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                       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, 2001
                                             -----------------

          [ ] 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: $997,696 as of March 31, 2002.

      Indicate  the  number of shares  outstanding  of each of the  registrant's
class of common stock, as of the latest  practicable  date:  9,976,964 shares of
Common Stock, par value $.01 per share, as of March 31, 2002.

                       DOCUMENTS INCORPORATED BY REFERENCE

None

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<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 operations 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 and to "we," "us", "our," and words of
like  import  refer to Porta  Systems  Corp.  and its  subsidiaries,  unless the
context indicates otherwise.

Forward-Looking Statements

      Statements  in  this  Form  10-K  annual  report  may be  "forward-looking
statements" within the meaning of the Private  Securities  Litigation Reform Act
of 1995.  Forward-looking statements include, but are not limited to, statements
that express our intentions, beliefs, expectations,  strategies,  predictions or
any other statements relating to our future activities or other future events or
conditions.  These statements are based on current  expectations,  estimates and
projections   about  our  business  based,  in  part,  on  assumptions  made  by
management.  These  statements  are not  guarantees  of future  performance  and
involve  risks,  uncertainties  and  assumptions  that are difficult to predict.
Therefore, actual outcomes and results may, and probably will, differ materially
from what is expressed or forecasted in the  forward-looking  statements  due to
numerous factors, including those risks discussed from time to time in this Form
10-K annual report,  including the risks  described  under "Risk Factors" and in
other  documents which we file with the Securities and Exchange  Commission.  In
addition,  such statements could be affected by risks and uncertainties  related
to  our  financial  conditions,  factors  which  affect  the  telecommunications
industry,  market and customer acceptance,  competition,  government regulations
and requirements and pricing,  as well as general industry and market conditions
and  growth  rates,  and  general  economic   conditions.   Any  forward-looking
statements  speak  only as of the date on which  they  are  made,  and we do not
undertake  any  obligation  to update any  forward-looking  statement to reflect
events or circumstances after the date of this Form 10-K.


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<PAGE>

Risk Factors

      We  are  incurring  losses  from  our  operations,   and  our  losses  are
continuing. We incurred a net loss of $14,774,000, or $1.50 per share (basic and
diluted), on sales of $28,062,000 for 2001, following a loss of $10,176,000,  or
$1.04 per share (basic and diluted) for 2000,  our losses are  continuing and we
expect that our losses will  continue  unless we are able both to  significantly
increase our revenue and reduce our expenses.  We cannot give  assurance that we
will be able to  operate  profitably  in the  future,  and if we are  unable  to
operate profitably, we may be unable to continue in business.

      Because of our decreasing  revenues together with problems facing both the
telecommunications  industry and the economy,  we may not be able to continue in
business.  As a result of the  deterioration of our operating  revenue resulting
from both market  conditions  and our  financial  condition,  we are  evaluating
various options, including the sale of one or more of our divisions as well as a
reorganization under the Bankruptcy Code.

      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 2001,  2000 and  1999,  our
stockholders'  deficit of $ 25,849,000  at December  31,  2001,  and our working
capital deficit of $31,236,000 as of December 31, 2001 our auditors  included in
their report an explanatory  paragraph  about our ability to continue as a going
concern.

      We require substantial  financing to meet our working capital requirements
and our principal  lender is providing us with financing at its  discretion.  We
had a working  capital  deficit  at  December  31,  2001 of  $31,236,000.  As of
December 31, 2001, our current liabilities include $22,095,000 due to our senior
lender,  all of which is due and payable on December 31, 2002, at which time our
agreement with the senior lender will terminate. In addition, subordinated notes
in the principal  amount of $6,144,000 plus accrued interest were outstanding as
of December  31,  2001.  These  subordinated  notes  became due on July 3, 2001.
Subsequent to December 31, 2001, the trustee of our  subordinated  debentures in
the principal amount of $500,000,  which will mature on July 1, 2002,  served us
with a notice of default  for  failure to pay  interest.  Our senior  lender has
prohibited  us from making any  payments  on any of the  subordinated  debt.  At
December 31, 2001, we did not have sufficient resources to pay the senior lender
when our  obligations  to the senior  lender mature on December 31, 2002, or the
subordinated notes, and we do not expect to generate the necessary cash from our
operations to enable us to make those  payments.  Since  December 31, 2001,  our
senior lender has agreed to advance us up to $1,500,000;  however, such advances
are at the  discretion  of the senior  lender and are  dependent on, among other
things,  the  perception  of the senior  lender that we are either  stemming our
losses or effecting a sale of one or more of our divisions.  Furthermore, if the
Company  sells a  division,  the  agreement  with the  Company's  senior  lender
requires it to pay the net  proceeds to the senior  lender.  As a result of this
provision and the Company's  obligations  to the holders of  subordinated  debt,
unless  the  lenders  consent  to the  Company  retaining  a portion  of the net
proceeds  from any sale for its  operations,  the  Company  will not receive any
significant  amount,  and may not receive any of the net proceeds  from any such
sale for working  capital.  If the senior lender ceases funding our  operations,
unless we have obtained alternative financing,  we will be unable to continue in
business.  Furthermore,  unless we obtain funding from another source, including
the sale of one of more of our divisions,  we will not be able to pay our senior
lender on December 31, 2002, and we may not be able to continue in business. See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations."

      Because of our failure to pay our  subordinated  debt,  the holders of the
subordinated  debt may seek to obtain and enforce  judgments  against us,  which
could cause a default under our agreement with our senior lender.  One holder of
subordinated notes has already commenced an action against us seeking payment of
his note,  and,  because of our failure to pay the notes when due, other holders
may bring similar  actions.  If such holders prevail in such actions and seek to
enforce a judgment against us, we may be in default under our agreement with our
senior  lender,  and we may seek, or our senior lender may seek or require us to
seek, protection under the Bankruptcy Code.


                                    2 of 31
<PAGE>

      Because  of our  financial  condition,  we have not  been  able to pay our
creditors on a timely basis,  and some of our creditors have obtained  judgments
against us. As a result of our continuing  financial  difficulties,  a number of
creditors  have engaged  attorneys  or  collection  agencies or commenced  legal
actions  against  us,  and some of them  have  obtained  judgments  against  us,
including a former landlord which has obtained a $400,000  judgment  against us.
The  creditors   include  five  former  senior   executives  who  have  deferred
compensation  agreements with us. The total payments due under these  agreements
are  approximately  $1.9 million,  of which $46,000 was due at December 31, 2001
and an  additional  $100,000 has become due in 2002.  Other  claimants  who have
already  either  commenced  litigation or otherwise  sought  collection  are due
approximately  $600,000.  If we are  unable  to reach a  settlement  with  these
creditors and others who have not yet brought claims, and these claimants obtain
judgments  against  us or seek to  enforce  a  judgment  against  us,  it may be
necessary for us, or our senior lender may require us, to seek protection  under
the Bankruptcy Code.

      Our largest  customer has ceased  placing  orders for OSS products with us
and has  significantly  decreased  orders for our  copper  connection/protection
products,  which are having a material  adverse  effect upon our  business.  Our
largest customers are British  Telecommunications and Fujitsu Telecommunications
LTD, which  purchases  telecommunications  equipment from us for sale to British
Telecommunications.  Sales to British Telecommunications  declined significantly
during the past year. British  Telecommunications has informally advised us that
it will not place orders with us for OSS products until we can demonstrate  that
we are  financially  viable.  The  decline  in  sales  of  connection/protection
products for British  Telecommunications  reflects both our financial  condition
and industry  conditions  generally.  We have not been able to replace the sales
made to British  Telecommunications and we cannot not give any assurance that we
will be able to. The  reluctance of British  Telecommunications  to place orders
for  OSS  products  may  affect  the  willingness  of  other  telecommunications
companies  to order new OSS  products  from us. The  reduced  level of our sales
resulting from the decline in sales to British  Telecommunications is continuing
to impair our  business,  and,  if we are not able to replace  these  sales,  or
generate new business from British  Telecommunications or Fujitsu, we may not be
able to continue in business.

      Since we sell to telecommunications  companies,  our sales are affected by
economic and other  factors that affect that  industry,  both  domestically  and
internationally.  During the past two years, the telecommunications industry has
been   affected  by  an   international   slowdown,   and  many,  if  not  most,
telecommunications  companies  have scaled back plans for  expansion,  which has
resulted  in a  significant  drop in the  requirements  for  products  including
products  such as our OSS products and our  connection/protection  products.  We
cannot  assure  you that  there will be any  positive  change in the  purchasing
patterns  of  telecommunications  companies  or that we will  benefit  from  any
positive change which may occur.

      Because of our financial  condition,  we may not be able to perform on our
contracts which may subject us to loss of business and penalties.  We are having
and we may continue to have  difficulty  performing  our  obligations  under our
contracts,  which could result in the  cancellation  of  contracts,  the loss of
future business and penalties for non-performance.


                                    3 of 31
<PAGE>

      We are heavily dependent on foreign sales.  Approximately 54% of our sales
in 2001,  66% of our sales in 2000 and 62% of our  sales for 1999,  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. Furthermore, our financial condition
has impaired our ability to generate new business in the international market as
potential customers express concern about our ability to perform.

      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  has  resulted  and may
continue  to  result  in  a   significant   decline  in  our  sales  to  British
Telecommunications.

      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. Our
competitors  are using our  financial  difficulties  in  successfully  competing
against us. We anticipate that our loss for 2001, 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.  Because of our  financial  problems,  we are not able to devote any
significant  effort to  research  and  development,  which  could  increase  our
difficulties in making sales of our products.

      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.  Because of our financial  problems we have  experienced key personnel
losses.


                                    4 of 31
<PAGE>

To the extent that these losses continue or are accelerated, we may be unable to
provide our customers with necessary service,  which could result in the failure
to generate new business.

We do not meet the continued  listing  standards of the American Stock Exchange,
and we may be delisted from that exchange.  If we are delisted from the American
Stock  Exchange,  our stock will be traded on the OTC Bulletin Board and will be
subject to the Securities  and Exchange  Commission's  penny stock rules,  which
impose additional sales practice  requirements on broker-dealers  which sell our
stock to persons other than established  customers and institutional  accredited
investors.  These  rules may affect the  ability of  broker-dealers  to sell our
common stock and may affect the ability of our  stockholders  to sell any common
stock they may own.

      We do not pay dividends on common stock.

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.

      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.


                                    5 of 31
<PAGE>

      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.

      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.


                                    6 of 31
<PAGE>

      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,

                      2001                2000                 1999
                      ----                ----                 ----
                                 (Dollars in thousands)

OSS Systems         $ 8,874        32%   $22,296        44%   $14,254        37%

Line Connecting
/Protecting
Equipment            12,756        46%    20,546        40%    18,189        47%

Signal Processing     5,737        20%     7,644        15%     6,328        16%

Other                   695         2%       654         1%       165         0%
                    -------   -------    -------   -------    -------   -------

Total               $28,062       100%   $51,140       100%   $38,936       100%
                    =======   =======    =======   =======    =======   =======

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 2001,  approximately 32% 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.


                                    7 of 31
<PAGE>

      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 2001, approximately 46% 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 2001, signal processing  equipment  accounted for approximately 20%
of our sales.

