  Amended  and
                  Restated Loan and Security  agreement between Foothill Capital
                  Corp. ("Foothill") and the Company.

   4.18           Amendment  No.  Ten dated as of March 1, 2001 to  Amended  and
                  Restated Loan and Security  agreement between Foothill Capital
                  Corp. ("Foothill") and the Company.


                                    22 of 24
<PAGE>

Exhibits (continued)

Exhibit No.       Description of Exhibit
-----------       ----------------------

   10.1           Form of Executive Salary Continuation Agreement,  incorporated
                  by  reference  to Exhibit 19 (cc) of the  Company's  Quarterly
                  Report on Form 10-Q for the quarter ended September 30, 1985.

   10.2           Agreement    dated    May    25,    1988    between    British
                  Telecommunications  plc  and  the  Company,   incorporated  by
                  reference to Exhibit 19 (a) of the Company's  Quarterly Report
                  on Form 10-Q for the quarter ended June 30, 1988. Confidential
                  Treatment granted; document filed separately with the SEC.

   10.3           Amendment to agreement  of May 25,  1988,  dated  September 1,
                  1996, between British  Telecommunications plc and the Company,
                  incorporated  by reference to Exhibit  10.6.1 of the Company's
                  Annual  Report on Form 10-K for the year  ended  December  31,
                  1996.

   10.4           Lease  dated  December  17,  1990  between the Company and LBA
                  properties,  Inc., incorporated by reference to Exhibit 10 (d)
                  of the Company's annual report on Form 10-K for the year ended
                  December 31, 1990.

   10.5           Employee  Stock Bonus Program filed as Exhibit 4.3 to the Form
                  S-8  dated  February  12,  1999  and  incorporated  herein  by
                  reference.

   10.6           1999  Stock  Option  Plan  filed  as  Exhibit  A to the  Proxy
                  Statement  for the 1999  Annual  Meeting to  Stockholders  and
                  incorporated herein by reference.

   10.7           1996  Stock  Option  Plan  filed  as  Exhibit  A to the  Proxy
                  Statement  for the 1996  Annual  Meeting to  Stockholders  and
                  incorporated herein by reference.

   10.8           1998 Stock  Option  Plan filed as Exhibit  4.2 to the Form S-8
                  dated December 3. 1998 and incorporated herein by reference.

   10.9           Senior Officers and Directors Stock Purchase  Program filed as
                  Exhibit  4.2 to the  Form  S-8  dated  February  12,  1999 and
                  incorporated herein by reference.

   10.10          Employee  Stock Purchase Plan filed as Exhibit 4.1 to the Form
                  S-8  dated  February  12,  1999  and  incorporated  herein  by
                  reference.

   22             Subsidiaries  of the  Company,  incorporated  by  reference to
                  Exhibit 22.1 of the  Company's  Annual  Report on Form 10K for
                  the year ended December 31, 1995.

   23             Consent of Independent Auditors.


                                    23 of 24
<PAGE>

SIGNATURES

      Pursuant  to the  requirements  of Section  13 or 15(b) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.

                                       PORTA SYSTEMS CORP.

Dated March 29, 2001                   By /s/ William V. Carney
                                          --------------------------------------
                                          William V. Carney
                                          Chairman of the Board and
                                          Chief Executive Officer

      Pursuant to the  requirements  of the Securities  Exchange Act of 1934, as
amended,  the report has been signed by the  following  persons on behalf of the
Registrant and in the capacities and on the dates  indicated.  Each person whose
signature  appears  below  hereby  authorizes  William  V.  Carney and Edward B.
Kornfeld or either of them acting in the absence of the others,  as his true and
lawful   attorney-in-fact  and  agent,  with  full  power  of  substitution  and
resubstitution  for  him  and in his  name,  place  and  stead,  in any  and all
capacities to sign any and all amendments to this report,  and to file the same,
with all exhibits thereto and other documents in connection therewith,  with the
Securities and Exchange Commission.

         Signature                      Title                          Date
-----------------------------   --------------------------        --------------

    /s/ William V. Carney       Chairman of the Board,            March 29, 2001
-----------------------------   Chief Executive Officer
        William V. Carney       and Director (Principal
                                Executive Officer)

   /s/ Edward B. Kornfeld       Senior Vice President and         March 29, 2001
-----------------------------   Chief Financial Officer
       Edward B. Kornfeld       (Principal Financial and
                                Accounting Officer)

      /s/ Seymour Joffe         Director                          March 29, 2001
-----------------------------
          Seymour Joffe

   /s/ Michael A. Tancredi      Director                          March 29, 2001
-----------------------------
       Michael A. Tancredi

     /s/ Warren H. Esanu        Director                          March 29, 2001
-----------------------------
         Warren H. Esanu

   /s/ Herbert H. Feldman       Director                          March 29, 2001
-----------------------------
       Herbert H. Feldman

    /s/ Stanley Kreitman        Director                          March 29, 2001
-----------------------------
        Stanley Kreitman

       /s/ Marco Elser          Director                          March 29, 2001
-----------------------------
           Marco Elser

    /s/ Robert Schreiber        Director                          March 29, 2001
-----------------------------
        Robert Schreiber


                                    24 of 24
<PAGE>

Exhibit I

Item 8. Financial Statements and Supplementary Data

Index                                                                       Page
-----                                                                       ----

Report of Independent Certified Public Accountants                           F-2

Consolidated Financial Statements and Notes:

  Consolidated Balance Sheets,
  December 31, 2000 and 1999                                                 F-3

  Consolidated Statements of Operations and
  Comprehensive Income (Loss),
  Years Ended December 31, 2000, 1999 and 1998                               F-4

  Consolidated Statements of Stockholders'
  Equity (Deficit), Years Ended
  December 31, 2000, 1999 and 1998                                           F-5

  Consolidated Statements of Cash Flows
  for the Years Ended December 31, 2000,
  1999 and 1998                                                              F-6

  Notes to Consolidated Financial Statements                                 F-7


                                      F-1
<PAGE>

               Report of Independent Certified Public Accountants

The Board of Directors and
Stockholders of Porta Systems Corp.
Syosset, New York

We have audited the  accompanying  consolidated  balance sheets of Porta Systems
Corp.  and  subsidiaries  as of  December  31,  2000 and 1999,  and the  related
consolidated   statements  of  operations  and   comprehensive   income  (loss),
stockholders'  equity  (deficit),  and cash flows for each of the three years in
the period ended December 31, 2000. These consolidated  financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  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  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Porta Systems Corp.
and  subsidiaries  as of December  31,  2000 and 1999,  and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting  principles  generally accepted
in the United States of America.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 2 to the
financial   statements,   the  Company  has  suffered  substantial  losses  from
operations  in 2000 and 1999 and, as of December 31, 2000,  has a  stockholders'
deficit  of  $10,792,000,  and has a working  capital  deficit  of  $24,152,000,
resulting  primarily  from  approximately  $27 million of debt  maturing in July
2001.  These factors  raise  substantial  doubt about the  Company's  ability to
continue as a going concern.  Management's  plans in regard to these matters are
also  described  in  Note  2.  The  financial  statements  do  not  include  any
adjustments that might result from the outcome of this uncertainty.

                                       /s/ BDO SEIDMAN, LLP
                                       BDO SEIDMAN, LLP

Melville, New York
March 21, 2001


                                      F-2
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
                           Consolidated Balance Sheets
                           December 31, 2000 and 1999
                        (in thousands, except par value)

                                                          2000           1999
                                                        --------       --------
                                     Assets
                                     ------
Current assets:
  Cash and cash equivalents                             $  2,366          3,245
  Accounts receivable -- trade, less
    allowance for doubtful accounts of
    $2,477 in 2000 and $1,879 in 1999                      7,425         12,137
  Inventories                                              7,150          8,893
  Prepaid expenses and other current
    assets                                                 1,130          1,373
                                                        --------       --------
         Total current assets                             18,071         25,648

Property, plant and equipment, net                         4,555          4,193
Goodwill, net of amortization of $5,003
  in 2000 and $4,284 in 1999                              10,357         11,076
Other assets                                               1,191          2,531
                                                        --------       --------
         Total assets                                   $ 34,174         43,448
                                                        ========       ========

                      Liabilities and Stockholders' Deficit
                      -------------------------------------
Current liabilities:
  Current portion of senior debt                        $ 20,746          2,000
  Current portion of subordinated notes                    6,144             --
  Accounts payable                                         7,173          8,831
  Accrued expenses                                         5,385          5,723
  Accrued interest payable                                   766            588
  Accrued commissions                                      1,553          1,864
  Accrued deferred compensation                              196            196
  Income taxes payable                                       259            267
  Short-term loans                                             1             44
                                                        --------       --------
         Total current liabilities                        42,223         19,513
                                                        --------       --------

Senior debt net of current maturities                         --         15,518
Subordinated notes                                            --          6,013
6% Convertible subordinated debentures                       376            371
Deferred compensation                                        987          1,004
Income taxes payable                                         154            352
Other long-term liabilities                                  918            971
Minority interest                                            308          1,093
                                                        --------       --------
         Total long-term liabilities                       2,743         25,322
                                                        --------       --------

         Total liabilities                                44,966         44,835
                                                        --------       --------

Commitments and contingencies

Stockholders' deficit:
  Preferred stock, no par value;
    authorized 1,000,000 shares, none
    issued                                                    --             --
  Common stock, par value $.01;
    authorized 20,000,000 shares, issued
    9,817,165 and 9,638,861 shares in
    2000 and 1999, respectively                               98             96
  Additional paid-in capital                              75,980         75,310
  Accumulated deficit                                    (81,135)       (70,959)
  Accumulated other comprehensive loss:
     Foreign currency translation
       adjustment                                         (3,797)        (3,896)
                                                        --------       --------
                                                          (8,854)           551
  Treasury stock, at cost, 30,940 shares                  (1,938)        (1,938)
                                                        --------       --------
         Total stockholders' deficit                     (10,792)        (1,387)
                                                        --------       --------
         Total liabilities and
           stockholders' deficit                        $ 34,174         43,448
                                                        ========       ========

          See accompanying notes to consolidated financial statements.