Marketing and Sales

      We operate  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 had a non-exclusive  supply  agreement with British  Telecommunications
covering  our  connecting/protecting  products.  This  agreement,  which did not
provide for any purchase commitments by British  Telecommunications,  expired on
August 31, 2001. British Telecommunications purchased line connecting/protecting
products  amounting  to  $3,339,000  (12% of sales) in 2001,  $4,261,000  (8% of
sales) in 2000, and $6,566,000  (17% of sales) in 1999.  During these years,  we
also  sold  our  products  to  unaffiliated  suppliers  for  resale  to  British
Telecommunications.   We  have  a   cross-licensing   agreement   with   British
Telecommunications  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.   Although  we  have  been
negotiating with British  Telecommunications with respect to a new non-exclusive
supply  agreement and British  Telecommunications  has made modest  purchases of
copper connection/protection  products from us, as of the date of this report we
have not reached an agreement with British Telecommunications, and we may not be
able to enter  into such an  agreement.  If we do not sell  products  to British
Telecommunications, whether  pursuant to a  supply  agreement or otherwise,  our
business could be impaired.


                                    8 of 31
<PAGE>

      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.
During 2001 and 2000, we had sales pursuant to this agreement of $3,200,000 (11%
of sales) and $12,051,000 (24% of sales), respectively.

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

      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,

                      2001                 2000                1999
                      ----                 ----                ----
                                  (Dollars in thousands)

North America       $13,356        48%   $22,795        45%   $14,664        38%

United Kingdom        8,060        29%    20,244        40%    15,673        40%

Asia/Pacific          4,552        16%     5,429        10%     4,159        11%

Other Europe          1,761         6%     2,482         5%     3,130         8%

Latin America           288         1%       146         0%     1,257         3%

Other                    45         0%        44         0%        53         0%
                    -------   -------    -------   -------    -------   -------

Total Sales         $28,062       100%   $51,140       100%   $38,936       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 23 of Notes  to the  Consolidated  Financial
      Statements.

      In selling to customers in foreign  countries,  we face 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 we establish facilities in foreign countries or
to the extent that payment is denominated in the local  currency,  we face risks
associated with currency  devaluation,  inability to convert local currency into
dollars, as well as local tax regulations and political instability.


                                    9 of 31
<PAGE>

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,  file servers 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 Syosset,  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.

Source and Availability of Components

      We generally  purchase the standard  components used in the manufacture of
our products from a number of suppliers. We attempt to assure ourselves 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  2001,   our  five  largest   customers   accounted  for  sales  of
$13,444,000,  or approximately  48% of sales, and, during 2000, our five largest
customers accounted for sales of $28,323,000, or approximately 55% of sales. Our
largest customer in 2001 with sales of $3,485,000, or approximately 12% of sales
was Philippine Long Distance Telephone.  Our largest customer in 2000 with sales
of $12,051,000,  or approximately  24% of sales was Fujitsu  Telecommunications.
Our sales to Fujitsu Telecommunications were $3,200,000, or approximately 11% of
sales in 2001. 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.  Direct sales to
British  Telecommunications  were  $3,339,000,  or 12% of  sales,  for  2001 and
$5,098,000,  or 10% of sales, for 2000. 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, 2001, our backlog was  approximately  $6,100,000  compared
with  approximately  $10,000,000  at December 31, 2000. Of the December 31, 2001
backlog,  approximately  $5,000,000  represented  orders from foreign  telephone
operating  companies.  We expect to ship  substantially  all of our December 31,
2001 backlog during 2002.


                                    10 of 31
<PAGE>

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.

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


                                    11 of 31
<PAGE>

lender, and the decision of British  Telecommunications  not to place orders for
new  OSS  products  from  us and  its  reduced  level  of  purchases  of  copper
connection/protection  products may place us at a  competitive  disadvantage  in
seeking new business and new orders for existing customers.

Research and Development Activities

      We spent  approximately  $4,400,000  in  2001,  $5,800,000  in  2000,  and
$6,100,000  in 1999 on research  and  development  activities.  All research and
development  was company  sponsored and is expensed as incurred.  As a result of
our  financial  difficulties,  we have scaled down our research and  development
effort, which could hurt our ability to offer competitive products.

Employees

      As of March 31, 2002,  we had 274  employees of which 58 were  employed in
the United States,  182 in Mexico,  27 in the United Kingdom,  3 in Poland, 3 in
Chile,  and 1 in China.  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.

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 located in Charlotte, North Carolina, which has been
vacated.  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 annual rental  related to the New York property is  approximately  $350,000.
All rental expense  related to the North Carolina  facility was accrued in 2000.
During 2001,  the Company sold its Glen Cove,  New York facility for  $1,850,000
and recognized a gain on the sale of $684,000, net of expenses of $180,000.

      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.

      We believe our properties are adequate for our needs.


                                    12 of 31
<PAGE>

Item 3. Legal Proceedings

      In July 2001, the holder of a subordinated note in the principal amount of
$500,000  commenced an action against the Company in the United States  District
Court for the Southern District of New York seeking payment of the principal and
accrued  interest on their  subordinated  notes which were payable in July 2001.
The payment of the note is subordinated to payment of the Company's  senior debt
and the Company believes that the subordination  provision of the note prohibits
payment  by the  Company.  The  plaintiffs'  motion for a summary  judgment  was
recently  denied by the court on the grounds  that the terms of the note did not
give them permission to obtain a judgment while Porta remained in default to the
senior debt holder.  The Company's  obligations under the subordinated notes are
reflected as current liabilities on the Company's balance sheet.

      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. We have filed an answer and
counterclaim  against the plaintiffs.  We believe that we have valid defenses to
the  claims  and  intend  to  defend  this  action   vigorously  and  to  assert
counterclaims against these former executives.

      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.


                                    13 of 31
<PAGE>

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

      During the fourth  quarter of 2001, no matters were submitted to a vote of
security holders of the Company.

                                     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 2000 and 2001,  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
                                                   ----          ---

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

2001     First Quarter                            $1.06         $0.22
         Second Quarter                            0.40          0.21
         Third Quarter                             0.30          0.10
         Fourth Quarter                            0.17          0.05

      We did not declare or pay any cash  dividends  in 2001 or 2000.  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 12, 2002, we had  approximately 983 stockholders of record and
the closing price of our common stock was $0.10.

      We did not issue any unregistered securities during 2001.

      We do not meet the  continued  listing  standards  of the  American  Stock
Exchange, and we may be delisted from that exchange. If we are delisted from the
American Stock Exchange,  our stock will be traded on the OTC Bulletin Board and
will be subject to the Securities and Exchange Commission's penny stock rules.


                                    14 of 31
<PAGE>

Item 6. Selected Financial Data

      The following  table sets forth certain  selected  consolidated  financial
information.  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:

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

                                                        2001          2000          1999          1998          1997
                                                        ----          ----          ----          ----          ----
                                                                  (In thousands, except per share data)
<S>                                                   <C>           <C>           <C>           <C>           <C>
Income Statement Data:

Sales                                                 $ 28,062      $ 51,140      $ 38,936      $ 59,343      $ 62,230
Operating income (loss)                                (11,453)       (5,153)       (9,709)        4,566         6,101

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

Income (loss) before discontinued
   operations and extraordinary item                   (14,774)      (10,176)      (13,686)          451        (7,021)

Net income (loss)                                      (14,774)      (10,176)      (13,686)          527        (6,899)

Basic per share amounts:
      Continuing operations                           $  (1.50)     $  (1.04)     $  (1.44)     $   0.05      $  (2.26)
      Net income (loss)                               $  (1.50)     $  (1.04)     $  (1.44)     $   0.06      $  (2.22)

Diluted per share amounts:
      Continuing operations                           $  (1.50)     $  (1.04)     $  (1.44)     $   0.04      $  (2.26)
      Net income (loss)                               $  (1.50)     $  (1.04)     $  (1.44)     $   0.05      $  (2.22)

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

Number of shares used in
   calculating net income (loss)
   per share-basic                                       9,878         9,763         9,489         9,281         3,111

Number of shares used in
   calculating net income (loss)
   per share-diluted                                     9,878         9,763         9,489         9,785         3,111

Balance Sheet Data:

Total assets                                          $ 17,833      $ 34,174      $ 43,448      $ 52,136      $ 51,000

Working capital (deficiency)                          $(31,236)     $(24,152)     $  6,135      $ 14,262      $  7,286

Long-term debt excluding current
   maturities                                         $    -0-      $    376      $ 21,902      $ 17,238      $ 18,858

Stockholders' equity (deficit)                        $(25,849)     $(10,792)     $ (1,387)     $ 11,984      $  6,813
</TABLE>


                                    15 of 31
<PAGE>

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

Critical Accounting Policies and Estimates

      Financial  Reporting  Release No. 60, which was  recently  released by the
Securities  and  Exchange  Commission,  requires  all  companies  to  include  a
discussion of critical  accounting  policies and methods used in the preparation
of financial statements.  Note 1 of Notes to Consolidated  Financial Statements,
included elsewhere on this annual report on Form 10-K, includes a summary of the
significant  accounting  policies  and methods  used in the  preparation  of our
consolidated financial statements.  We believe the following critical accounting
policies affect the significant judgements and estimates used in the preparation
of our financial statements:

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,  goodwill  valuation and the deferred tax asset valuation  allowance.
Actual results could differ from those and other estimates.

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.

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 the  estimated
useful  life  as  determined  by  events  and   circumstances  of  the  business
combination  that gave rise to the  goodwill.  We assess the  recoverability  of
unamortized goodwill using the undiscounted projected future cash flows from the
related businesses.


                                    16 of 31
<PAGE>

      Our  consolidated  statements  of  operations  for the three  years  ended
December 31, 2001, 2000 and 1999,  respectively,  as a percentage of sales is as
follows:

                                                      Years Ended December 31,

                                                     2001      2000        1999
                                                     ----      ----        ----

Sales                                                100%       100%       100%
Cost of sales                                         71%        70%        74%
                                                    ----       ----       ----
  Gross Profit                                        29%        30%        26%
Selling, general and
administrative expenses                               33%        28%        35%
Research and development expenses                     16%        12%        16%
Goodwill impairment                                   21%        --         --
                                                    ----       ----       ----
Operating loss                                       (41%)      (10%)      (25%)
Interest expense                                     (16%)       (9%)       (9%)
Gain on sale of assets                                 2%        --         --
Other                                                  1%        (1%)        1%
                                                                          ----
Loss before income
   taxes, equity in net loss of joint
   venture and minority interest                     (54%)      (20%)      (33%)
Income tax benefit (expense),
   equity in net loss of joint venture
   and minority interest                               1%        --         (2%)
                                                    ----       ----       ----

Net loss                                             (53%)      (20%)      (35%)
                                                    ====       ====       ====


                                    17 of 31
<PAGE>

Results of Operations

Years Ended December 31, 2001 and 2000

      Our sales for 2001 were  $28,062,000  compared to  $51,140,000  in 2000, a
decrease of  $23,078,000  (45%).  The decrease in revenue is  attributed  to the
decline in sales from all divisions.

      OSS sales for 2001 were $8,874,000, compared to 2000 sales of $22,296,000,
a  decrease  of  $13,422,000  (60%).  The  decline in sales from 2000 to 2001 is
attributed  to the  completion  during 2000 of certain sales  contracts  secured
during  1999 and  failure to secure new  contracts  as a result of the  negative
impact of reduced  opportunities  in Europe,  delays we encountered in obtaining
software from a vendor necessary to complete certain contracts and our financial
difficulties.  We expect to  recognize  the balance of the  revenue  from the in
process  OSS  contracts  during  2002.  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   decreased
approximately  $7,790,000 (38%) from $20,546,000 in 2000 to $12,756,000 in 2001.
The  reduced  sales  level  reflected  a  decrease  in volume of sales to United
States,  United  Kingdom  and Mexican  customers.  The  results  were  adversely
affected by the general slowdown in the telecommunications industry.

      Signal  processing   revenue  for  2001  compared  to  2000  decreased  by
$1,907,000 (25%) from $7,644,000 to $5,737,000.  The decrease in sales primarily
reflects  delays in the receipt of certain  anticipated  contracts and a general
slowdown in the order rate from customers during 2001.

      Gross margin  decreased  from 30% in 2000 to 29% in 2001.  The decrease in
gross  margin  is  primarily  attributed  to the lower  sales  volume in the OSS
division causing  inefficiency  resulting from our inability to absorb our fixed
expenses associated with the OSS contracts over our revenue base.

      Selling, general and administrative expenses decreased by $5,257,000 (36%)
from  $14,573,000  in 2000 to $9,316,000 in 2001. The decrease from 2000 to 2001
primarily  reflects reduced  professional  legal expenses and decreased expenses
reflecting  our  reorganization  of our sales and  marketing  efforts of the OSS
division.

      Research  and  development  expenses  decreased by  $1,403,000  (24%) from
$5,830,000 in 2000 to $4,427,000 in 2001. The decreased expense in 2001 resulted
from our efforts to reduce our expenses primarily related to the OSS business.

      In December  2001, we determined  that  $5,802,000 of goodwill  associated
with our OSS business unit was impaired,  and we recorded an impairment  loss in
that amount.  This  assessment  was based on the continued  decline in sales and
losses  generated  by the  business  unit  over the past  several  years and the
declining  prospects  for  additional  sales of the products  based on the older
technology  that originally  gave rise to the goodwill.  In addition,  there are
presently no negotiations in progress for the sale of the OSS division.

      As a result of the above,  we had an operating loss of $11,453,000 in 2001
versus operating loss of $5,153,000 in 2000.

      Interest expense for 2001 decreased by $20,000 from $4,500,000 for 2000 to
$4,480,000 in 2001.


                                    18 of 31
<PAGE>

Results of Operations (continued)

      During 2001, we sold our Glen Cove,  New York facility for  $1,850,000 and
recognized a gain on the sale of $684,000,  net of expenses of $180,000.  Of the
net proceeds of $1,670,000,  $474,000 was used to reduce  outstanding  principal
and $350,000 to reduce outstanding interest obligations to our senior lender. We
retained the remaining proceeds of $846,000 for working capital purposes.

      As of December 31, 2001, we had a net income tax benefit of $203,000 which
is  comprised  of income tax  expense of $58,000 and  benefit of  $261,000.  The
benefit  reflects the reduction of an accrual for potential tax liability to one
of our subsidiaries  that had previously  operated in Puerto Rico as a result of
the expiration of the statute of limitations.

      As the result of the foregoing,  the 2001 net loss was $14,774,000,  $1.50
per share (basic and diluted),  compared with a net loss of  $10,176,000,  $1.04
per share (basic and diluted) for 2000.

      Our losses are continuing into 2002, and we cannot give any assurance that
we  will be able  to  operate  profitably  in the  future.  As a  result  of the
deterioration of our operating revenue resulting from both market conditions and
our financial condition,  we are evaluating various options,  including the sale
of one or more of our divisions as well as a reorganization under the Bankruptcy
Code.

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.


                                    19 of 31
<PAGE>

Results of Operations (continued)

      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 7 and 9 of Notes to Consolidated
Financial Statements).

      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.

Liquidity and Capital Resources

      At December  31,  2001,  we had cash and cash  equivalents  of  $1,204,000
compared with  $2,366,000 at December 31, 2000. Our working  capital deficit was
$31,236,000  at December  31,  2001  compared  to a working  capital  deficit of
$24,152,000  at December  31, 2000.  The working  capital  deficit  reflects the
current  liabilities to the senior and  subordinated  lenders  together with the
effect of the  reduced  level of  business,  which  resulted  in  reduced  cash,
receivables  and inventory.  During 2001, we used  $3,779,000 of cash to support
our  operations.  Our principal  source of funds during 2001 was borrowings from
our senior lender.

      As of December  31, 2001,  our debt  includes  $22,095,000  of senior debt
which  matured on January 7, 2002,  and  $6,144,000 of  subordinated  debt which
became due on July 3, 2001.  We were unable to pay the  interest  payment on the
subordinated  notes of approximately  $1,358,000 which represents  interest from
July  2000  through  December  2001.  At  December  31,  2001,  we did not  have
sufficient resources to pay either the senior lender or the subordinated lenders
and it is unlikely that we can generate such cash from our  operations,  and our
senior lender has precluded us from making payments on the subordinated debt.


                                    20 of 31
<PAGE>

Liquidity and Capital Resources (continued)

      On March 1,  2002,  our  senior  lender  and we agreed to an  amended  and
restated  loan and security  agreement  whereby a new term loan was  established
with a maximum  principal amount of $1,500,000.  The agreement allows us to draw
monies  subject  to  our  senior  lender's  receipt  and  approval  of a  weekly
disbursement budget.  Obligations under the new term loan shall bear interest at
12%. Secondly, the agreement establishes all indebtedness prior to March 1, 2002
as an old term loan in the amount of $22,610,000, which includes the balance due
at December 31, 2001 plus accrued  interest  though March 1, 2002.  The old term
loan shall  bear no  interest  until such time as the senior  lender in its sole
discretion notifies us that interest shall be payable. Both the new and old term
loans expire on December 31, 2002. As part of this agreement,  the senior lender
continues  to  preclude  us from  making any  payments  on  indebtedness  to any
subordinated  creditors except to pay accounts payable in the ordinary course of
business.  The $1,500,000  being advanced by our senior lender is being advanced
at the discretion of the senior lender and such advances are dependent on, among
other things,  the  perception of the senior lender that we are either  stemming
our losses or  effecting a sale of one or more of our  divisions.  If the senior
lender  ceases  funding  our  operations,  unless we have  obtained  alternative
financing,  we will be unable to continue in  business.  Furthermore,  unless we
obtain  funding from another  source,  including  the sale of one of more of our
divisions,  we will not be able to pay our senior  lender on December  31, 2002,
and we may not be able to continue in business.

      As of December  31,  2001,  we had  remaining  outstanding  $382,000 of 6%
Debentures, net of original issue discount of $3,000, 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.  Due to the
restriction  imposed by our senior lender precluding us from making any payments
on  indebtedness  to any  subordinated  debt  holder,  we were unable to pay the
interest  due on July 1, 2001.  Thus,  interest  due at  December  31,  2001 was
$35,000. Additionally, we have been notified by the trustee that the non-payment
of the interest caused an event of default.

      As of December 31, 2001, we had  outstanding  $6,144,000  of  subordinated
notes,  all of which  became due during 2001.  We did not have the  resources to
pay, and we did not pay,  either the  principal or interest on the  subordinated
notes and are  restricted  by our senior lender from making such  payments.  The
holder of a subordinated  note in the principal amount of $500,000 has commenced
an action  seeking  payment of the principal and interest on his note.  However,
the court  recently  denied the  holder's  motion for a summary  judgment on the
grounds  that the  terms of the note  did not give him  permission  to  obtain a
judgment while we remained in default to the senior debt holder.

      As a result of our continuing financial difficulties:

      o     we are having and we may continue to have difficulty  performing our
            obligations   under  our  contracts,   which  could  result  in  the
            cancellation  of  contracts  or the  loss  of  future  business  and
            penalties for non-performance; and

      o     a number of  creditors,  including  one  holder of our  subordinated
            notes,  as discussed  above,  have engaged  attorneys or  collection
            agencies or  commenced  legal  actions  against us, and some of them
            have obtained  judgments against us, including a former landlord who
            has obtained a $400,000 judgment against us.

      The  creditors  include five former  senior  executives  who have deferred
compensation  agreements with us. The total payments due under these  agreements
are  approximately  $1.9 million,  of which $46,000 was due at December 31, 2001
and an  additional  $100,000 has become due in 2002.  Other  claimants  who have
already either commenced  litigation or otherwise sought  collection or who have
obtained judgments against us are due approximately  $600,000.  If we are unable
to reach a settlement  with these  creditors and others who have not yet brought
claims,  and these  claimants  obtain  judgments  against  us or, in the case of
creditors who have already


                                    21 of 31
<PAGE>

obtained  judgments,  if the creditors  seek to enforce the judgment,  it may be
necessary for us, or our senior lender may require us, to seek protection  under
the Bankruptcy Code.

      We  are  seeking  to  address  our  need  for   liquidity   by   exploring
alternatives,  including  the  possible  sale of one or  more of our  divisions.
During 2000 and 2001 we were engaged in discussions with respect to the possible
sale of our divisions;  however,  those  negotiations were terminated without an
agreement   having  been  reached.   Although  we  are  engaged  in  preliminary
discussions with respect to the sale of one of our divisions, we have not signed
any  agreements  with respect to such a sale,  and we cannot give any  assurance
that we will be able to sell  any  divisions  on  reasonable  terms,  if at all.
Furthermore,  if we sell a division, we anticipate that a substantial portion of
the net proceeds  will be made to our senior  lender and we will not receive any
significant  amount of working  capital from such a sale.  During 2001 and early
2002, we have taken steps to reduce overhead and headcount.  We will continue to
look to reduce  costs while we seek  additional  business  from new and existing
customers.  Our senior  lender has  precluded  us from  making any  payments  on
indebtedness to any subordinated creditors.  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.  Furthermore,  we  believe  that  our  losses  and our
financial  position are having and will continue to have an adverse  effect upon
our  ability to develop new  business as  competitors  and  potential  customers
question our ability both to perform our obligations under any agreements we may
enter and to continue in business.  We have been  informally  advised by British
Telecommunications,  which is one of our largest customers that,  because of our
financial  position,  it will not place orders with us for OSS products until we
can demonstrate that we are financially viable. However, this customer continues
to place orders for OSS  maintenance  and modest orders for line test  products.
The  loss of this  customer  would  have a  material  adverse  effect  upon  our
operations.  In addition,  our auditors  included in their report an explanatory
paragraph about our ability to continue as a going concern.

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 2002, 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


                                    22 of 31
<PAGE>

                                    Part III

Item 10. Directors and Executive Officers

      Set forth below is information concerning our directors:

<TABLE>
<CAPTION>
    Name                      Principal Occupation or Employment             Director Since       Age
    ----                      ----------------------------------             --------------       ---
<S>                           <C>                                            <C>                  <C>
William V. Carney(1)          Chairman of the board and chief executive
                              officer                                        1970                 65

Michael A. Tancredi           Senior vice president, secretary and
                              treasurer                                      1970                 72

Warren H. Esanu1(1,2)         Of counsel to Esanu Katsky Korins &
                              Siger, LLP, attorneys at law                   1997                 59

Herbert H. Feldman1(1,2)      President, Alpha Risk Management, Inc.,
                              independent risk management consultants        1989                 68

Marco M. Elser                Managing director of Elser & Co., an
                              investment advisory firm                       2000                 43
</TABLE>

----------
      (1)   Member of the executive committee.
      (2)   Member of the audit and compensation committees.