                                      F-3
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
      Consolidated Statements of Operations and Comprehensive Income (Loss)
                  Years ended December 31, 2000, 1999 and 1998
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                                       2000               1999               1998
                                                                                     --------           --------           --------
<S>                                                                                  <C>                  <C>                <C>
Sales                                                                                $ 51,140             38,936             59,343
Cost of sales                                                                          35,890             28,952             35,188
                                                                                     --------           --------           --------
      Gross profit                                                                     15,250              9,984             24,155
                                                                                     --------           --------           --------

Selling, general and administrative expenses                                           14,573             13,603             13,079
Research and development expenses                                                       5,830              6,090              6,510
                                                                                     --------           --------           --------

      Total expenses                                                                   20,403             19,693             19,589
                                                                                     --------           --------           --------

      Operating income (loss)                                                          (5,153)            (9,709)             4,566

Interest expense                                                                       (4,500)            (3,571)            (3,750)
Interest income                                                                           129                188                272
Other income (expense), net                                                              (813)               218              1,028
Debt conversion expense                                                                    --                 --               (945)
                                                                                     --------           --------           --------

      Income (loss) before income taxes
        and minority interest                                                         (10,337)           (12,874)             1,171

Income tax expense                                                                        227                873                606
Minority interest                                                                        (388)               (61)               114
                                                                                     --------           --------           --------

      Income (loss) before extraordinary item                                         (10,176)           (13,686)               451

Extraordinary gain on early extinguishment of debt                                         --                 --                 76
                                                                                     --------           --------           --------

      Net income (loss)                                                              $(10,176)           (13,686)               527
                                                                                     ========           ========           ========

Other comprehensive income (loss), net of tax:

  Foreign currency translation adjustments                                                 99               (142)               273
                                                                                     --------           --------           --------

      Comprehensive income (loss)                                                    $(10,077)           (13,828)               800
                                                                                     ========           ========           ========

Basic per share amounts:
  Income (loss) before extraordinary item                                            $  (1.04)             (1.44)              0.05
  Extraordinary item                                                                       --                 --               0.01
                                                                                     --------           --------           --------
      Net income (loss) per share of common stock                                    $  (1.04)             (1.44)              0.06
                                                                                     ========           ========           ========

   Weighted average shares of common stock outstanding                                  9,763              9,489              9,281
                                                                                     ========           ========           ========

Diluted per share amounts:
  Income (loss) before extraordinary item                                            $  (1.04)             (1.44)              0.04
  Extraordinary item                                                                       --                 --               0.01
                                                                                     --------           --------           --------
      Net income (loss) per share of common stock                                    $  (1.04)             (1.44)              0.05
                                                                                     ========           ========           ========

  Weighted average shares of common stock outstanding                                   9,763              9,489              9,785
                                                                                     ========           ========           ========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-4
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
            Consolidated Statements of Stockholders' Equity (Deficit)
                  Years ended December 31, 2000, 1999 and 1998
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                     Accumulated                            Receivable      Total
                                     Common Stock                       Other       Retained                    for         Stock-
                                   -----------------   Additional   Comprehensive   Earnings                 Employee      holders'
                                   No. of  Par Value     Paid-in       Income     (Accumulated  Treasury       Stock       Equity/
                                   Shares   Amount       Capital       (Loss)        Deficit)     Stock      Purchases    (Deficit)
                                   ------  ---------   ----------   ------------- ------------  --------    ----------    ---------
<S>                                <C>     <C>          <C>           <C>           <C>         <C>          <C>          <C>
Balance at December 31, 1997       8,644   $     86     $ 70,926      $ (4,027)     $(57,799)   $ (2,066)    $   (307)    $  6,813

Net income 1998                       --         --           --            --           527          --           --          527
Common stock issued                  841          9        3,702            --            --          --           --        3,711
Warrants issued                       --         --          630            --            --          --           --          630
Restructure of receivable for
  employee stock purchases            --         --         (123)           --            (1)        128          294          298
Receivable from directors and
  officers under stock purchase
  program                             --         --           --            --            --          --         (268)        (268)
Foreign currency translation
  adjustment                          --         --           --           273            --          --           --          273
                                   -----   --------     --------      --------      --------    --------     --------     --------

Balance at December 31, 1998       9,485         95       75,135        (3,754)      (57,273)     (1,938)        (281)      11,984

Net loss 1999                         --         --           --            --       (13,686)         --           --      (13,686)
Common stock issued                  154          1          119            --            --          --           --          120
Warrant re-pricing                    --         --           56            --            --          --           --           56
Collection of receivable from
  directors and officers under
  stock purchase program              --         --           --            --            --          --          281          281
Foreign currency translation
  adjustment                          --         --           --          (142)           --          --           --         (142)
                                   -----   --------     --------      --------      --------    --------     --------     --------

Balance at December 31, 1999       9,639         96       75,310        (3,896)      (70,959)     (1,938)         -0-       (1,387)

Net loss 2000                         --         --           --            --       (10,176)         --           --      (10,176)
Common stock issued                  178          2          174            --            --          --           --          176
Warrants issued or re-priced          --         --          496            --            --          --           --          496
Foreign currency translation
  adjustment                          --         --           --            99            --          --           --           99
                                   -----   --------     --------      --------      --------    --------     --------     --------

Balance at December 31, 2000       9,817   $     98     $ 75,980      $ (3,797)     $(81,135)   $ (1,938)    $    -0-     $(10,792)
                                   =====   ========     ========      ========      ========    ========     ========     ========
</TABLE>

           See accompanying notes to consolidated financial statements


                                      F-5
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
                 Consolidated Statements of Cash Flows (Note 21)
                  Years ended December 31, 2000, 1999 and 1998
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                         2000              1999             1998
                                                                                       --------          --------          ------
<S>                                                                                    <C>                  <C>             <C>
Cash flows from operating activities:
  Net income (loss)                                                                    $(10,176)          (13,686)            527
  Adjustments to reconcile net income (loss) to net cash
    provided by (used in) operating activities:
      Extraordinary gain                                                                     --                --             (76)
      Non-cash debt conversion expense                                                       --                --             945
      Non-cash financing expenses                                                           373                18             473
      Non-cash compensation expense                                                          --                 8             298
      Depreciation and amortization                                                       1,911             1,677           2,195
      Amortization of debt discounts                                                         56               326             323
      Minority interest                                                                    (388)              (61)            114
  Changes in operating assets and liabilities:
    Accounts receivable                                                                   4,712             7,665          (4,911)
    Inventories                                                                           1,743                51            (785)
    Prepaid expenses                                                                        243               343            (450)
    Other assets                                                                          1,427               113             962
    Accounts payable, accrued expenses and other liabilities                             (2,405)              238             276
                                                                                       --------          --------          ------
          Net cash used in operating activities                                          (2,504)           (3,308)           (109)
                                                                                       --------          --------          ------

Cash flows from investing activities:
  Repayment of receivables from stock purchase program                                       --               281              --
  Capital expenditures, net                                                              (1,533)             (951)           (665)
                                                                                       --------          --------          ------
          Net cash used in investing activities                                          (1,533)             (670)           (665)
                                                                                       --------          --------          ------

Cash flows from financing activities:
  Proceeds from senior debt                                                               5,010             6,150               6
  Repayments of senior debt                                                              (1,782)           (1,820)         (4,780)
  Proceeds from Subordinated debentures and warrants                                         80                64           6,000
  Repayment of zero coupon senior subordinated convertible notes                             --                --          (2,796)
  Proceeds from the exercise of options and warrants                                        176                --              --
  Proceeds (repayments) of notes payable/short-term loans                                   (43)             (100)             24
                                                                                       --------          --------          ------
          Net cash provided by (used in) financing activities                             3,441             4,294          (1,546)
                                                                                       --------          --------          ------

Effect of exchange rate changes on cash                                                    (283)             (115)            273
                                                                                       --------          --------          ------
Increase (decrease) in cash and cash equivalents                                           (879)              201          (2,047)
Cash and equivalents - beginning of year                                                  3,245             3,044           5,091
                                                                                       --------          --------          ------

Cash and equivalents - end of year                                                     $  2,366             3,245           3,044
                                                                                       ========          ========          ======
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-6
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                           December 31, 2000 and 1999

(1) Summary of Significant Accounting Policies

      Nature of Operations and Principles of Consolidation

      Porta Systems Corp. ("Porta" or the "Company")  designs,  manufactures and
            markets  systems  for  the  connection,   protection,   testing  and
            administration  of public and private  telecommunications  lines and
            networks.  The Company has various  patents for copper and  software
            based products and systems that support voice, data, image and video
            transmission.  Porta's  principal  customers  are the U.S.  regional
            telephone operating companies and foreign telephone companies.

      The accompanying  consolidated  financial  statements include the accounts
            of Porta and its  majority-owned  or  controlled  subsidiaries.  All
            significant   intercompany   transactions  and  balances  have  been
            eliminated in consolidation.

      Revenue Recognition

      Revenue, other than from long-term contracts for specialized  products, is
            recognized when a product is shipped. Revenues and earnings relating
            to long-term  contracts for  specialized  products are recognized on
            the   percentage-of-completion   basis  primarily  measured  by  the
            attainment of milestones. Anticipated losses, if any, are recognized
            in the period in which they are identified.

      Concentration of Credit Risk

      Financial instruments,  which potentially  subject Porta to concentrations
            of credit risk, consist principally of cash and accounts receivable.
            At times such cash in banks exceeds the FDIC insurance limit.

      As discussed  in  notes  17 and 22, substantial  portions of Porta's sales
            are to customers in foreign  countries.  The  Company's  credit risk
            with  respect to new  foreign  customers  is  reduced  by  obtaining
            letters of credit for a substantial  portion of the contract  price,
            and by monitoring credit exposure related to each customer.

      Cash Equivalents

      The Company  considers  investments   with   original  maturities of three
            months or less at the time of purchase to be cash equivalents.  Cash
            equivalents consist of commercial paper.

      Inventories

      Inventories are stated at the lower of cost (on the  average or  first-in,
            first-out methods) or market.

      Property, Plant and Equipment

      Property, plant and equipment are carried at cost. Leasehold  improvements
            are amortized over the term of the lease.  Depreciation  is computed
            using the  straight-line  method over the related assets'  estimated
            lives.

                                                                     (Continued)


                                      F-7
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements, Continued

      Deferred Computer Software

      Software costs  incurred for specific  customer  contracts  are charged to
            cost of sales at the time revenues on such contracts are recognized.
            Software  development  costs relating to products the Company offers
            for sale are  deferred in  accordance  with  Statement  of Financial
            Accounting  Standards  (SFAS)  No. 86  "Accounting  for the Costs of
            Computer Software to Be Sold, Leased, or Otherwise Marketed".  These
            costs  are  amortized  to cost of sales  over the  periods  that the
            related  product  will be  sold,  up to a  maximum  of  four  years.
            Amortization  of  computer  software  costs,  which  all  relate  to
            products the Company offers for sale,  amounted to approximately $0,
            $82,000, and $461,000 in 2000, 1999 and 1998, respectively.

      Goodwill

      Goodwill represents the difference between the purchase price and the fair
            market value of net assets acquired in business combinations treated
            as purchases.  Goodwill is amortized on a straight-line basis over a
            remaining  life of 10 to 30 years.  During 1999 and 2000, in view of
            recent  competitive  developments in the  telecommunications  market
            place and Porta's  changing  business model in response,  management
            has reassessed the useful life of certain of its goodwill.  While in
            management's  opinion,  there  is  currently  no  impairment  in the
            carrying value of this  long-lived  intangible  asset (based upon an
            analysis  of  undiscounted   future  cash  flows),   management  has
            determined  that the useful life of the goodwill should be shortened
            to be more  reflective of the current rate of technology  change and
            competitive   conditions.   Accordingly,   management   changed  the
            estimated  useful life of certain  goodwill from an original life of
            40  years  to a  remaining  life of 13 years in 1999 and 10 years in
            2000,  which  changes  were  applied  prospectively  from the fourth
            quarters of 1999 and 2000.  These  changes in  accounting  estimates
            increased  amortization expense in 2000 and in 1999 by approximately
            $25,000 and $58,000,  respectively. At December 31, 2000, $6,465,000
            of the  goodwill  is  being  amortized  over  a  remaining  life  of
            approximately  10 years and  $3,892,000  is being  amortized  over a
            remaining life of  approximately  30 years. The Company assesses the
            recoverability  of  unamortized   goodwill  using  the  undiscounted
            projected future cash flows from the related businesses.

      Income Taxes

      Deferred income taxes are recognized based on the differences  between the
            tax bases of assets and  liabilities  and their reported  amounts in
            the financial  statements  that will result in taxable or deductible
            amounts in future  years.  Further,  the  effects of tax law or rate
            changes are  included  in income as part of deferred  tax expense or
            benefit for the period that includes the enactment date (note 14).

      Foreign Currency Translation

      Assets and liabilities of foreign subsidiaries  are translated at year-end
            rates of exchange,  and revenues and expenses are  translated at the
            average rates of exchange for the year.  Gains and losses  resulting
            from  translation  are  accumulated  in  a  separate   component  of
            stockholders'  equity.  Gains  and  losses  resulting  from  foreign
            currency transactions  (transactions denominated in a currency other
            than the functional  currency) are included in comprehensive  income
            or loss.

                                                                     (Continued)


                                      F-8
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      Net Income (Loss) Per Share

      Basic net income (loss) per share is based on the weighted  average number
            of shares outstanding.  Diluted net income (loss) per share is based
            on the weighted  average number of shares  outstanding plus dilutive
            potential  shares of common  stock,  if such shares had been issued.
            The  calculation  of the  diluted  net income per share for the year
            ended  December 31, 1998,  assumes the exercise of dilutive  options
            and warrants and the conversion of the 6%  Subordinated  Debentures.
            For 2000 and 1999, no dilutive potential shares of common stock were
            added to  compute  diluted  loss per share  because  the  effect was
            anti-dilutive.

      Reclassifications

      Certain   reclassifications   have  been  made  to  conform  prior  years'
            consolidated financial statements to the 2000 presentation.

      Accounting for Stock-Based Compensation

      The Company  follows  the Statement of Financial  Accounting  Standard No.
            123,  "Accounting for Stock-Based  Compensation".  Porta has elected
            not to implement the fair value based accounting method for employee
            stock options,  but has elected to disclose the pro-forma net income
            and  earnings  per share as if such  method had been used to account
            for stock-based compensation cost as described in the Statement.

      Accounting for the Impairment of Long-Lived Assets

      The Company  follows  the Statement of Financial  Accounting  Standard No.
            121,  "Accounting  for the  Impairment of Long-Lived  Assets and for
            Long-Lived  Assets to be Disposed Of".  Porta believes that there is
            no impairment of its long-lived assets.

      Use of Estimates

      The preparation  of  financial  statements  in accordance  with  generally
            accepted accounting principles requires management to make estimates
            and  assumptions   that  affect  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.  Among the more
            significant  estimates  included  in  these  consolidated  financial
            statements  are  the  estimated   allowance  for  doubtful  accounts
            receivable,   inventory  reserves,   percentage  of  completion  for
            long-term contracts, and the deferred tax asset valuation allowance.
            Actual results could differ from those and other estimates.

      New Accounting Standard

      Staff Accounting  Bulletin  (SAB) 101,  "Revenue  Recognition in Financial
            Statements", provides guidance on the recognition,  presentation and
            disclosure of revenues in financial statements and requires adoption
            no later than the fourth  fiscal  quarter of fiscal years  beginning
            after  December 15, 1999.  The Company  implemented  SAB 101 and its
            adoption did not have a material impact on the Company's earnings or
            financial position.

                                                                     (Continued)


                                      F-9
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

(2) Liquidity

      As of  December 31,  2000,  Porta's  debt includes  $20,746,000  of senior
            debt of which $1,160,000  matured on January 2, 2001 and $19,586,000
            matures on July 3, 2001,  and  $6,144,000  of  subordinated  debt of
            which $900,000 matured on January 2, 2001 and $5,244,000  matures on
            July 3, 2001. Porta did not have the resources to pay the $1,160,000
            due to the senior lender and the $900,000 due the subordinated  debt
            holders on the January 2, 2001 maturity date. On March 13, 2001, the
            Company  and its  senior  lender  agreed  to defer  the  payment  of
            borrowings due on January 2, 2001,  defer all monthly  facility fees
            and the  $400,000  principal  payment  due on April  1,  2001 to the
            earlier of the  termination  of the agreement of July 3, 2001 or the
            sale of one or more of the divisions of the Company. As part of this
            agreement,  the senior lender  precluded the Company from making any
            payments on indebtedness to any subordinated creditors except to pay
            accounts payable in the ordinary course of business.

      The Company was unable  to pay  the interest  payment on the  subordinated
            notes of approximately $440,000 which was due on January 2, 2001. At
            December 31, 2000, the Company did not have sufficient  resources to
            pay either the senior lender or the subordinated lenders at maturity
            and it is  likely  that  it  cannot  generate  such  cash  from  its
            operations,  and the senior  lender  had  precluded  us from  making
            payments  on the  subordinated  debt.  Although  Porta is seeking to
            refinance or  restructure  this debt prior to the maturity date, its
            business may be impaired if it is unable to do so.

      The Company's  cash  availability   during   2001  and  thereafter  may be
            affected by a number of factors.  At December 31, 2000,  the Company
            had no cash  available  under its credit  facility  and had borrowed
            more than the amount  available to the Company  under its  borrowing
            base.  To the extent that credit is not  available,  the Company may
            have  difficulty  performing  its  obligations  under its contracts,
            which could result in the  cancellation  of contracts or the loss of
            future  business and  penalties  for  non-performance.  In addition,
            $1,160,000 of senior debt and $900,000 of  subordinated  debt became
            due in January 2001 and $24,830,000 of senior and subordinated  debt
            will become due in July 2001.  Under the default  provisions  of the
            loan agreement with the senior lender, a default on the subordinated
            notes can  trigger a default  in the  Company's  obligations  to the
            senior  lender.  The Company does not presently  have the ability to
            pay  these  debts  and,  if the  Company  cannot  obtain  either  an
            extension on the maturity of the debts or an  alternative  financing
            source or raise funds from the sale of one or more of its divisions,
            the Company may be unable to meet these financial obligations.

      The Company has  been  exploring alternatives, including the possible sale
            of one of its divisions. The Company has been engaged in discussions
            with respect to the possible sale of one of its divisions.  Previous
            discussions  terminated  without an  agreement.  The Company has not
            signed any  agreements  with  respect to such a sale,  and it cannot
            give any  assurance  that it will be able to sell any  divisions  on
            reasonable terms, if at all. During 2000 and early 2001, the Company
            has taken

                                                                     (Continued)


                                      F-10
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

            steps  to  reduce  overhead  and  headcount,   and  consolidate  OSS
            operations.  The Company has also  entered into an agreement to sell
            its Glen Cove facility.  The Company will continue to look to reduce
            costs  while  it seeks  additional  business  from new and  existing
            customers,  and  pursues an  extension  of its  existing  sources of
            finance or alternative finance sources. The Company has no formal or
            informal  agreement  or  understanding  as to an  extension  of  its
            existing loans or any alternative  financing  source,  and it cannot
            give  any  assurance  that  it will be  able  to  obtain  either  an
            extension of its existing debt or generate funds to enable it to pay
            its loans.

      These financial  statements  have been prepared  assuming that the Company
            will  continue as a going concern and,  accordingly,  do not include
            any   adjustments   that  might  result  from  the  outcome  of  the
            uncertainties described above.

(3) Accounts Receivable

      Accounts receivable  included  approximately $0 and $3,211,000 at December
            31,  2000 and 1999,  respectively,  of  revenues  earned but not yet
            contractually   billable   relating  to  long-term   contracts   for
            specialized  products.  All such  amounts at December  31, 1999 were
            billed  in  2000.   In  addition,   accounts   receivable   included
            approximately  $1,197,000  and  $1,252,000  at December 31, 2000 and
            1999,  respectively,  of retainage balances due on various long-term
            contracts.  All such amounts, net of reserves,  at December 31, 2000
            are  expected  to be  collected  2001 and all such  amounts,  net of
            reserves,  at  December  31,  1999,  were  collected  in  2000.  The
            allowance  for  doubtful  accounts  receivable  was  $2,477,000  and
            $1,879,000  as of  December  31,  2000 and 1999,  respectively.  The
            allowance  for doubtful  accounts was  increased  by  provisions  of
            $730,000,  $1,070,000,  and $210,000 and  decreased by write-offs of
            $132,000,  $106,000,  and $353,000 for the years ended  December 31,
            2000, 1999, and 1998, respectively.

(4) Inventories

      Inventories consist of the following:

                                                           December 31,
                                                  -----------------------------
                                                     2000               1999
                                                  ----------          ---------
         Parts and components                     $4,973,000          5,558,000
         Work-in-process                             543,000            584,000
         Finished goods                            1,634,000          2,751,000
                                                  ----------          ---------
                                                  $7,150,000          8,893,000
                                                  ==========          =========

(5) Property, Plant and Equipment

      Property, plant and equipment consists of the following:

                                              December 31
                                       -------------------------     Estimated
                                          2000           1999       useful lives
                                       -----------     ---------   -------------
Land                                   $   246,000       246,000        --
Buildings                                2,284,000     2,284,000    20-50 years
Machinery and equipment                  8,870,000     9,079,000     3-8 years
Furniture and fixtures                   2,700,000     2,825,000    5-10 years
Transportation equipment                   133,000       151,000      4 years
Tools and molds                          4,124,000     3,474,000      8 years
Leasehold improvements                     858,000       871,000   Term of lease
                                       -----------     ---------
                                        19,215,000    18,930,000
Less accumulated depreciation
  and amortization                      14,660,000    14,737,000
                                       -----------     ---------
                                       $ 4,555,000     4,193,000
                                       ===========     =========

                                                                     (Continued)


                                      F-11
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      Total depreciation  and  amortization  expense  for  2000,  1999 and 1998,
            related to property,  plant and equipment  amounted to approximately
            $1,156,000, $998,000 and $1,197,000, respectively.

      In March 2001,  Porta  entered  into a contract to sell its Glen Cove, New
            York facility for  $1,850,000.  It is expected that the  transaction
            will close in June 2001. The carrying value of the land and building
            at December 31, 2000 was approximately $1,000,000.