      Mr.  Carney has been  chairman  of the board and chief  executive  officer
since October 1996. He was vice chairman from 1988 to October 1996,  senior vice
president  from 1989 to October  1996,  chief  technical  officer since 1990 and
secretary   from  1977  to  October   1996.   He  also  served  as  senior  vice
president-mechanical    engineering    from   1988   to   1989,    senior   vice
president-connector    products    from    1985    to    1988,    senior    vice
president-manufacturing  from 1984 to 1985 and senior vice  president-operations
from 1977 to 1984.

      Mr. Tancredi has been senior vice president, secretary and treasurer since
January 1997. He has been vice president-administration since 1995 and treasurer
since 1978, having served as vice president-finance and administration from 1989
to 1995 and vice president-finance from 1984 to 1989.

      Mr.  Esanu  has been a  director  since  April  1997 and also  served as a
director  from 1989 to 1996.  He was also our  chairman  of the board from March
1996 to October  1996.  He has been of counsel to Esanu  Katsky  Korins & Siger,
LLP,  attorneys at law,  for more than the past five years.  Mr. Esanu is also a
founding  partner and chairman of Paul Reed Smith  Guitars  Limited  Partnership
(Maryland),  a leading manufacturer of premium-priced  electrical guitars. He is
also a senior  officer and  director of a number of  privately  held real estate
investment and management companies.

      Mr.  Elser has been the  managing  director of Elser & Co., an  investment
advisory firm more than the past five years.  He has also been  associated  with
Northeast  Securities,  a  US-based  broker  dealer and is  responsible  for the
Italian office, which he founded in 1994.

      Mr. Feldman has been president of Alpha Risk Management, Inc., independent
risk management consultants, for more than the past five years.


                                    23 of 31
<PAGE>

      Set forth is information concerning our executive officers:

Name of Executive Officer     Position                                      Age
-------------------------     --------                                      ---

  William V. Carney           Chairman of the board and
                                chief executive officer                     65

  Michael A. Tancredi         Senior vice president,
                                secretary and treasurer                     72

  Edward B. Kornfeld          Senior vice president-operations and
                                chief financial officer                     58

  David L. Rawlings           Senior vice president                         58

      All of our  officers  serve at the  pleasure  of the  board of  directors.
Messrs. Carney and Tancredi are also members of the board of directors as stated
above.  There is no family  relationship  between any of the executive  officers
listed below.

      Mr. Kornfeld, 58, has been senior vice president-operations since 1996 and
chief financial officer since October 1995. He was vice  president-finance  from
October 1995 until 1996.  For more than five years prior thereto,  Mr.  Kornfeld
held positions with several companies for more than five years,  including Excel
Technology Inc. (Quantronix Corp.) and Anorad Corporation.

      Mr.  Rawlings,  58, has been vice president since March 1996. Mr. Rawlings
was assistant  vice president of research and  development-copper  products from
1992 until March 1996.

Item 11. Executive Compensation

      The following table shows the  compensation we paid to our chief executive
officer and the four most highly compensated executive officers,  other than the
chief executive officer, whose salary and bonus earned exceeded $100,000 for the
year ended December 31, 2001.


                                    24 of 31
<PAGE>

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                    Annual                  Long-Term
                                                    Compensation            Compensation
                                                    ------------            ------------
                                                                              (Awards)

                                                                              Restricted       Options,
                                                                             Stock Awards        SARs       All other
Name and Principal Position              Year       Salary         Bonus       (Dollars)       (Number)     Compensation
---------------------------              ----       ------        --------     ---------       --------     ------------
<S>                                      <C>       <C>               <C>          <C>          <C>            <C>
William V. Carney, Chairman of the       2001      $240,000          --           --                --        $ 7,981
board and chief executive officer        2000       240,000          --           --                --         29,556
                                         1999       240,000          --           --                --         31,996

Edward B. Kornfeld, Senior vice          2001       192,000          --           --                --          4,872
president - operations and chief         2000       192,000          --           --                --          4,872
financial officer                        1999       192,000          --           --                --          5,553

David Rawlings, Senior vice president,   2001       146,750          --           --             5,000          4,343
connector division                       2000       142,000          --           --            10,000          4,287
                                         1999       131,119          --           --                --          4,953

Prem Chandran, Senior vice president,    2001       135,750          --           --             5,000          2,666
signal division                          2000       131,000          --           --            10,000          2,562
                                         1999       120,119          --           --                --          2,808
</TABLE>

----------


                                    25 of 31
<PAGE>

      In 2002, Mr. Chandran resigned as an officer.

      "All Other  Compensation"  includes a payment to the  executive's  account
pursuant to our 401(k)  Plan,  premiums  paid with  respect to the equity  split
dollar program (in 2000 and 1999),  group life insurance in amounts greater than
that available to all employees and special long term disability coverage.

      Set forth below is a chart that shows,  for 2001,  the  components of "All
Other Compensation" listed in the Summary Compensation Table.



                          Mr. Carney  Mr. Kornfeld  Mr. Rawlings   Mr. Chandran
                          ----------  ------------  ------------   ------------

401(k) Match               $ 2,550      $ 2,550        $ 2,021       $ 1,856
Supplemental Insurance       5,431        2,322          2,322           810

      Certain of our officers named in the summary  compensation  table or their
affiliates  are  parties  to  employment  or  other  agreements   providing  for
compensation during and after their employment.

      Employment  Agreements.  We have entered into  employment  agreements with
Messrs.  Carney and Kornfeld.  The agreements  continue on a year-to-year basis,
for January 1 of each year,  unless  terminated on prior notice of not less than
120 days for Mr.  Carney and 90 days for Mr.  Kornfeld.  Salary is determined by
the board,  except  that the  salary  may not be  reduced  except as a part of a
salary reduction  program  applicable to all executive  officers.  Upon death or
termination of employment as a result of a disability, the officer or his estate
is to receive a payment equal to three months salary. Upon a termination without
cause,  Mr. Carney is entitled to receive his then current salary for 36 months,
and Mr.  Kornfeld is entitled to receive his then current  salary for six months
plus one month for each full year of  service  up to a maximum  aggregate  of 24
months.  In the event that an  executive  is covered by an  executive  severance
agreement,  including the salary  continuation  agreements (as described below),
which  provides  for  payments  upon  termination  subsequent  to a  "change  of
control,"  the  executive  would be  entitled  to the  greater of the  severance
arrangements as described in this paragraph or the severance  payments under the
executive severance agreements.

      Salary  Continuation  Agreements.  We are  party  to  salary  continuation
agreements with Messrs. Carney and Kornfeld. The salary continuation  agreements
provide that, in the event that a change of control  occurs and the  executive's
employment with us is subsequently  terminated by us other than for cause, death
or  disability,  or is  terminated by the executive as a result of a substantial
alteration  in the  executive's  duties,  compensation  or other  benefits,  the
executive  shall be entitled  to the  payment of an amount  equal to his monthly
salary at the rate in effect as of the date of his  termination  (or, if higher,
as in  effect  immediately  prior to the  change in  control)  plus the pro rata
monthly  amount of his most  recent  annual  bonus paid  immediately  before the
change of control  multiplied by 36 in the case of Mr. Carney and 24 in the case
of Mr. Kornfeld. For purposes of the salary continuation agreements, a change of
control is defined as one which  would be required to be reported in response to
the proxy rules  under the  Securities  Exchange  Act of 1934,  as amended,  the
acquisition  of beneficial  ownership,  directly or  indirectly,  by a person or
group of  persons of our  securities  representing  25% or more of the  combined
voting power of our then  outstanding  securities,  or, during any period of two
consecutive   years,  if  individuals  who  at  the  beginning  of  such  period
constituted  the board  cease for any reason to  constitute  at least a majority
thereof unless the election of each new director was nominated or ratified by at
least two-thirds of the directors then still in office who were directors at the
beginning of the period. The change of control must occur during the term of the
salary continuation agreement,  which in each case is currently through December
31,  2001 and is renewed  automatically  unless we give timely  notice  prior to
January  1 of any year of our  election  not to renew the  agreement.  If such a
change of control  occurs during the  effectiveness  of the salary  continuation
agreement,  any  termination  of such  covered  employee  during  the 18  months
following  the change of control will result in the payment of the  compensation
described above.


                                    26 of 31
<PAGE>

Item 12. Principal Holders of Securities and Security Holdings of Management

      The following table and discussion  provides  information as to the shares
of common stock beneficially owned on March 15, 2002 by:

      o     each director;
      o     each officer named in the summary compensation table;
      o     each person  owning of record or known by us,  based on  information
            provided to us by the persons named below,  to own  beneficially  at
            least 5% of our common stock; and
      o     all officers and directors as a group.

                                        Shares of Common       Percentage of
                                        Stock Beneficially     Outstanding
       Name                                   Owned            Common Stock
       ----                                   -----            ------------
William V. Carney                            303,021               3.0%
Michael A. Tancredi                          114,238               1.1%
Warren H. Esanu                              116,500               1.1%
Herbert H. Feldman                            71,000                *
Marco M. Elser                               360,324               3.6%
Edward B. Kornfeld                           114,317               1.1%
David Rawlings                                27,820                *
Prem Chandran                                 25,240                *
All directors and officers
  as a group (12 individuals)              1,216,906              12.2%

----------
* Less than 1%

      The shares for all officers and directors as a group do not include shares
owned by Mr. Chandran, who is no longer an officer.

      Except as otherwise  indicated  each person has the sole power to vote and
dispose of all shares of common stock listed opposite his name.

      The number of shares  owned by our  directors  and  officers  named in the
summary  compensation  table includes  shares of common stock which are issuable
upon exercise of options and warrants that are  exercisable at March 15, 2002 or
will become  exercisable  within 60 days after that date. Set forth below is the
number of shares of common stock  issuable  upon  exercise of those  options and
warrants for each of these directors and officers.

                Name                                       Shares
                ----                                       ------
       William V. Carney                                   180,000
       Michael A. Tancredi                                  75,000
       Warren H. Esanu                                      61,500
       Herbert H. Feldman                                   51,000
       Marco M. Elser                                        5,000
       Edward B. Kornfeld                                   88,000
       David Rawlings                                       27,820
       Prem Chandran                                        25,240
       All officers and directors as a group               564,325


                                    27 of 31
<PAGE>

      The shares of common stock issuable upon exercise of Mr.  Esanu's  options
and warrants include warrants to purchase 12,500 shares of common stock issuable
upon warrants held by Elmira Realty Management Corp.  pension and profit sharing
plan. Mr. Esanu has the sole voting and dispositive power with respect to shares
issuable upon exercise of these warrants. All other directors and officers named
in the table hold only options.