(6) Senior Debt

      On December  31,  2000  and  1999,  Porta's  long-term  debt  consisted of
            senior debt under its credit  facility in the amount of  $20,596,000
            and $16,276,000,  respectively,  and  non-interest  bearing deferred
            funding  fee notes  payable to the senior  lender in the  amounts of
            $150,000 and $1,242,000,  respectively. As of December 31, 2000, the
            total outstanding  principal balance, of which $1,160,000 was due on
            January 1, 2001 and  $19,586,000  is due on July 3,  2001,  has been
            classified as a current liability. (See Note 2)

      During 2000, the Company and its senior  lender  agreed to extend the loan
            and security  agreement to July 3, 2001.  As part of the  agreement,
            Porta agreed to reduce the exercise price of outstanding warrants to
            purchase 471,000 shares of common stock held by its senior lender to
            $2.00 per share, the value of the reduction of the warrant price was
            $169,000  which was  recorded  as  deferred  financing  expense  and
            additional  paid in capital in 2000.  In addition  during 2000,  the
            Company and its senior lender agreed to increase the revolving  line
            maximum by $2,000,000 from $9,000,000 to $11,000,000 through January
            1,  2001.  As  of  December  31,  2000,  the  Company  had  borrowed
            $1,160,000 under the increased revolving line. As of January 1, 2001
            the   revolving   line  maximum  will  return  to   $9,000,000.   As
            consideration,  the Company  issued to its senior lender a five-year
            warrant  to  purchase  100,000  shares of common  stock at $2.00 per
            share.  The value of the  warrants  issued  was  $129,000  which was
            recorded  as  deferred  financing  expense  and  additional  paid in
            capital in 2000.  The balance of the facility is comprised of a term
            loan. The credit facility is secured by substantially all of Porta's
            assets. All obligations, except undrawn letters of credit, letter of
            credit  guarantees and the deferred fee notes, bear interest at 12%.
            The Company  incurs a fee of 2% per annum on the average  balance of
            letter of credit  guarantees  outstanding.  In  connection  with the
            senior  lender's waiver of  non-compliance  during 2000, the Company
            reduced from $2.00 per share to $1.00 per share,  the exercise price
            of  warrants to purchase  571,000  shares of common  stock which are
            held by the lender. The value of the reduction on exercise price was
            $59,000 and recorded as deferred  financing  expense and  additional
            paid in capital.  Based upon the warrant  transactions  during 2000,
            additional non-cash interest expense of $289,000 was recognized.

      The agreement  provides  for loan   principal  payments of $400,000 on the
            last day of each quarter during the term of the  agreement.  As part
            of the agreement,  the loan  amortization  shall first be applied to
            the non-interest bearing notes payable until these notes are paid in
            full and then to the term loan. The agreement also requires Porta to
            pay additional  principal  payments if its cash flow exceeds certain
            amounts. A monthly facility fee payment of $50,000 continuing to the
            end of the agreement is also required.

                                                                     (Continued)


                                      F-12
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      On January  2,  2001,  Porta   did  not  have the  resources  to repay the
            $1,160,000 of principal due. In March 2001, the senior lender agreed
            to allow the Company to defer the repayment of borrowings related to
            the increased maximum, defer all monthly facility fees and the April
            1, 2001 principal  payment to the earlier of the  termination of the
            agreement  of  July  3,  2001  or the  sale  of one or  more  of the
            divisions of the Company.  The agreement  also precluded the Company
            from  making  any  payments  on  indebtedness  to  any  subordinated
            creditors,  although it permits  payment of accounts  payable in the
            ordinary course of business.

      Financial debt  covenants  include an  interest  coverage  ratio  measured
            quarterly,   limitations   on  the   incurrence   of   indebtedness,
            limitations   on   capital   expenditures,   and   prohibitions   on
            declarations of any cash or stock dividends or the repurchase of the
            Company's  stock.  As of December 31,  2000,  the Company was not in
            compliance with the interest coverage covenant.  In addition,  as of
            December 31, 2000, the  outstanding  advances from the senior lender
            exceeded  the maximum  allowable  under the  borrowing  base formula
            since the Company's  eligible  assets were not sufficient to support
            the  outstanding  balance under the combined  revolving  advance and
            standby letters of credit  guarantee.  As a result,  the outstanding
            advances from the senior lender exceeded the maximum allowable under
            the borrowing  base formula by  $3,700,000 as of March 9, 2001.  The
            Company has obtained a waiver of such non-compliance from its senior
            lender  related to the interest  coverage ratio and the over advance
            under the line through July 2, 2001.

      Maturities of Porta's long-term debt, including  convertible  subordinated
            debentures and subordinated notes (notes 7 and 8), are as follows:

                      2001                       $26,890,000
                      2002                           376,000
                                                 -----------
                                                 $27,266,000
                                                 ===========

(7) 6% Convertible Subordinated  Debentures and Zero  Coupon Senior Subordinated
    Convertible Notes

      As of December  31, 2000  and 1999  Porta  had  outstanding  $376,000  and
            $371,000 of its 6% convertible  subordinated  debentures due July 1,
            2002 (the  "Debentures"),  net of original  issue discount of $9,000
            and  $14,000,  respectively.  The  face  amount  of the  outstanding
            Debentures  was  $385,000 at both  December  31, 2000 and 1999.  The
            Debentures are convertible at any time prior to maturity into Common
            Stock of the Company at a  conversion  rate of 8.333 shares for each
            $1,000  face  amount of  Debentures,  subject  to  adjustment  under
            certain circumstances.

      The Debentures are  redeemable  at the option of Porta, (a) in whole or in
            part,  at  redemption  prices  ranging  from  89.626% of face amount
            beginning July 1, 1995 to 100% of face amount beginning July 1, 2001
            and  thereafter,  together  with accrued and unpaid  interest to the
            redemption date, and (b) in whole at any time, at a redemption price
            equal to the issue  price  plus  interest  and that  portion  of the
            original issue discount and interest accrued to the redemption date,
            in the event of certain  changes in United  States  taxation  or the
            imposition of certain certification,  information or other reporting
            requirements.

      Interest on the Debentures is payable on July 1 of each year. The interest
            accrued amounted to $12,000 as of both December 31, 2000 and 1999.

      Pursuant to a debt  restructuring  prior to and during  1998,  the Company
            recorded an extraordinary gain of approximately $76,000 in 1998.

                                                                     (Continued)


                                      F-13
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

(8) Subordinated Notes

      As of  December   31,  2000   and  1999,   $6,144,000   and    $6,013,000,
            respectively,  of Subordinated Notes were outstanding which includes
            $144,000 and $64,000,  respectively,  of additional  principal  from
            paid  in  kind  options  and  unamortized  debt  discount  of $0 and
            $51,000,  respectively. As of December 31, 2000, $900,000 matured on
            January 2, 2001 and $5,244,000 will mature on July 3, 2001.

      Porta did not  have  the  resources  to pay  the  $900,000  principal  and
            approximately  $440,000 of interest on the  subordinated  debt which
            was due on January  2,  2001.  In  addition,  the senior  lender had
            precluded the Company from making payments on the subordinated debt.
            (See Note 2)

      During December 1999,   Porta  (a)  extended  its  maturity  date  of  the
            $6,000,000  outstanding  principal  amount of Subordinated  Notes to
            January 3, 2001 with the right to extend the  maturity  date to July
            3, 2001 if Porta achieves certain financial  results,  (b) increased
            the interest rate of the Subordinated  Notes to 14% per annum during
            the initial  term and to 15% during the extended  term,  (c) reduced
            the exercise price of the previously  issued Series B and C Warrants
            to $1.00 per share,  (d)  granted  the  holders of the  Subordinated
            Notes the right to a payment in kind option, whereby the note holder
            has the right to receive  interest in the form of a new subordinated
            note in the principal amount equal to 125% of the interest then due,
            with the new subordinated  note bearing interest at the rate of 125%
            of the then current interest rate of the Subordinated Notes, and (e)
            agreed that, if Porta extends the maturity date of the  Subordinated
            Notes to July 3, 2001, it will issue to the noteholders New Warrants
            to purchase a total of 300,000 shares of Common Stock at the average
            closing  price of the Common Stock for five  trading days  preceding
            January 3, 2001.  As a result of the  amendment to the  Subordinated
            Notes,  Porta recorded a discount of approximately  $56,000 relating
            to the  re-pricing of the warrants and additional  interest  expense
            for  Noteholders who elected the paid in kind option at December 31,
            1999 of approximately $13,000.

      In    April 2000,  the Company and the holders of  $5,100,000,  or 85%, of
            the  subordinated  notes agreed to eliminate  the  requirement  that
            Porta meet specific financial goals for Porta to extend the maturity
            date of their subordinated notes to July 3, 2001. In connection with
            this  agreement,  Porta  agreed  to  issue  to the  noteholders  New
            Warrants to  purchase  127,500  shares of Common  Stock at $3.00 per
            share, the value of which was determined to be $140,000 and recorded
            as deferred  financing  expenses and  additional  paid in capital in
            2000.  Additional  non-cash interest expense of $84,000 was recorded
            during 2000 in connection with this transaction.  Porta may issue to
            any other  noteholders  who agree to this  amendment New Warrants to
            purchase up to 22,500 shares of Common Stock at $3.00 per share. The
            remaining  New Warrants to purchase  150,000  shares of Common Stock
            will be issued if the notes are extended.

                                                                     (Continued)


                                      F-14
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

(9) Joint Venture

      The Company  has  a 50%  interest   in a joint  venture  agreement  with a
            Korean partner.  Unless otherwise  terminated in accordance with the
            joint  venture  agreement,  the  joint  venture  will  terminate  on
            December 31, 2010.  In addition,  the Company has obtained an option
            to acquire an  additional  1%  interest  of the joint  venture,  for
            approximately  $190,000.  The Company consolidates the operations of
            the  joint  venture  since  the  Company  can  obtain a  controlling
            interest at its election and the joint venture is entirely dependent
            on the Company for the  products  it sells and  receives  management
            assistance from the Company. The joint venture partner's interest is
            shown as a minority interest.

(10) Stockholders' Equity

      Porta had  outstanding  warrants to its senior lender to purchase  571,152
            shares of common stock,  which are immediately  exercisable at $1.00
            per share and for which  471,152  expire on  November  30,  2002 and
            100,000 expire on June 6, 2005.

      Porta had outstanding to an investment banker warrants to purchase 400,000
            shares of common stock at $1.56 per share which expire April 2002.

      See Note  8 in   connection  with   the  issuance  of the  Series  B and C
            Warrants as part of the private placement of the subordinated  Notes
            and the amendment of the terms of the Subordinated  Notes and Series
            B and C Warrants.

      As of December 31,  2000, Porta  had  stock purchase warrants  outstanding
            to purchase (i) 53,000  shares of common stock at an exercise  price
            of $17.50 per share until  November  2001 and (ii) 15,000  shares of
            common  stock at an  exercise  price of $1.8125  per share until May
            2005 of which  warrants to purchase 5,000 shares of common stock are
            immediately exercisable.

      Under a 1984 Employee  Incentive  Plan,  Porta provided an opportunity for
            certain  employees  of the Company and its  subsidiaries  to acquire
            subordinated convertible debentures. As a result, as of December 31,
            1998,  there was $13,000 of  employee  promissory  notes  receivable
            outstanding,  of which the maturity  date has been extended to April
            1999.  During 1998,  the Board of Directors  approved a reduction in
            the  original  issue  price of the  debentures  to the then  current
            market  rate of the  common  stock,  approximately  $1.38 per share,
            which  common stock was held by Porta as  collateral  for the notes.
            Accordingly,  the related receivable from employees was reduced from
            $307,000 to $13,000 to reflect the new  valuation.  The reduction on
            the original  issue  resulted in a non-cash  compensation  charge in
            1998 of $298,000. During 1999, all of the receivables from employees
            were paid.

                                                                     (Continued)


                                      F-15
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

(11) Stockholder Rights Plan

      Porta has a  Stockholder  Rights Plan in which  preferred  stock  purchase
            rights were distributed to stockholders as a dividend at the rate of
            one right for each common share.  Each right  entitles the holder to
            buy from Porta one one-hundredth of a newly issued share of Series A
            junior participating preferred stock at an exercise price of $175.00
            per right.

      The rights  will  be  exercisable  only if  a  person  or  group  acquires
            beneficial ownership of 22.5 percent or more of Porta's common stock
            or commences a tender or exchange offer upon  consummation  of which
            such person or group would  beneficially own 22.5 percent or more of
            the common stock.

      If any  person  becomes  the  beneficial  owner of 22.5 percent or more of
            Porta's  common stock other than pursuant to an offer for all shares
            which is fair to and  otherwise  in the best  interests of Porta and
            its  stockholders,  each  right not owned by such  person or related
            parties  will enable its holders to  purchase,  at the right's  then
            current  exercise  price,  shares of common  stock of Porta (or,  in
            certain  circumstances  as determined  by the Board of Directors,  a
            combination  of cash,  property,  common stock or other  securities)
            having a value of twice the right's exercise price. In addition,  if
            Porta  is  involved  in  a  merger  or  other  business  combination
            transaction  with another  person in which its shares are changed or
            converted,  or sells  more than 50  percent of its assets to another
            person or persons, each right that has not previously been exercised
            will  entitle its holder to  purchase,  at the right's  then current
            exercise price, common shares of such other person having a value of
            twice the right's exercise price.

      Porta will  generally  be entitled  to redeem the  rights,  by action of a
          majority of the continuing directors of the Company, at $.01 per right
          at any time until the tenth business day following public announcement
          that a 22.5 percent position has been acquired.

(12) Employee Benefit Plans

      Porta has  deferred  compensation  agreements  with  certain  officers and
            employees,  with benefits  commencing at retirement  equal to 50% of
            the  employee's  base  salary,   as  defined.   Payments  under  the
            agreements  will be made for a period of fifteen years following the
            earlier of  attainment  of age 65 or death.  During  2000,  1999 and
            1998, Porta accrued approximately  $180,000,  $180,000 and $185,000,
            respectively, under these agreements.

      In 1986,  Porta  established  the  Porta Systems Corp. 401(k) Savings Plan
            for the  benefit of  eligible  employees,  as defined in the Savings
            Plan.  Participants  contribute a specified percentage of their base
            salary up to a maximum  of 15%.  Porta  will  match a  participant's
            contribution  by an amount equal to 25% of the first 6%  contributed
            by the  participant.  A participant is 100% vested in the balance to
            his credit.  For the years ended  December 31, 2000,  1999 and 1998,
            Porta's  contribution  amounted  to $72,000,  $93,000  and  $96,000,
            respectively.

                                                                     (Continued)


                                      F-16
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      In 1999,  Porta  established  the  Employee  Stock  Purchase  Plan for the
            benefit of  eligible  employees,  as defined in the  Purchase  Plan,
            which  permits   employees  to  purchase  Porta's  common  stock  at
            discounts up to 10%.  Porta has reserved  1,000,000  shares of Porta
            stock for issuance under the plan.  During 2000,  84,804 shares were
            issued  pursuant to the Purchase  Plan.  Subsequent  to December 31,
            2000,  Porta  issued  approximately  38,900  shares  of stock to the
            participants of the Purchase Plan.

      Porta does not  provide any other  post-retirement  benefits to any of its
            employees.

(13) Incentive Plans

      During 1999, Porta  established an Employee Stock Bonus Plan whereby stock
            may  be  given  to   non-officers  or  directors  to  recognize  the
            contributions  of employees.  A maximum of 100,000  shares of common
            stock is reserved  for issuance  pursuant to the Bonus Plan.  During
            1999 Porta issued 4,250 shares of common stock pursuant to the Bonus
            Plan and  recorded  a charge of  approximately  $8,000.  No share of
            common stock were issued pursuant to the Bonus Plan during 2000.

      Porta's 1986 Stock  Incentive Plan ("1986  Plan"),  expired in March 1996,
            although  options  granted  prior to the  expiration  date remain in
            effect in  accordance  with their terms.  Options  granted under the
            1986 Plan may be incentive stock options, as defined in the Internal
            Revenue Code, or options that are not incentive  stock options.  The
            exercise price for all options granted were equal to the fair market
            value at the date of grant.

      Porta's 1996 Stock  Incentive  Plan ("1996 Plan") covers 450,000 shares of
            common stock. Incentive stock options cannot be issued subsequent to
            ten years from the date the 1996 Plan was  approved.  Options  under
            the 1996 Plan may be granted to key  employees,  including  officers
            and  directors  of the  Company  and its  subsidiaries,  except that
            members and alternate  members of the stock option committee are not
            eligible for options under the 1996 Plan. The exercise price for all
            options  granted  were equal to the fair market value at the date of
            grant and vest as determined by the board of directors. In addition,
            the 1996 Plan  provides for the  automatic  grant to  non-management
            directors of  non-qualified  options to purchase 2,000 shares on May
            1st of each year  commencing  May 1, 1996,  based  upon the  average
            closing price of the last ten trading days of April of each year.

      Porta's 1998 Stock  Non-Qualified  Stock Option Plan ("1998  Plan") covers
            450,000  shares of common stock.  Options under the 1998 Plan may be
            granted to key  employees,  including  officers and directors of the
            Company and its  subsidiaries.  The  exercise  price for all options
            granted were equal to the fair market value at the date of grant and
            vest as determined by the board of directors.

                                                                     (Continued)


                                      F-17
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      Porta's 1999 Incentive and  Non-Qualified  Stock Option Plan ("1999 Plan")
            covers  400,000  shares of common  stock.  Incentive  stock  options
            cannot be issued subsequent to ten years from the date the 1999 Plan
            was  approved.  Options  under the 1999 Plan may be  granted  to key
            employees,  including  officers and directors of the Company and its
            subsidiaries, except that members and alternate members of the stock
            option  committee  are not eligible for options under the 1999 Plan.
            The  exercise  price for all options  granted were equal to the fair
            market  value  at the date of grant  and vest as  determined  by the
            board of  directors.  In  addition,  the 1999 Plan  provides for the
            automatic grant to non-management directors of non-qualified options
            to purchase  5,000 shares on May 1st of each year  commencing May 1,
            1999,  based upon the average  closing price of the last ten trading
            days  of  April  of  each   year;   provided,   however,   that  the
            non-management  directors will not be granted  non-qualified options
            pursuant  to the 1999 Plan for any year to the  extent  options  are
            granted under the 1996 Plan for such year.

      During 1998,  pursuant to an  employment  contract  with an officer, Porta
            issued  options to purchase  30,000  shares of common stock at $1.25
            per share, which approximated  market value on the date of issuance,
            and expire on August 2004.  As of December 31, 2000,  all options to
            purchase  shares of common stock had been forfeited  pursuant to the
            terms of the contract.

      During 1999, pursuant  to  employment  contracts  with 4  officers,  Porta
            issued  options to purchase  95,000 shares of common stock at $2.06,
            as to 60,000  shares and $1.75,  as to 35,000  shares.  The exercise
            prices  approximated  market  value on the date of  issuance.  As of
            December 31, 2000, 80,000 options to purchase shares of common stock
            had been forfeited. The remaining 15,000 options expire in May 2005.
            As of December 31, 2000, 5000 of the options are vested.

      Porta applies APB Opinion 25,  "Accounting  for Stock Issued to Employees"
            ("APB 25") and related  Interpretations  in accounting for the 1999,
            1998,  1996 and 1986 Plans.  Under APB 25, no  compensation  cost is
            recognized  for options  granted to  employees  at  exercise  prices
            greater than or equal to fair market value of the underlying  common
            stock at the date of grant.

      Porta has adopted the disclosure only provisions of Statement of Financial
            Accounting   Standard   No.   123,   "Accounting   for   Stock-Based
            Compensation" ("SFAS No.123") which requires the Company to provide,
            beginning  with 1995 grants,  pro forma  information  regarding  net
            income and net income per common  share  (basic and  diluted)  as if
            compensation   costs  for  Porta's   stock  option  plans  had  been
            determined  in accordance  with the fair value method  prescribed in
            SFAS No.123.  If Porta had elected to recognize  compensation  costs
            based  on  fair  value  of the  options  granted  at  grant  date as
            prescribed  by SFAS No. 123, net income (loss) and net income (loss)
            per share  (basic and  diluted)  would have been  reduced to the pro
            forma amounts indicated below:

               (Dollars in thousands, except per share data)

                                                 2000         1999         1998
                                                -------     --------      ------

      Pro forma net income (loss)              $(10,393)    $(14,280)     $  237
      Pro forma net income (loss) per
        share (basic and diluted)               $ (1.06)    $  (1.50)     $ 0.03

      The   weighted-average fair value of options granted was $1.62, $ 1.36 and
            $1.47 per share in 2000, 1999 and 1998, respectively.