Item 13. Certain Relationships and Related Transactions

      During 2001, Warren H. Esanu, a director,  served as a member of our audit
and compensation committees.  During 2001, the law firm of Esanu Katsky Korins &
Siger, LLP, to which Mr. Esanu is of counsel, provided legal services to us, for
which it  received  fees of  $486,220.  Esanu  Katsky  Korins  &  Siger,  LLP is
continuing to render legal services to us during 2002.

                                     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.


                                    28 of 31
<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        Amended  and  Restated  Loan and  Security  Agreement  dated as of
              November 28, 1994,  between the Company and Foothill  ("Foothill")
              Capital Corporation, incorporated by reference to Exhibit 2 to the
              Company's Current Report on Form 8-K dated November 30, 1994.

   4.2        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,  incorporated  by  reference to
              Exhibit  4.7 of the  Company's  Annual  Report on Form 10K for the
              year ended December 31, 1995.

   4.3        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,  incorporated  by  reference to
              Exhibit 4.7.2 of the  Company's  Annual Report on Form 10K for the
              year ended December 31, 1995.

   4.4        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.

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

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

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


                                    29 of 31
<PAGE>

Exhibits (continued)

Exhibit No.   Description of Exhibit

  4.8         Combined  Amendment  No. Four dated as of March 1, 2002 to Amended
              and Restated Loan and Security  agreement between Foothill and the
              Company.

  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        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.

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

  10.4        1999 Stock  Option Plan filed as Exhibit A to the Proxy  Statement
              for the 1999  Annual  Meeting  to  Stockholders  and  incorporated
              herein by reference.

  10.5        1996 Stock  Option Plan filed as Exhibit A to the Proxy  Statement
              for the 1996  Annual  Meeting  to  Stockholders  and  incorporated
              herein by reference.

  10.6        1998 Stock  Option Plan filed as Exhibit 4.2 to the Form S-8 dated
              December 3. 1998 and incorporated herein by reference.

  10.7        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.

  10.8        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.


                                    30 of 31
<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 April 12, 2002                          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.

<TABLE>
<CAPTION>

        Signature                                Title                                        Date
-------------------------             --------------------------------------------        --------------
   <S>                               <C>                                                  <C>
   /s/ William V. Carney              Chairman of the Board,                              April 12, 2002
   ----------------------             Chief Executive Officer and Director
       William V. Carney              (Principal Executive Officer)

   /s/ Edward B. Kornfeld             Senior Vice President and                           April 12, 2002
   ----------------------             Chief Financial Officer
       Edward B. Kornfeld             (Principal Financial and Accounting Officer)

   ______________________             Director                                            April 12, 2002
       Warren H. Esanu

   /s/ Michael A. Tancredi            Director                                            April 12, 2002
   ----------------------
       Michael A. Tancredi

   /s/ Herbert H. Feldman             Director                                            April 12, 2002
   ----------------------
       Herbert H. Feldman

   /s/ Marco Elser                    Director                                            April 12, 2002
   ----------------------
       Marco Elser
</TABLE>


                                    31 of 31
<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, 2001 and 2000                                             F-3

     Consolidated Statements of Operations and
     Comprehensive Loss,
     Years Ended December 31, 2001, 2000 and 1999                           F-4

     Consolidated Statements of Stockholders'
     Equity (Deficit), Years Ended
     December 31, 2001, 2000 and 1999                                       F-5

     Consolidated Statements of Cash Flows
     for the Years Ended December 31, 2001,
     2000 and 1999                                                          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,  2001 and 2000,  and the  related
consolidated  statements of operations  and  comprehensive  loss,  stockholders'
equity (deficit), and cash flows for each of the three years in the period ended
December  31,   2001.   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,  2001 and 2000,  and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 2001, 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  2001,  2000  and  1999  and,  as of  December  31,  2001,  has a
stockholders'   deficit  of  $25,849,000   and  a  working  capital  deficit  of
$31,236,000.  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 15, 2002


                                      F-2
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
                           Consolidated Balance Sheets
                           December 31, 2001 and 2000
                   (in thousands, except shares and par value)

<TABLE>
<CAPTION>
                     Assets                                                                       2001             2000
                     ------                                                                       ----             ----
<S>                                                                                             <C>                <C>
Current assets:
    Cash and cash equivalents                                                                   $  1,204           2,366
    Accounts receivable - trade, less allowance for doubtful
       accounts of $2,168 in 2001 and $2,477 in 2000                                               4,284           7,425
    Inventories                                                                                    5,206           7,150
    Prepaid expenses and other current assets                                                        852           1,130
                                                                                                --------        --------
                  Total current assets                                                            11,546          18,071

Property, plant and equipment, net                                                                 2,328           4,555
Goodwill, net of amortization of $1,501 in 2001 and $5,003 in 2000                                 3,761          10,357
Other assets                                                                                         198           1,191
                                                                                                --------        --------
                  Total assets                                                                  $ 17,833          34,174
                                                                                                ========        ========

                      Liabilities and Stockholders' Deficit

Current liabilities:
    Senior debt                                                                                 $ 22,095          20,746
    Subordinated notes                                                                             6,144           6,144
    6% Convertible subordinated debentures                                                           382              --
    Accounts payable                                                                               7,023           7,173
    Accrued expenses                                                                               3,417           5,385
    Accrued interest payable                                                                       1,593             766
    Accrued commissions                                                                            1,607           1,553
    Accrued deferred compensation                                                                    196             196
    Income taxes payable                                                                             314             259
    Short-term loans                                                                                  11               1
                                                                                                --------        --------
                  Total current liabilities                                                       42,782          42,223
                                                                                                --------        --------

6% Convertible subordinated debentures                                                                --             376
Deferred compensation                                                                                900             987
Income taxes payable                                                                                  --             154
Other long-term liabilities                                                                           --             918
Minority interest                                                                                     --             308
                                                                                                --------        --------
                  Total long-term liabilities                                                        900           2,743
                                                                                                --------        --------

                  Total liabilities                                                               43,682          44,966
                                                                                                --------        --------

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 9,947,421 and 9,817,165 shares in 2001 and 2000, respectively                           99              98
    Additional paid-in capital                                                                    76,056          75,980
    Accumulated deficit                                                                          (95,909)        (81,135)
    Accumulated other comprehensive loss:
       Foreign currency translation adjustment                                                    (4,157)         (3,797)
                                                                                                --------        --------
                                                                                                 (23,911)         (8,854)
    Treasury stock, at cost, 30,940 shares                                                        (1,938)         (1,938)
                                                                                                --------        --------
                  Total stockholders' deficit                                                    (25,849)        (10,792)
                                                                                                --------        --------
                  Total liabilities and stockholders' deficit                                   $ 17,833          34,174
                                                                                                ========        ========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-3
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
                    Consolidated Statements of Operations and
                     Comprehensive Loss Years ended December
                             31, 2001, 2000 and 1999
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                                    2001              2000               1999
                                                                                    ----              ----               ----
<S>                                                                               <C>                 <C>               <C>
Sales                                                                             $ 28,062            51,140            38,936
Cost of sales                                                                       19,970            35,890            28,952
                                                                                  --------          --------          --------
                  Gross profit                                                       8,092            15,250             9,984
                                                                                  --------          --------          --------

Selling, general and administrative expenses                                         9,316            14,573            13,603
Research and development expenses                                                    4,427             5,830             6,090
Goodwill impairment                                                                  5,802                --                --
                                                                                  --------          --------          --------

                  Total expenses                                                    19,545            20,403            19,693
                                                                                  --------          --------          --------

                  Operating loss                                                   (11,453)           (5,153)           (9,709)

Interest expense                                                                    (4,480)           (4,500)           (3,571)
Interest income                                                                         31               129               188
Gain on sale of assets                                                                 684                --                --
Other income (expense), net                                                            191              (813)              218
                                                                                  --------          --------          --------

                  Loss before income taxes, equity in net loss
                  of joint venture and minority interest                           (15,027)          (10,337)          (12,874)

Income tax benefit (expense)                                                           203              (227)             (873)
Equity in net loss of joint venture                                                   (175)               --                --
Minority interest                                                                      225               388                61
                                                                                  --------          --------          --------


                  Net loss                                                        $(14,774)          (10,176)          (13,686)
                                                                                  ========          ========          ========

Other comprehensive income (loss):

   Foreign currency translation adjustments                                           (360)               99              (142)
                                                                                  --------          --------          --------


                  Comprehensive loss                                              $(15,134)          (10,077)          (13,828)
                                                                                  ========          ========          ========


Basic per share amounts:
   Net loss per share of common stock                                             $  (1.50)            (1.04)            (1.44)
                                                                                  ========          ========          ========

   Weighted average shares of common stock outstanding                               9,878             9,763             9,489
                                                                                  ========          ========          ========

Diluted per share amounts:
   Net loss per share of common stock                                             $  (1.50)            (1.04)            (1.44)
                                                                                  ========          ========          ========

   Weighted average shares of common stock outstanding                               9,878             9,763             9,489
                                                                                  ========          ========          ========
</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, 2001, 2000 and 1999
                                 (In thousands)
<TABLE>
<CAPTION>

                                                                                                           Receivable    Total
                                       Common Stock                 Accumulated                               for        Stock-
                                       -----------      Additional     Other                                Employee    holders'
                                    No. of  Par Value   Paid-in    Comprehensive  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, 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
Warrants re-priced                      --      --           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)

Net loss 2001                           --      --           --           --        (14,774)          --        --      (14,774)
Common stock issued                    130       1           37           --             --           --        --           38
Warrants re-priced                      --      --           39           --             --           --        --           39
Foreign currency translation
   adjustment                           --      --           --         (360)            --           --        --         (360)
                                  ---------------------------------------------------------------------------------------------

Balance at December 31, 2001         9,947     $99      $76,056      $(4,157)      $(95,909)     $(1,938)    $-0-      $(25,849)
                                  ========     ===      =======      =======       ========      =======     =====     ========
</TABLE>

           See accompanying notes to consolidated financial statements


                                      F-5
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
                 Consolidated Statements of Cash Flows (Note 22)
                  Years ended December 31, 2001, 2000 and 1999
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                      2001            2000            1999
                                                                                      ----            ----            ----
<S>                                                                                 <C>              <C>             <C>
Cash flows from operating activities:
    Net loss                                                                        $(14,774)        (10,176)        (13,686)
    Adjustments to reconcile net loss to net cash
       used in operating activities:
          Non-cash financing expenses                                                    123             373              18
          Gain on sale of assets                                                        (684)             --              --
          Non-cash compensation expense                                                   --              --               8
          Depreciation and amortization                                                1,909           1,911           1,677
          Goodwill impairment                                                          5,802              --              --
          Amortization of debt discounts                                                   6              56             326
          Minority interest                                                             (225)           (388)            (61)
          Equity in loss of joint venture                                                175              --              --
    Changes in operating assets and liabilities:
       Accounts receivable                                                             3,141           4,712           7,665
       Inventories                                                                     1,944           1,743              51
       Prepaid expenses                                                                  278             243             343
       Other assets                                                                      867           1,427             113
       Accounts payable, accrued expenses and other liabilities                       (2,341)         (2,405)            238
                                                                                    --------        --------        --------
                  Net cash used in operating activities                               (3,779)         (2,504)         (3,308)
                                                                                    --------        --------        --------

Cash flows from investing activities:
    Repayment of receivables from stock purchase program                                  --              --             281
    Net proceeds from the sale of assets                                               1,670              --              --
    Capital expenditures, net                                                           (196)         (1,533)           (951)
                                                                                    --------        --------        --------
                  Net cash provided by (used in) investing activities                  1,474          (1,533)           (670)
                                                                                    --------        --------        --------

Cash flows from financing activities:
    Proceeds from senior debt                                                          2,222           5,010           6,150
    Repayments of senior debt                                                           (873)         (1,782)         (1,820)
    Proceeds from subordinated debentures and warrants                                    --              80              64
    Proceeds from the exercise of options and warrants                                    38             176              --
    Proceeds (repayments) of notes payable/short-term loans                               10             (43)           (100)
                                                                                    --------        --------        --------
                  Net cash provided by financing activities                            1,397           3,441           4,294
                                                                                    --------        --------        --------

Effect of exchange rate changes on cash                                                 (254)           (283)           (115)
                                                                                    --------        --------        --------
Increase (decrease) in cash and cash equivalents                                      (1,162)           (879)            201
Cash and equivalents - beginning of year                                               2,366           3,245           3,044
                                                                                    --------        --------        --------

Cash and equivalents - end of year                                                  $  1,204           2,366           3,245
                                                                                    ========        ========        ========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-6
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                           December 31, 2001 and 2000

(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 18 and 23, 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, $0,
      and $82,000 in 2001, 2000 and 1999, 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  the
      estimated  useful life as  determined by events and  circumstances  of the
      business combination that gave rise to the goodwill.  The Company assesses
      the   recoverability  of  unamortized   goodwill  using  the  undiscounted
      projected future cash flows from the related businesses (note 6).