                                                                     (Continued)


                                      F-18
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      The fair  value  of each option  grant is  estimated  on the date of grant
            using the  Black-Scholes  option-pricing  model  with the  following
            assumptions for 2000, 1999 and 1998:

                            2000                 1999                 1998
                            ----                 ----                 ----

Dividends:             $0.00 per share      $0.00 per share      $0.00 per share
Volatility:             57.64%-68.70%        45.80%-80.00%        46.10%-80.00%
Risk-free interest:      5.54%-6.53%          4.50%-6.40%          4.80%-6.40%
Expected term:            5 years               5 years              5 years

      A summary of the status of Porta's  1986 stock  option plan as of December
      31, 2000,  1999,  and 1998,  and changes  during the years ending on those
      dates is presented below:

<TABLE>
<CAPTION>
                                                           2000                          1999                         1998
                                                 -----------------------        -----------------------     -----------------------
                                                 Shares   Weighted              Shares   Weighted           Shares   Weighted
                                                 Under    Average               Under    Average            Under    Average
                                                 Option   Exercise Price        Option   Exercise Price     Option   Exercise Price
                                                 ------   --------------        ------   --------------     ------   --------------
<S>                                              <C>         <C>                <C>          <C>            <C>         <C>
Outstanding beginning of year                    3,000       $     5            15,527       $    57        16,392      $    57
Granted                                             --            --                --
Exercised                                           --            --                --
Forfeited                                           --            --           (12,527)           70          (865)          63
                                                 -----       -------             -----                      ------
Outstanding end of year                          3,000       $     5             3,000       $     5        15,527      $    57
                                                 =====                           =====                      ======
Options exercisable at year-end                  3,000                           3,000                      15,527
                                                 =====                           =====                      ======
</TABLE>

      The following   table    summarizes   information    about  stock  options
            outstanding under the 1986 Plan at December 31, 2000:

<TABLE>
<CAPTION>
                                    Options Outstanding                           Options Exercisable
                    -----------------------------------------------------    -------------------------------
Range of            Outstanding      Remaining           Weighted-average    Exercisable    Weighted-Average
Exercise Prices     at 12/31/00      Contractual Life    Exercise Price      at 12/31/00    Exercise Price
---------------     -----------      ----------------    --------------      -----------    --------------
<S>                   <C>            <C>                       <C>              <C>               <C>
$ 5                   3,000          1.8 years                 $ 5              3,000             $ 5
                      =====                                                     =====
</TABLE>

      A summary  of  the  status  of  Porta's  1996   stock  option  plan  as of
            December 31,  2000,  1999 and 1998,  and changes  during the year is
            presented below:

<TABLE>
<CAPTION>
                                                           2000                          1999                         1998
                                                 -----------------------        -----------------------     -----------------------
                                                 Shares   Weighted              Shares   Weighted           Shares   Weighted
                                                 Under    Average               Under    Average            Under    Average
                                                 Option   Exercise Price        Option   Exercise Price     Option   Exercise Price
                                                 ------   --------------        ------   --------------     ------   --------------
<S>                                              <C>         <C>                <C>          <C>            <C>         <C>
Outstanding beginning of year                    412,838     $  1.73            447,938      $ 1.73         437,988     $ 1.67
Granted                                               --          --                 --          --          12,000       3.85
Exercised                                         (6,000)       1.50                 --                          --         --
Forfeited                                         (6,075)       1.51            (35,100)       1.77          (2,050)      1.51
                                                 -------     -------            -------                     -------
Outstanding end of year                          400,763     $  1.73            412,838      $ 1.73         447,938     $ 1.73
                                                 =======                        =======                     =======
Options exercisable at year-end                  400,763                        412,838                     447,938
                                                 =======                        =======                     =======
</TABLE>

                                                                     (Continued)


                                      F-19
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      The following   table    summarizes   information    about  stock  options
            outstanding under the 1996 Plan at December 31, 2000:

<TABLE>
<CAPTION>
                                    Options Outstanding                           Options Exercisable
                    -----------------------------------------------------    -------------------------------
Range of            Outstanding      Remaining           Weighted-average    Exercisable    Weighted-Average
Exercise Prices     at 12/31/00      Contractual Life    Exercise Price      at 12/31/00    Exercise Price
---------------     -----------      ----------------    --------------      -----------    --------------
<S>                   <C>            <C>                     <C>               <C>              <C>
$ 1 to 5              400,763        5.5 years               $ 1.73            400,763          $ 1.73
                      =======                                                  =======
</TABLE>

      A summary  of  the  status  of  Porta's  1998  stock  option  plan  as  of
            December 31, 2000, and changes during the year is presented below:

<TABLE>
<CAPTION>
                                                           2000                          1999                         1998
                                                 -----------------------        -----------------------     -----------------------
                                                 Shares   Weighted              Shares   Weighted           Shares   Weighted
                                                 Under    Average               Under    Average            Under    Average
                                                 Option   Exercise Price        Option   Exercise Price     Option   Exercise Price
                                                 ------   --------------        ------   --------------     ------   --------------
<S>                                              <C>         <C>                <C>          <C>            <C>         <C>
Outstanding beginning of year                    429,200     $3.28              444,500      $3.25                0     $0.00
Granted                                               --        --                2,200       1.96          448,000      3.25
Exercised                                             --        --                   --         --               --        --
Forfeited                                        (17,250)     3.25              (17,500)      2.32           (3,500)     3.25
                                                 -------                        -------                     -------
Outstanding end of year                          411,950     $3.24              429,200      $3.28          444,500     $3.25
                                                 =======                        =======                     =======
Options exercisable at year-end                  358,850                        358,400                         -0-
                                                 =======                        =======                     =======
</TABLE>

      The following   table   summarizes   information   about   stock   options
            outstanding under the 1998 Plan at December 31, 2000:

<TABLE>
<CAPTION>
                                    Options Outstanding                           Options Exercisable
                    -----------------------------------------------------    -------------------------------
Range of            Outstanding      Remaining           Weighted-average    Exercisable    Weighted-Average
Exercise Prices     at 12/31/00      Contractual Life    Exercise Price      at 12/31/00    Exercise Price
---------------     -----------      ----------------    --------------      -----------    --------------
<S>                   <C>            <C>                     <C>               <C>              <C>
$ 1 to 5              411,950        3.1 years               $ 3.24            358,850          $ 3.25
                      =======                                                  =======
</TABLE>

      A summary  of  the  status  of  Porta's  1999  stock  option  plan  as  of
            December 31, 2000, and changes during the year is presented below:

<TABLE>
<CAPTION>
                                                           2000                          1999
                                                 -----------------------        -----------------------
                                                 Shares   Weighted              Shares   Weighted
                                                 Under    Average               Under    Average
                                                 Option   Exercise Price        Option   Exercise Price
                                                 ------   --------------        ------   --------------
<S>                                              <C>         <C>                <C>          <C>
Outstanding beginning of year                     25,500     $1.72                   0       $0.00
Granted                                          108,500      3.12              25,500        1.72
Exercised                                             --        --                  --          --
Forfeited                                             --        --                  --          --
                                                 -------                        ------
Outstanding end of year                          134,000     $2.86              25,500       $1.72
                                                 =======                        ======
Options exercisable at year-end                   45,167                        25,000
                                                 =======                        ======
</TABLE>

                                                                     (Continued)


                                      F-20
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      The following   table   summarizes    information    about  stock  options
            outstanding under the 1999 Plan at December 31, 2000:

<TABLE>
<CAPTION>
                                    Options Outstanding                           Options Exercisable
                    -----------------------------------------------------    -------------------------------
Range of            Outstanding      Remaining           Weighted-average    Exercisable    Weighted-Average
Exercise Prices     at 12/31/00      Contractual Life    Exercise Price      at 12/31/00    Exercise Price
---------------     -----------      ----------------    --------------      -----------    --------------
<S>                   <C>            <C>                     <C>               <C>              <C>
$ 1 to 5              134,000        6.4 years               $ 2.86            45,167           $ 1.97
                      =======                                                  ======
</TABLE>

(14) Income Taxes

      The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
                                                     2000                         1999                              1998
                                                     ----                         ----                              ----
                                              Current    Deferred       Current          Deferred         Current          Deferred
                                              -------    --------       -------          --------         -------          --------
<S>                                          <C>           <C>            <C>             <C>              <C>               <C>
Federal                                      $     --         --              --          716,000               --           (8,000)
State and foreign                             227,000         --          62,000           95,000          615,000           (1,000)
                                             --------      -----        --------         --------         --------         --------
   Total                                     $227,000         --          62,000          811,000          615,000           (9,000)
                                             ========      =====        ========         ========         ========         ========
</TABLE>

      The   domestic and foreign  components of income  (loss) before  provision
          for income taxes were as follows:

                                          2000           1999           1998
                                          ----           ----           ----
      United States                   $(7,519,000)    (7,516,000)    (1,424,000)
      Foreign                          (2,430,000)    (5,297,000)     2,481,000
                                      -----------    -----------     ----------
      Income (loss) before
         provision for income taxes   $(9,949,000)   (12,813,000)     1,057,000
                                      ===========    ===========     ==========

      A   reconciliation of Porta's income tax provision and the amount computed
          by  applying  the  statutory  U.S.  federal  income tax rate of 34% to
          income  (loss) from  continuing  operations  before income taxes is as
          follows:
<TABLE>
<CAPTION>
                                                                                     2000               1999               1998
                                                                                     ----               ----               ----
<S>                                                                               <C>                 <C>                <C>
Tax expense (benefit) at statutory rate                                           $(3,383,000)        (4,356,000)           398,000
Increase (decrease) in income tax benefit resulting from:
  Increase (decrease) in valuation allowance                                        2,776,000          5,486,000         (4,097,000)
  State and foreign taxes, less applicable federal benefits                          (127,000)          (368,000)           615,000
  Debt conversion expense not deductible for tax                                           --                 --            411,000
  Other expenses not deductible for tax                                               345,000            152,000            136,000
  Foreign income taxed at rates
    Different from U.S. statutory rate                                                 25,000             (5,000)          (239,000)
  Utilization of net operating loss carryforward                                           --                 --           (118,000)
  Expiration of capital loss and investment
    tax credit carryforwards                                                               --                 --          4,387,000
  Estimated NOL adjustments, including Section 382 limitation                         594,000                 --           (719,000)
  Other                                                                                (3,000)           (36,000)          (168,000)
                                                                                  -----------        -----------        -----------

                                                                                  $   227,000            873,000            606,000
                                                                                  ===========        ===========        ===========
</TABLE>

      Porta has unused United States tax net operating loss (NOL)  carryforwards
            of approximately  $85,000,000 expiring at various dates between 2009
            and 2020.  No tax  benefit or expense  was  apportioned  to the 1998
            extraordinary  gains,  as such  amounts are  immaterial.  Due to the
            change in ownership  which  resulted from the  conversion of Porta's
            Zero coupon subordinated  convertible notes to common stock, Porta's
            usage of its NOL will be limited in accordance with Internal Revenue
            Code section 382.  Porta's  carryforward  utilization  of the NOL is
            limited to $1,767,000 per year. The carryforward amounts are subject
            to review by the Internal  Revenue  Service (IRS).  The capital loss
            carryforwards  expired  during  1998 and, as a result of the section
            382  limitation,  no benefit from tax credit  carryforwards  will be
            available.  In  addition,  Porta has  foreign NOL  carryforwards  of
            approximately $3,400,000 with indefinite expiration dates.