   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 15).

   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.

   Net Loss Per Share

   Basic net loss per share is based on the  weighted  average  number of shares
      outstanding.  Diluted net loss per share is based on the weighted  average
      number of shares  outstanding plus the dilutive effect of potential shares
      of common  stock,  as if such shares had been issued.  For 2001,  2000 and
      1999, no dilutive  potential  shares of common stock were added to compute
      diluted loss per share because the effect was anti-dilutive.

                                                                     (Continued)


                                      F-8
<PAGE>

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

   Reclassifications

   Certain reclassifications have been made to conform prior years' consolidated
      financial statements to the 2001 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 except for goodwill as discussed in note 6.

   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,  goodwill  valuation and the deferred tax asset
      valuation  allowance.  Actual  results  could  differ from those and other
      estimates.

   New Accounting Pronouncements

   In June 2001,  the  Financial  Accounting  Standards  Board  ("FASB")  issued
      Statement  of  Financial   Accounting  Standards  No.  141  ("SFAS  141"),
      "Business  Combinations" and SFAS No. 142,  "Goodwill and Other Intangible
      Assets"  effective for fiscal years  beginning after December 15, 2001. It
      also issued SFAS No. 143, "Accounting for Obligations  Associated with the
      Retirement  of  Long-Lived  Assets"  in  August  2001 and  SFAS  No.  144,
      "Accounting  for the  Impairment  or  Disposal  of  Long-Lived  Assets" in
      October 2001.

   SFAS141 requires the use of the purchase  method of accounting  and prohibits
      the use of the  pooling-of-interests  method of  accounting  for  business
      combinations  initiated  after June 30, 2001.  SFAS 141 also requires that
      the Company  recognize  acquired  intangible assets apart from goodwill if
      the acquired intangible assets meet certain criteria.  SFAS 141 applies to
      all business  combinations  initiated after June 30, 2001 and for purchase
      business  combinations  completed  on or  after  July  1,  2001.  It  also
      requires,  upon  adoption  of SFAS 142,  that the Company  reclassify  the
      carrying  amounts of intangible  assets and goodwill based on the criteria
      in SFAS 141.

                                                                     (Continued)


                                      F-9
<PAGE>

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

   SFAS142  requires,  among other  things,  that  companies no longer  amortize
      goodwill,  but instead, test goodwill for impairment at least annually. In
      addition,  SFAS 142 requires that the Company identify reporting units for
      the  purposes of  assessing  potential  future  impairments  of  goodwill,
      reassess the useful lives of other existing recognized  intangible assets,
      and cease  amortization  of intangible  assets with an  indefinite  useful
      life. An intangible asset with an indefinite  useful life should be tested
      for  impairment in  accordance  with the guidance in SFAS 142. SFAS 142 is
      required to be applied in fiscal years  beginning  after December 15, 2001
      to all  goodwill  and other  intangible  assets  recognized  at that date,
      regardless  of when  those  assets  were  initially  recognized.  SFAS 142
      requires the Company to complete a transitional  goodwill  impairment test
      six months  from the date of  adoption.  The  Company is also  required to
      reassess  the useful  lives of other  intangible  assets  within the first
      interim  quarter  after  adoption  of SFAS  142.  The  Company's  previous
      business  combinations were accounted for using the purchase method. As of
      December 31,  2001,  the net  carrying  amount of goodwill is  $3,761,000.
      Currently, the Company is assessing,  but has not yet determined,  how the
      adoption of SFAS 141 and SFAS 142 will impact its  financial  position and
      results of operations.

   SFAS143  establishes  standards for the reporting of  obligations  associated
      with the retirement of tangible long-lived assets and the associated asset
      retirement  costs.  It  also  provides   accounting   guidance  for  legal
      obligations  associated with the retirement of tangible long-lived assets.
      SFAS 143 is effective for fiscal years  beginning after June 15, 2002 with
      early adoption permitted.  The Company expects that the provisions of SFAS
      143  will  not have a  material  effect  on its  consolidated  results  of
      operations.

   SFAS144 establishes a single  accounting model for the impairment or disposal
      of  long-lived  assets  and  new  standards  for  reporting   discontinued
      operations.  The  provisions  of SFAS 144 are  effective  in fiscal  years
      beginning  after  December  15,  2001  and in  general  are to be  applied
      prospectively.  The Company is currently evaluating the provisions of SFAS
      144  but  does  not  expect  they  will  have  a  material  effect  on its
      consolidated results of operations upon adoption.

(2)   Liquidity

   As of December 31, 2001,  Porta's debt included  $22,095,000  of senior debt,
      which matured on January 7, 2002,  and  $6,144,000 of  subordinated  debt,
      which matured on July 3, 2001. The Company was unable to pay the principal
      ($6,144,000)  or interest  ($1,358,000)  on the  subordinated  notes.  The
      amount of interest  represents  interest  from July 2000 through  December
      2001. At December 31, 2001, the Company did not have sufficient  resources
      to pay either  the senior  lender or the  subordinated  lenders  and it is
      likely  that it cannot  generate  such cash from its  operations,  and the
      senior  lender had  precluded  the  Company  from  making  payments on the
      subordinated debt.

                                                                     (Continued)


                                      F-10
<PAGE>

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

   On March 1, 2002,  the Company and its senior lender agreed to an amended and
      restated  loan  and  security  agreement  whereby  a  new  term  loan  was
      established with a maximum  principal amount of $1,500,000.  The agreement
      allows the Company to draw monies subject to the senior  lender's  receipt
      and approval of a weekly disbursement budget. However, the advances are at
      the discretion of the senior lender.  Obligations  under the new term loan
      bear  interest at 12% per annum.  The amended  agreement  establishes  all
      indebtedness  prior to March 1, 2002 as an old term loan in the  amount of
      $22,610,000,  which  includes  the balance  due at December  31, 2001 plus
      accrued  interest  through March 1, 2002.  The old term loan shall bear no
      interest  until  such time as the  senior  lender  in its sole  discretion
      notifies the Company that interest shall be payable.  Both the new and old
      term loans are payable on December  31, 2002.  As part of this  agreement,
      the senior  lender  continues  to  preclude  the  Company  from making any
      payments on indebtedness to any subordinated creditors, but the Company is
      not  prohibited  from  paying  accounts  payable in the  normal  course of
      business. The agreement also requires the Company to diligently pursue the
      sale of one or more of  its divisions and  pay the net proceeds  from such
      sale to the senior lender, which may not leave the Company with sufficient
      capital for its operations.

   The $1,500,000  being  advanced  by  the Company's  senior  lender  is  being
      advanced at the  discretion  of the senior  lender and such  advances  are
      dependent on, among other things, the perception of the senior lender that
      the Company is either  stemming  its losses or  effecting a sale of one or
      more  of its  divisions.  If the  senior  lender  ceases  funding  Porta's
      operations, unless it has obtained alternative financing, the Company will
      be unable to continue in business. Furthermore, unless the Company obtains
      funding  from  another  source,  including  the sale of one of more of its
      divisions, Porta will not be able to pay its senior lender on December 31,
      2002, and Porta may not be able to continue in business.

   As of December 31, 2001, the Company had remaining outstanding $382,000 of 6%
      Debentures, net of original issue discount of $3,000, 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.
      Due to the restriction  imposed by the Company's senior lender  precluding
      it from  making any  payments on  indebtedness  to any  subordinated  debt
      holder,  the Company was unable to pay the  interest  due on July 1, 2001.
      Thus,  interest due at December 31, 2001 was  $35,000.  Additionally,  the
      trustee has  notified  the Company  that the  non-payment  of the interest
      caused an event of default.

   As of  December  31,  2001,  the  Company  had   outstanding   $6,144,000  of
      subordinated  notes,  all of which became due during 2001. The Company did
      not have the resources to pay, and it did not pay, either the principal or
      interest on the subordinated  notes and is restricted by its senior lender
      from  making  such  payments.  The  holder of a  subordinated  note in the
      principal  amount of $500,000 has commenced an action  seeking  payment of
      the principal and interest on his note. However, the court recently denied
      the holder's  motion for a summary  judgment on the grounds that the terms
      of the note did not give him  permission  to obtain a  judgment  while the
      Company remained in default to the senior debt holder.

                                                                     (Continued)
                                      F-11

<PAGE>

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

   As a result of its continuing financial difficulties:

      o     the Company is having and may continue to 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; and

      o     a number of creditors,  including one holder of Porta's subordinated
            notes,  as discussed  above,  have engaged  attorneys or  collection
            agencies or commenced legal actions against the Company, and some of
            them have obtained judgments against the Company, including a former
            landlord who has obtained a $400,000 judgment against the Company.

   The creditors  include  five  former  senior  executives  who  have  deferred
      compensation  agreements  with the Company.  The total  payments due under
      these agreements are approximately $1.9 million,  of which $46,000 was due
      at December  31, 2001 and an  additional  $100,000 has become due in 2002.
      Other claimants who have already either commenced  litigation or otherwise
      sought  collection or have obtained a judgment against the Company are due
      approximately  $600,000.  If Porta is  unable to reach a  settlement  with
      these  creditors  and others who have not yet  brought  claims,  and these
      claimants  obtain  judgments  against  the  Company  or  seek  to  enforce
      judgments  against the Company,  it may be necessary for it, or its senior
      lender may require it, to seek protection under the Bankruptcy Code.