                                                                     (Continued)


                                      F-21
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      Porta's United States net operating loss carryforwards  (after limitations
            as described above) expire in the following years:

                      2009                       $  4,106,000
                      2010                         18,880,000
                      2011                            884,000
                      2018                             37,000
                      2019                          7,546,000
                      2020                          8,761,000
                                                 ------------
                                                 $ 40,214,000
                                                 ============

      The components  of  the deferred tax assets, the net balance of which zero
            after the valuation allowance,  as of December 31, 2000 and 1999 are
            as follows:

                                                       2000            1999
                                                       ----            ----
Deferred tax assets:
  Inventory                                        $  1,211,000       1,193,000
  Allowance for doubtful accounts receivable            828,000         723,000
  Benefits of tax loss carryforwards                 16,622,000      13,285,000
  Benefit plans                                         845,000         819,000
  Accrued commissions                                   581,000         718,000
  Other                                                 390,000         449,000
  Depreciation                                          392,000         906,000
                                                   ------------    ------------
                                                     20,869,000      18,093,000
  Valuation allowance                               (20,869,000)    (18,093,000)
                                                   ------------    ------------
                                                   $         --              --
                                                   ============    ============

      Deferred taxes result from temporary  differences between the tax bases of
            assets and liabilities  and their reported  amounts in the financial
            statements.  The temporary differences result from costs required to
            be capitalized for tax purposes by the US Internal Revenue Code, and
            certain items accrued for financial  reporting  purposes in the year
            incurred but not deductible for tax purposes until paid.

      Because of Porta's losses in 2000 and 1999, a valuation  allowance for the
            entire  deferred tax asset was provided due to the uncertainty as to
            future realization.

      The income tax  returns  of Porta and its  subsidiary  operating in Puerto
            Rico were  examined by the IRS for the tax years ended  December 31,
            1989 and 1988.  As a result of this  examination,  the IRS increased
            the  Puerto  Rico   subsidiary's   taxable  income   resulting  from
            intercompany transactions,  with a corresponding increase in Porta's
            net  operating  losses.  The  settlement  amounted to  approximately
            $953,000.  Porta is currently in a  structured  settlement  with the
            IRS, which is reviewed  annually,  whereby monthly  payments will be
            made to liquidate the settlement.  Aggregate  annual amounts payable
            by Porta, including interest on the unpaid amounts at a current rate
            of 7%, is $240,000 in 2000. As of December 31, 2000,  Porta has made
            all the required payments through that date under the settlement and
            approximately $398,000 remains outstanding.

      No provision  was  made  for  U.S.  income  taxes  on  the   undistributed
            earnings  of  Porta's  foreign  subsidiaries  as it is  management's
            intention to utilize those earnings in the foreign operations for an
            indefinite  period of time or repatriate such earnings only when tax
            effective to do so. At December 31, 2000,  undistributed earnings of
            the foreign  subsidiaries  amounted to approximately  $26,000. It is
            not practicable to determine the amount of income or withholding tax
            that would be payable upon the remittance of those earnings.

                                                                     (Continued)


                                      F-22
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

(15) Leases

      At December  31, 2000, Porta  and  its subsidiaries  leased  manufacturing
            and  administrative  facilities,  equipment and automobiles  under a
            number of operating  leases.  Porta is required to pay  increases in
            real estate taxes on the  facilities  in addition to minimum  rents.
            Total  rent   expense  for  2000,   1999,   and  1998   amounted  to
            approximately $876,000, $874,000 and $716,000, respectively. Minimum
            rental commitments, exclusive of future escalation charges, for each
            of the next five years are as follows:

                        2001                      $ 1,005,000
                        2002                          866,000
                        2003                          753,000
                        2004                          719,000
                        2005                          558,000
                        Thereafter                  3,215,000
                                                  -----------
                                                  $ 7,116,000
                                                  ===========

(16) Contingencies

      At December 31,  2000,  Porta  was  contingently  liable  for  outstanding
            letters  of  credit  and  surety  bonds  aggregating   approximately
            $720,000  and  $3,480,000,   respectively,   as  security   for  the
            performance of certain long-term contracts.

      Porta is a party to legal actions  arising out of the ordinary  conduct of
            its  business.  Management  believes  that the  settlement  of these
            matters will not have a materially  adverse  effect on the financial
            position of the Company (note 20).

(17) Major Customers

      Duringthe years ended  December  31,  2000,  1999 and 1998,  Porta's  five
            largest   customers   accounted   for  sales  of   $28,323,000,   or
            approximately  55% of sales,  $19,700,000,  or approximately  51% of
            sales, and $28,797,000, or approximately 49% of sales, respectively.
            Porta's  largest  customer  in 2000 with  sales of  $12,051,000,  or
            approximately  24% of sales, was Fujitsu  Telecommunications  Europe
            LTD ("FTEL").  A significant amount of sales of our products for use
            by  British  Telecommunications  plc  ("BT")  were  sold  to FTEL as
            purchasing  agent to BT. Porta's  largest  customer in 1999 and 1998
            was BT. Sales to BT for the year ended  December 31, 2000,  1999 and
            1998   amounted   to   $5,098,000,   $7,825,000   and   $15,349,000,
            respectively,  or approximately 10%, 20% and 26%,  respectively,  of
            Porta's   sales  for  such   years.   Therefore,   any   significant
            interruption or decline in sales to FTEL or BT may have a materially
            adverse  effect upon Porta's  operations.  During  2000,  sales to a
            Mexican telephone  company were $5,507,000,  or approximately 11% of
            sales.  During  1998,  sales to a  Chilean  telephone  company  were
            $6,834,000,  or  approximately  12% of  sales.  No  other  customers
            account for 10% or more of Porta's sales for any year. Approximately
            26% and 28%,  respectively,  of Porta's accounts  receivable are due
            from the five  largest  customers  as of December 31, 2000 and 1999,
            respectively.

                                                                     (Continued)


                                      F-23
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

(18) Fair Values of Financial Instruments

      Cash  equivalents,  accounts  receivable,  accounts and notes payable, and
            short-term  loans  are  reflected  in  the  consolidated   financial
            statements at fair value because of the short term maturity of these
            instruments.

      The fair value  of  Porta's long-term debt cannot be reasonably  estimated
            due to the lack of marketability of such instruments.

(19) Net Income (Loss) Per Share

      The following  table  sets  forth the computation of basic and diluted net
            income (loss) per share:

<TABLE>
<CAPTION>
                                                                                   2000              1999             1998
                                                                               ------------      ------------      -----------
<S>                                                                            <C>               <C>               <C>
Numerator-Basic and diluted
  Net income (loss) per share:
  Income (loss) from continuing operations                                     $(10,176,000)     $(13,686,000)     $   451,000
  Extraordinary item                                                                     --                --           76,000
                                                                               ------------      ------------      -----------
  Net income (loss)                                                            $(10,176,000)     $(13,686,000)     $   527,000
                                                                               ============      ============      ===========

Denominator:

  Denominator for basic net income (loss)
    per share -weighted-average shares                                            9,763,000         9,489,000        9,281,000
  Effect of dilutive securities:
    Options and Warrants                                                                 --                --          452,000
    6% Convertible Subordinated Notes                                                    --                --           52,000
                                                                               ------------      ------------      -----------
  Denominator for diluted net income (loss) per share-
    adjusted weighted-average shares and
    assumed conversions                                                           9,763,000         9,489,000         9,785000
                                                                               ============      ============      ===========
  Basic per share amounts:
    Continuing operations                                                      $      (1.04)     $      (1.44)     $      0.05
    Extraordinary item                                                                   --                --             0.01
                                                                               ------------      ------------      -----------
      Net income (loss) per share
      of common stock                                                          $      (1.04)     $      (1.44)     $      0.06
                                                                               ============      ============      ===========
    Diluted per share amounts:
      Continuing operations                                                    $      (1.04)     $      (1.44)     $      0.04
      Extraordinary item                                                                 --                --             0.01
                                                                               ------------      ------------      -----------
        Net income (loss) per share
        of common stock                                                        $      (1.04)     $      (1.44)     $      0.05
                                                                               ============      ============      ===========
</TABLE>

                                                                     (Continued)


                                      F-24
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      Options to purchase  649,733,  638,508 and 486,577  shares of common stock
            for 2000, 1999 and 1998, respectively,  with exercise prices ranging
            from  $1.69 to $5.00,  $1.69 to $5.00 and $3.25 to $86.25  for 2000,
            1999 and 1998,  respectively,  were  outstanding but not included in
            the  computation  of diluted net income (loss) per share because the
            exercise prices were greater than the average market price of common
            stock during such years.

      Warrants to purchase  195,500,  913,000 and 53,000  shares of common stock
            for 2000, 1999 and 1998, respectively,  with exercise prices ranging
            from $1.81 to $17.50,  $1.56 to $17.50 and $17.50 for 2000, 1999 and
            1998,  respectively,  were  outstanding  but  not  included  in  the
            computation  of diluted  net income  (loss)  per share  because  the
            exercise prices were greater than the average market price of common
            stock during such years.

(20) Legal Matters

      In  March 2000,  the  Company suspended (with pay) Messrs.  Ronald Wilkins
            and  Michael  Bahlo,  two  of its  executive  officers,  from  their
            positions  pending  completion  of the  Companies  investigation  of
            certain  matters  that  had  come  to its  attention.  Prior  to the
            completion  of this  investigation,  however,  these two  executives
            accepted  positions  with  another  company and thereby  voluntarily
            resigned from their  positions  with the Company.  In February 2001,
            these  two  executives,  together  with  a  third  former  executive
            officer,  Mr. Michael Lamb, who similarly resigned from his position
            with the Company,  filed suit in the Supreme  Court for the State of
            New York,  County of New York. The complaint  asserts various claims
            against the Company based on the allegation that each of these three
            executives was  improperly  terminated  from his employment  without
            cause,  and seeks  compensatory  damages,  liquidating  damages  and
            attorney's  fees. The Company believes that it has valid defenses to
            the  claims and  intends to defend  this  action  vigorously  and to
            assert counterclaims against these former executives.

      In September  2000,  the Company and  BMS  Corporation  each  disputed the
            performance  by the other  party of its  obligations  under  certain
            settlement  agreements  which were  entered  into in June 2000.  BMS
            commenced  an  arbitration  proceeding  which was settled in January
            2001 with the execution of amended agreements. The amended agreement
            included,  among other things,  an extended payment  schedule,  with
            each such  payment  being  secured by the  Company's  confession  of
            judgment held in escrow by BMS.

      In July  1996,  an action  was commenced against Porta and certain present
            and former  directors in the Supreme Court of the State of New York,
            New York County by certain stockholders and warrant holders of Porta
            who acquired their  securities in connection with the acquisition by
            Porta of Aster Corporation. The complaint alleges breach of contract
            against  Porta and breach of fiduciary  duty  against the  directors
            arising  out of an alleged  failure to register  certain  restricted
            shares and warrants  owned by the  plaintiffs.  The complaint  seeks
            damages of $413,000; however, counsel for the plaintiff have advised
            Porta that additional  plaintiffs may be added and, as a result, the
            amount of damages  claimed  may be  substantially  greater  than the
            amount  presently  claimed.  Porta believes that the defendants have
            valid  defenses to the claims.  Discovery  is  proceeding,  although
            there has been no significant  activity in this matter subsequent to
            December 31, 1999.

(21) Cash Flow Information

      (1) Supplemental cash flow information for the years ended December 31, is
      as follows:

                                                 2000         1999         1998
                                                ------       ------       ------
            Cash paid for interest              $3,763        3,117        2,629
                                                ======       ======       ======

            Cash paid for income taxes          $  183          379          223
                                                ======       ======       ======

                                                                     (Continued)


                                      F-25
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      (2) Non-cash transactions:

            (i)  During  1998,  the  Company  exchanged  approximately  $250,000
            principal amount of its Debentures,  net of unamortized discount and
            accrued interest,  for 5,000 shares of common stock, and $192,000 of
            Notes, (note 7).

            (ii) During 1998,  the Company  issued 53,000 shares of common stock
            upon the conversion of Notes valued at approximately  $280,000 (note
            7).

            (iii) During 1998, the Company issued 330,000 shares of common stock
            upon the conversion of $1,260,000 of Debentures (note 7)

            (iv) During 1998,  the Company issued 147,000 shares of common stock
            valued at  approximately  $500,000 to satisfy a portion of the final
            settlement of a class action lawsuit (note 10).

            (v) In  connection  with  advisory  services  provided in 1997 by an
            investment banking firm, the Company issued 120,000 shares of common
            stock in 1998 valued at approximately $340,000 (notes 7 and 10).

            (vi) In 1998, in connection with the subordinated notes, the Company
            issued Series B and Series C Warrants, which were valued at $630,000
            and were recorded as part of additional paid in capital and original
            issue discount (note 8).

            (vii) In 1999, in connection with advisory  services  provided by an
            investment banking firm, the Company issued 150,000 shares of common
            stock valued at approximately $113,000 (notes 7 and 10).

            (viii) In 1999,  Porta  incurred a  non-cash  charge of $56,000 as a
            result of the  reduction in the  exercise  price of the Series B and
            Series C Warrants (note 8).

            (ix) In 2000,  Porta  incurred a non-cash  charge of  $140,000  as a
            result of the issuance New Warrants (note 8).

            (x) In 2000,  Porta  incurred a  non-cash  charge of  $169,000  as a
            result of the reduction in the exercise price of the Warrants issued
            to its senior lender (note 6).

            (xi) In 2000,  Porta  incurred a non-cash  charge of  $129,000  as a
            result of Warrants issued to its senior lender in connection with an
            increase in its revolving  line of credit to its senior lender (note
            6).

            (xii) In 2000,  Porta  incurred  a  non-cash  charge of $59,000 as a
            result of the reduction in the exercise price of the Warrants issued
            to its senior  lender in  connection  with a waiver of default (note
            6).

                                                                     (Continued)


                                      F-26
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

(22) Segment and Geographic Data

      Porta has  three  reportable  segments:  Line  Connection  and  Protection
            Equipment  ("Line") whose  products  interconnect  copper  telephone
            lines to switching equipment and provides fuse elements that protect
            telephone equipment and personnel from electrical surges;  Operating
            Support  Systems  ("OSS")  whose  products   automate  the  testing,
            provisioning,   maintenance  and   administration  of  communication
            networks and the management of support personnel and equipment;  and
            Signal  Processing  ("Signal")  whose  products  are  used  in  data
            communication   devices  that  employ  high  frequency   transformer
            technology.

      The factors  used  to determine the above  segments  focused  primarily on
            the  types  of  products  and  services  provided,  and the  type of
            customer served.  Each of these segments is managed  separately from
            the others,  and management  evaluates segment  performance based on
            operating income.

                                       2000            1999            1998
                                       ----            ----            ----
Revenue:
      Line                         $ 20,546,000      18,189,000      24,291,000
      OSS                            22,296,000      14,254,000      27,318,000
      Signal                          7,644,000       6,328,000       7,539,000
                                   ------------    ------------    ------------

                                   $ 50,486,000      38,771,000      59,148,000
                                   ============    ============    ============

Segment profit:
      Line                         $  3,665,000       3,582,000       6,580,000
      OSS                            (6,201,000)    (10,650,000)       (365,000)
      Signal                          2,088,000       1,884,000       1,953,000
                                   ------------    ------------    ------------
                                   $   (448,000)     (5,184,000)      8,168,000
                                   ============    ============    ============

Depreciation and amortization:
      Line                         $    424,000         505,000         722,000
      OSS                             1,262,000         881,000       1,170,000
      Signal                            162,000         199,000         200,000
                                   ------------    ------------    ------------
                                   $  1,848,000       1,585,000       2,092,000
                                   ============    ============    ============

Total identifiable assets:
      Line                         $  8,508,000       7,921,000      10,330,000
      OSS                            14,942,000      21,637,000      28,283,000
      Signal                          6,591,000       7,965,000       8,176,000
                                   ------------    ------------    ------------
                                   $ 30,041,000      37,523,000      46,789,000
                                   ============    ============    ============

Capital expenditures:
      Line                         $    340,000         415,000         280,000
      OSS                             1,132,000         670,000         283,000
      Signal                             45,000          27,000          93,000
                                   ------------    ------------    ------------
                                   $  1,517,000       1,112,000         656,000
                                   ============    ============    ============

                                                                     (Continued)


                                      F-27
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      The following table reconciles segment totals to consolidated totals:

<TABLE>
<CAPTION>
                                                                               2000                 1999                   1998
                                                                               ----                 ----                   ----
<S>                                                                        <C>                     <C>                   <C>
Revenue:
      Total revenue for reportable segments                                $ 50,486,000            38,771,000            59,148,000
      Other revenue                                                             654,000               165,000               195,000
                                                                           ------------          ------------          ------------
   Consolidated total revenue                                              $ 51,140,000            38,936,000            59,343,000
                                                                           ============          ============          ============

Operating income (loss):
      Total segment profit (loss) for reportable segments                  $   (448,000)           (5,184,000)            8,168,000
      Corporate and unallocated                                              (4,705,000)           (4,525,000)           (3,602,000)
                                                                           ------------          ------------          ------------
   Consolidated total operating income (loss)                              $ (5,153,000)           (9,709,000)            4,566,000
                                                                           ============          ============          ============

Depreciation and amortization:
      Total for reportable segments                                        $  1,848,000             1,585,000             2,092,000
      Corporate and unallocated                                                  63,000                92,000               103,000
                                                                           ------------          ------------          ------------
   Consolidated total deprecation and amortization                         $  1,911,000             1,677,000             2,195,000
                                                                           ============          ============          ============

Total assets:
      Total for reportable segments                                        $ 30,041,000            37,523,000            46,789,000
      Corporate and unallocated                                               4,133,000             5,925,000             5,347,000
                                                                           ------------          ------------          ------------
   Consolidated total assets                                               $ 34,174,000            43,448,000            52,136,000
                                                                           ============          ============          ============

Capital expenditures:
      Total for reportable segments                                        $  1,517,000             1,112,000               656,000
      Corporate and unallocated                                                  16,000                79,000                 9,000
                                                                           ------------          ------------          ------------
   Consolidated total capital expenditures                                 $  1,533,000             1,191,000               665,000
                                                                           ============          ============          ============
</TABLE>

      The following table presents  information  about the Company by geographic
      area:

                                            2000           1999          1998
                                            ----           ----          ----
Revenue:
      United States                      $17,225,000    14,368,000    18,951,000
      United Kingdom                      20,244,000    15,673,000    20,441,000
      Asia/Pacific                         5,429,000     4,159,000     7,181,000
      Other Europe                         2,482,000     3,130,000     3,337,000
      Latin America                          146,000     1,257,000     7,463,000
      Other North America                  5,570,000       296,000     1,879,000
      Other                                   44,000        53,000        51,000
                                         -----------   -----------   -----------

Consolidated total revenue               $51,140,000    38,936,000    59,343,000
                                         ===========   ===========   ===========

Consolidated long-lived assets:
      United States                      $12,115,000    12,011,000    13,317,000
      United Kingdom                       1,107,000     2,398,000     2,520,000
      Other North America                    568,000       618,000       663,000
      Asia/Pacific                           612,000       200,000       273,000
      Latin America                           14,000        35,000        26,000
      Other                                    3,000         8,000        11,000
                                         -----------   -----------   -----------
                                          14,419,000    15,270,000    16,810,000
   Current and other assets               19,755,000    28,178,000    36,326,000
                                         -----------   -----------   -----------
Consolidated total assets                $34,174,000    43,448,000    53,136,000
                                         ===========   ===========   ===========

                                                                     (Continued)


                                      F-28
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

(23) Quarterly Information (Unaudited)

      The following presents certain unaudited quarterly financial data:

<TABLE>
<CAPTION>
                                                                                  Quarter Ended
                                                 ----------------------------------------------------------------------------------
                                                 March 31, 2000        June 30, 2000       September 30, 2000     December 31, 2000
                                                 --------------        -------------       ------------------     -----------------
<S>                                               <C>                   <C>                   <C>                   <C>
Net sales                                         $ 15,928,000          $ 13,828,000          $ 11,195,000          $ 10,189,000
Gross profit                                         5,716,000             3,570,000             2,852,000             3,112,000
Net income (loss)                                      306,000            (2,887,000)           (3,156,000)           (4,439,000)
Net income (loss) per share:
  Basic                                           $       0.03          $      (0.30)         $      (0.32)         $      (0.45)
  Diluted                                         $       0.03          $      (0.30)         $      (0.32)         $      (0.45)
</TABLE>

<TABLE>
<CAPTION>
                                                                                  Quarter Ended
                                                 ----------------------------------------------------------------------------------
                                                 March 31, 1999        June 30, 1999       September 30, 1999     December 31, 1999
                                                 --------------        -------------       ------------------     -----------------
<S>                                               <C>                   <C>                   <C>                   <C>
Net sales                                         $  9,526,000          $  9,109,000          $  8,397,000          $ 11,904,000
Gross profit                                         2,811,000             2,639,000             1,878,000             2,656,000
Net loss                                            (1,744,000)           (2,940,000)           (3,999,000)           (5,003,000)
Net loss per share:
  Basic                                           $      (0.18)         $      (0.31)         $      (0.42)         $      (0.53)
  Diluted                                         $      (0.18)         $      (0.31)         $      (0.42)         $      (0.53)
</TABLE>

      Net loss  for the quarter  ended  December  31, 2000  reflects an  accrual
            associated  with  the  reduction  of  overhead  and  headcount,  and
            consolidation of OSS operations of approximately $900,000.



                                      F-29