   The Company is  seeking  to  address  its need  for  liquidity  by  exploring
      alternatives, including the possible sale of one or more of its divisions.
      During 2000 and 2001, the Company was engaged in discussions  with respect
      to the possible sale of its divisions;  however,  those  negotiations were
      terminated without an agreement having been reached.  Although the Company
      is engaged in preliminary discussions with respect to a sale of one of its
      divisions,  the Company has not signed any agreements with respect to such
      a sale,  and it may not be able to sell any of its divisions on reasonable
      terms.  Furthermore,  if the Company sells a division,  the agreement with
      the  Company's  senior  lender  requires it to pay the net proceeds to the
      senior lender. As a result of this provision and the Company's obligations
      to the holders of  subordinated  debt,  unless the lenders  consent to the
      Company  retaining  a portion  of the net  proceeds  from any sale for its
      operations,  the Company will not receive any significant  amount, and may
      not  receive  any of the net  proceeds  from  any such  sale  for  working
      capital. During 2001 and early 2002, the Company has taken steps to reduce
      overhead and headcount.  The Company will continue to look to reduce costs
      while it  seeks  additional  business  from  new and  existing  customers.
      Because of its present stock price, it is highly unlikely that the Company
      will be able to raise funds  through  the sales of its equity  securities,
      and Porta's financial  condition prevents it from issuing debt securities.
      In the event that the Company is unable to extend its debt obligations and
      sell one or more of its  divisions,  it cannot be assured that the Company
      will be able to continue in operations.  Furthermore, the Company believes
      that its losses and its financial position are having and will continue to
      have an  adverse  effect  upon its  ability  to develop  new  business  as
      competitors and potential  customers  question its ability both to perform
      its  obligations  under any  agreements  it may enter and to  continue  in
      business.   The   Company   has  been   informally   advised   by  British
      Telecommunications, which is one of its largest customers that, because of
      Porta's financial  position,  this customer will not place orders with the
      Company  for  its  OSS  products  until  it  can  demonstrate  that  it is
      financially viable.  However,  this customer continues to place orders for
      OSS maintenance and modest orders for line test products. The loss of this
      customer  would  have  a  material   adverse  effect  upon  the  Company's
      operations.


                                      F-12
<PAGE>

   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.

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

(3) Accounts Receivable

   Accounts receivable  included  approximately  $500,000 and $0 at December 31,
      2001 and 2000, respectively,  of revenues earned but not yet contractually
      billable  relating to long-term  contracts for specialized  products.  All
      such amounts at December  31, 2001 are  expected to be billed in 2002.  In
      addition,   accounts  receivable  included   approximately   $311,000  and
      $1,197,000  at December  31,  2001 and 2000,  respectively,  of  retainage
      balances due on various  long-term  contracts.  All such  amounts,  net of
      reserves,  at December  31, 2001 are  expected to be collected in 2002 and
      all such amounts, net of reserves, at December 31, 2000, were collected in
      2001.  The allowance for doubtful  accounts  receivable was $2,168,000 and
      $2,477,000 as of December 31, 2001 and 2000,  respectively.  The allowance
      for doubtful  accounts was increased by provisions  of $0,  $730,000,  and
      $1,070,000 and decreased by write-offs of $309,000, $132,000, and $106,000
      for the years ended December 31, 2001, 2000, and 1999, respectively.

(4) Inventories

   Inventories consist of the following: December 31,

                                                     2001                 2000
                                                     ----                 ----
Parts and components                              $3,217,000           4,973,000
Work-in-process                                      192,000             543,000
Finished goods                                     1,797,000           1,634,000
                                                  ----------          ----------
                                                  $5,206,000           7,150,000
                                                  ==========          ==========

(5) Property, Plant and Equipment

   Property, plant and equipment consists of the following:

                                               December 31
                                            -----------------        Estimated
                                            2001         2000       useful lives
                                            ----         ----       ------------
Land                                    $  132,000       246,000         --
Buildings                                1,060,000     2,284,000     30 years
Machinery and equipment                  7,221,000     8,870,000    3-10 years
Furniture and fixtures                   2,557,000     2,700,000      8 years
Transportation equipment                    84,000       133,000      4 years
Tools and molds                          4,108,000     4,124,000      8 years
Leasehold improvements                     822,000       858,000   Term of lease
                                        ----------    ----------
                                        15,984,000    19,215,000
Less accumulated depreciation
   and amortization                     13,656,000    14,660,000
                                        ----------    ----------
                                        $2,328,000     4,555,000
                                        ==========    ==========

During 2001,  the Company sold its Glen Cove,  New York facility for  $1,850,000
   and  recognized a gain on the sale of $684,000,  net of expenses of $180,000.
   Of the net proceeds of  $1,670,000,  $474,000 was used to reduce  outstanding
   principal  and $350,000 to reduce  outstanding  interest  obligations  to the
   Company's  senior  lender.  The Company  retained the  remaining  proceeds of
   $846,000 for working capital purposes.

                                                                     (Continued)

                                      F-13

<PAGE>

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

(6) Goodwill

   As of December 31, 2001 and 2000,  unamortized  goodwill was  $3,761,000  and
      $10,357,000,  respectively.  In December 2001, the Company determined that
      $5,802,000 of goodwill  associated with its OSS business unit was impaired
      and as such recorded an impairment  loss. This assessment was based on the
      continued  decline in sales and losses generated by the business unit over
      the past several years and the declining prospects for additional sales of
      the products based on the older  technology  that  originally gave rise to
      the goodwill.  Additionally,  there are presently no ongoing  negotiations
      regarding the sale of the OSS division.

   During 2000 and  1999,  in view of  recent  competitive  developments  in the
      telecommunications  market place and Porta's  changing  business  model in
      response,  management  reassessed  the  useful  life  of  certain  of  its
      goodwill. At that time, in management's  opinion,  there was no impairment
      in the carrying value of this long-lived  intangible  asset (based upon an
      analysis of  undiscounted  future cash flows),  and management  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 estimate increased  amortization expense in 2000 and in 1999 by
      approximately $25,000 and $58,000, respectively.

   Goodwill associated with one of Porta's other business units of $3,761,000 is
      amortized on a straight-line  basis over a remaining life of 29 years. The
      Company has determined that there is no impairment of this asset.

(7) Senior Debt

   On December 31, 2001 and 2000,  Porta's  senior debt  consisted of debt under
      its  credit  facility  in  the  amount  of  $22,095,000  and  $20,596,000,
      respectively, and a non-interest bearing deferred funding fee note payable
      to the senior lender in the amounts of $0 and $150,000,  respectively.  As
      of December 31, 2001, the total  outstanding  principal  balance  was  due
      on January 7, 2002, and has been  classified as a  current liability. (See
      Note 2)

                                                                     (Continued)

                                      F-14

<PAGE>

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

   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
      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  in  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 also provided
      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 the Company 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.

   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.

   In April 2001,  the Company and its senior  lender  agreed to add all current
      and future  interest due,  which will be computed at 14%, to the principal
      balance through the loan expiration  date. As  consideration,  the Company
      agreed  to  reduce  the  exercise  price of the  outstanding  warrants  to
      purchase  approximately  570,000 shares of common stock held by its senior
      lender to $0.25 per share.  The value of the  reduction in exercise  price
      was $39,000, which was recorded as interest expense and additional paid in
      capital.

   On the July 3, 2001, the loan  expiration  date, the Company did not have the
      resources  to repay the loan,  at which  time the  senior  lender  and the
      Company  executed an extension  agreement  for  approximately  a one month
      period, which extensions continued monthly though February 2002.

                                                                     (Continued)

                                      F-15

<PAGE>

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

   Subsequent to December 31, 2001,  the senior  lender agreed to an amended and
      restated  loan  and  security  agreement  whereby  a  new  term  loan  was
      established with a maximum  principal amount of $1,500,000.  The agreement
      allows the Company to draw monies subject to the senior  lender's  receipt
      and approval of a weekly  disbursement  budget.  Any  advances  under this
      agreement are subject to the discretion of the senior lender.  Obligations
      under the new term loan bear interest at 12%,  which interest shall accrue
      monthly  and be  applied to the  principal  until  September  1, 2002 when
      interest  for the month of August  2002 shall be paid and  interest  shall
      continue to be paid each subsequent month. The agreement provides that all
      indebtedness  prior to March 1, 2002 is  reflected  as an old term loan in
      the amount of  $22,610,000,  which  includes the principal  balance due at
      December 31, 2001 plus accrued interest though March 1, 2002. The old term
      loan bears no  interest  until such time as the senior  lender in its sole
      discretion  notifies the Company that interest shall be payable.  Both the
      new and old term loans are due on December  31,  2002.  Additionally,  the
      senior  lender has  prohibited  the Company  from  making any  payments on
      indebtedness  to  any  subordinated  creditors,  but  the  Company  is not
      prohibited  from  paying  accounts  payable  in  the  ordinary  course  of
      business.  Finally, the agreement allows for standby letters of credit not
      to exceed a maximum of $573,000.

(8) 6% Convertible Subordinated Debentures

   As of December 31, 2001 and 2000 Porta had outstanding  $382,000 and $376,000
      of its 6%  convertible  subordinated  debentures  due  July 1,  2002  (the
      "Debentures"),  net of  original  issue  discount  of $3,000  and  $9,000,
      respectively.  The face amount of the outstanding  Debentures was $385,000
      at both December 31, 2001 and 2000. 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 Company has not paid interest
      on these  Debentures  since July 2000, and its senior lender  prohibits it
      from making any payments of principal  and interest  (note 7). At December
      31,  2001 and 2000,  accrued  interest on the  debentures  was $35,000 and
      $12,000, respectively. Subsequent to December 31, 2001, the trustee of the
      Debentures  gave  notice to the Company  that it was in default  under the
      indenture and the Debentures.

   (9) Subordinated Notes

   As of  December  31, 2001 and 2000,  $6,144,000  of  Subordinated  Notes were
      outstanding.  As  of  December  31,  2001,  $6,144,000  of  principal  and
      $1,358,000 of accrued  interest were due and payable.  However,  Porta did
      not have the resources to pay the  $6,144,000  principal and $1,358,000 of
      interest due on the subordinated debt. In addition,  the senior lender had
      precluded the Company from making payments on the subordinated  debt (note
      7). During 2001, one of the noteholders unsuccessfully attempted to obtain
      a judgment  compelling  the  Company to pay the past due Notes and related
      interest (note 21).

                                                                     (Continued)

                                      F-16

<PAGE>

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

   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 connection  with a further  amendment of the  Subordinated  Notes in April
      2000,  the  Company  agreed to issue to the  noteholders  New  Warrants to
      purchase  an  aggregate  of  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.

(10) 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.  The
      Company's  option  to  acquire  an  additional  1%  interest  of the joint
      venture, for approximately  $190,000 expired during 2001. Prior to October
      1, 2001,  the Company  consolidated  the  operations  of the joint venture
      since the Company could obtain a controlling  interest at its election and
      the joint  venture was 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  through
      September 30, 2001. Based on the expiration of the option  agreement,  the
      reduced  volume of products sold to the joint venture and reduced level of
      management assistance provided to the joint venture,  Porta's share of the
      losses on its investment have been recorded on the equity method effective
      October 1, 2001. As such losses are in excess of Porta's  investment,  and
      Porta does not guaranty such excess  losses,  the  investment in the joint
      venture is carried at $0 as of December 31, 2001.

(11) Stockholders' Equity

   Porta had  outstanding  warrants  to its senior  lender to  purchase  571,152
      shares of common stock,  which are  immediately  exercisable  at $0.25 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.

                                                                     (Continued)

                                      F-17

<PAGE>

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

   See Note 9 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, 2001,  Porta had stock  purchase  warrants  outstanding to
      purchase 15,000 shares of common stock at an exercise price of $1.8125 per
      share until May 2005 of which warrants to purchase 10,000 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.

(12) 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. This plan has expired.

(13) Employee Benefit Plans

   Porta has deferred  compensation  agreements  with certain present and former
      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  2001,  2000 and 1999,
      Porta accrued approximately $166,000, $180,000 and $180,000, 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, 2001, 2000 and 1999, Porta's  contribution  amounted to
      $54,000, $72,000 and $93,000, respectively.

   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 2001 and 2000, 130,256 and 84,804 shares, respectively, were issued
      pursuant to the Purchase  Plan.  Subsequent  to December  31, 2001,  Porta
      issued  approximately  29,500 shares of stock to the  participants  of the
      Purchase Plan.

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

                                                                     (Continued)

                                      F-18

<PAGE>

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

(14) 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 shares of common stock were issued  pursuant to
      the Bonus Plan during 2001 and 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 prices 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  prices 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  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  prices 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.

   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  prices 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.

                                                                     (Continued)

                                      F-19

<PAGE>

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

   During 1999, pursuant to an employment contract with an officer, Porta issued
      options to purchase 15,000 shares of common stock at $1.75 per share.  The
      exercise  prices  approximated  market value on the date of issuance.  The
      options expire in May 2005. As of December 31, 2001, 10,000 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 (loss) and net income
      (loss) 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 loss and net loss per share (basic
      and diluted) would have been increased to the pro forma amounts  indicated
      below:

      (Dollars in thousands, except per share data)

                                             2001          2000          1999
                                             ----          ----          ----
Pro forma net loss                         $(14,787)     $(10,393)     $(14,280)
Pro forma net loss per share (basic
  and diluted)                             $  (1.50)     $  (1.06)     $  (1.50)

   The weighted-average fair values of options  granted  were $0.23,  $ 1.62 and
      $1.36 per share in 2001, 2000 and 1999, respectively.

   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
      2001, 2000 and 1999:

                                  2001              2000               1999
                                  ----              ----               ----
    Dividends:              $0.00 per share    $0.00 per share   $0.00 per share
    Volatility:             100%               57.64%-68.70%     45.80%-80.00%
    Risk-free interest:     4.22%-5.48%        5.54%-6.53%       4.50%-6.40%
    Expected term:          5 - 9.6 years        5 years           5 years

                                                                     (Continued)

                                      F-20

<PAGE>

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

      A summary of the status of Porta's  stock  option plans as of December 31,
      2001,  2000,  and 1999, and changes during the years ending on those dates
      is presented below:
<TABLE>
<CAPTION>
                                                     2001                   2000                          1999
                                        -------------------------  -----------------------     ---------------------------
                                        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           949,713       $2.55        870,538       $2.51          907,965        $3.42
Granted                                  55,000        0.29        108,500        3.12           27,700         1.74
Exercised                                   --                      (6,000)       1.50            --
Forfeited                              (203,008)       2.58        (23,325)       2.80          (65,127)       15.04
                                        -------                    -------                      -------
Outstanding end of year                 801,705       $3.96        949,713       $2.55          870,538        $2.51
                                        =======                    =======                      =======
Options exercisable at year-end         698,105                    807,780                      799,238
                                        =======                    =======                      =======
</TABLE>

   The following table summarizes  information  about stock options  outstanding
      under the stock option plans at December 31, 2001:

<TABLE>
<CAPTION>
                                     Options Outstanding                            Options Exercisable
                     --------------------------------------------------    ----------------------------------
    Range of         Outstanding    Remaining          Weighted-average    Exercisable       Weighted-Average
    Exercise Prices  at 12/31/01    Contractual Life   Exercise Price      at 12/31/01       Exercise Price
    ---------------  -----------    ----------------   --------------      -----------       --------------
    <S>                 <C>         <C>                    <C>                <C>                 <C>
    <$1.00              55,000      6.7 years              $0.29              31,000              $0.31
    $1.00 - 1.99       280,780      5.5 years              $1.51             280,613              $1.51
    $2.00 - 2.99        51,175      3.8 years              $2.25              50,375              $2.26
    $3.00 - 3.99       411,750      2.6 years              $3.24             333,117              $3.26
    $4.00 - 5.00         3,000      0.8 years              $5.00               3,000              $5.00
</TABLE>

(15) Income Taxes

   The provision (benefit) for income taxes consists of the following:

<TABLE>
<CAPTION>
                                2001                     2000                    1999
                       --------------------     --------------------    ---------------------
                       Current     Deferred     Current     Deferred    Current      Deferred
                       -------     --------     -------     --------    -------      --------
<S>                  <C>                                                              <C>
Federal              $      --        --              --       --            --       716,000
State and foreign     (203,000)       --         227,000       --        62,000        95,000
                     ---------        --       ---------       --     ---------     ---------
             Total   $(203,000)       --         227,000       --        62,000       811,000
                     =========        ==       =========       ==     =========     =========
</TABLE>

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

                                       2001             2000           1999
                                       ----             ----           ----
United States                     $(11,578,000)     (7,519,000)     (7,516,000)
Foreign                             (3,399,000)     (2,430,000)     (5,297,000)
                                  ------------      ----------     -----------
Loss before provision for
   income taxes                   $(14,977,000)     (9,949,000)    (12,813,000)
                                  ============      ==========     ===========

                                                                     (Continued)

                                      F-21

<PAGE>

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

   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 loss from
      continuing operations before income taxes is as follows:

<TABLE>
<CAPTION>
                                                                      2001            2000           1999
                                                                      ----            ----           ----
<S>                                                                <C>             <C>            <C>
Tax expense (benefit) at statutory rate                            $(5,092,000)    (3,383,000)    (4,356,000)
Increase (decrease) in income tax benefit resulting from:
   Increase (decrease) in valuation allowance                        3,057,000      2,776,000      5,486,000
   State and foreign taxes, less applicable federal benefits          (211,000)      (127,000)      (368,000)
   Non-deductible goodwill impairment                                1,973,000             --             --
   Other expenses not deductible for tax                               333,000        345,000        152,000
   Foreign income taxed at rates
       Different from U.S. statutory rate                              (19,000)        25,000         (5,000)
   Estimated NOL adjustments, including Section 382 limitation              --        594,000             --
   Reversal of prior year's accrual                                   (262,000)
   Other                                                                18,000         (3,000)       (36,000)
                                                                   -----------    -----------    -----------
                                                                   $  (203,000)       227,000        873,000
                                                                   ===========    ===========    ===========
</TABLE>

   Porta has unused United States tax net operating loss (NOL)  carryforwards of
      approximately $89,000,000 expiring at various dates between 2009 and 2021.
      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).  In  addition,  Porta has
      foreign NOL  carryforwards  of  approximately  $5,700,000  with indefinite
      expiration dates.

   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                         8,441,000
                       2021                         3,961,000
                                                  -----------
                                                  $43,855,000
                                                  ===========

   The components of the  deferred  tax  assets,  the net  balance of which zero
      after the  valuation  allowance,  as of December  31, 2001 and 2000 are as
      follows:

                                                        2001           2000
                                                        ----           ----
    Deferred tax assets:
       Inventory                                   $  1,370,000       1,211,000
       Allowance for doubtful accounts receivable       835,000         828,000
       Benefits of tax loss carryforwards            18,734,000      16,622,000
       Benefit plans                                    633,000         845,000
       Accrued commissions                              619,000         581,000
       Other                                            917,000         390,000
       Depreciation                                     818,000         392,000
                                                   ------------    ------------
                                                     23,926,000      20,869,000
       Valuation allowance                          (23,926,000)    (20,869,000)
                                                   ------------    ------------
                                                   $         --              --
                                                   ============    ============

                                                                     (Continued)

                                      F-22

<PAGE>


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

   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 2001 and 2000,  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 year ended  December 31, 1989.  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.  The aggregate  annual
      amounts  payable by Porta,  including  interest on the unpaid amounts at a
      current rate of 7%, is $240,000 in 2001.  As of December  31, 2001,  Porta
      has not made  all the  required  payments  through  that  date  under  the
      settlement and has been in correspondence  with the IRS to obtain an offer
      in compromise. As of December 31, 2001, $274,000 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, 2001,  undistributed  earnings of the foreign subsidiaries amounted to
      approximately $1,186,000. It is not practicable to determine the amount of
      income or  withholding  tax that would be payable upon the  remittance  of
      those earnings.

(16) Leases

   At December 31, 2001, 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
      2001,  2000, and 1999 amounted to approximately  $793,000,  $1,357,000 and
      $874,000,  respectively. All rental expense related to the Company's North
      Carolina  facility,  which has been  vacated,  were  accrued in 2000.  The
      landlord of the North Carolina  facility has obtained a $400,000  judgment
      against the  Company.  Minimum  rental  commitments,  exclusive  of future
      escalation charges, for each of the next five years are as follows:

                      2002                      $1,005,000
                      2003                         774,000
                      2004                         720,000
                      2005                         555,000
                      2006                         222,000
                      Thereafter                 2,914,000
                                                ----------
                                                $6,190,000
                                                ==========

                                                                     (Continued)

                                      F-23

<PAGE>

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

(17) Contingencies

   At December 31, 2001, Porta was contingently  liable for outstanding  letters
      of  credit  aggregating   approximately   $573,000  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 21).

   As a result of the Company's continuing financial  difficulties,  a number of
      creditors have engaged attorneys or collection agencies or commenced legal
      actions  against the  Company,  and some of them have  obtained  judgments
      against the  Company,  including a former  landlord of the North  Carolina
      facility, which has obtained a $400,000 judgment against the Company (note
      15). The creditors include five former senior executives who have deferred
      compensation  agreements  with the Company.  The total  payments due under
      these agreements are approximately $1.9 million,  of which $46,000 was due
      at December  31, 2001 and an  additional  $100,000 has become due in 2002.
      Other claimants who have already either commenced  litigation or otherwise
      sought  collection or have obtained a judgment against the Company are due
      approximately $600,000.

(18) Major Customers

   During the years ended December 31, 2001, 2000 and 1999, Porta's five largest
      customers  accounted for sales of  $13,444,000,  or  approximately  48% of
      sales,  $28,323,000,  or approximately  55% of sales, and $19,700,000,  or
      approximately 51% of sales, respectively. Porta's largest customer in 2001
      with sales of $3,485,000,  or approximately  12% of sales, was Philippines
      Long  Distance  Telephone  (PLDT).  However,   Porta's  sales  to  British
      Telecommunications plc ("BT") directly of $3,339,000, approximately 12% of
      sales,  and  through  Fujitsu  Telecommunications  Europe LTD  ("FTEL") as
      purchasing agent to BT of $3,200,000,  approximately 11% of sales in 2001,
      combined for sales of  $6,539,000,  approximately  23% of sales,  in 2001.
      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 the Company's products for use
      by British  Telecommunications  plc ("BT") were sold to FTEL as purchasing
      agent to BT. Porta's  largest  customer in 1999 was BT. Direct sales to BT
      for  the  year  ended  December  31,  2001,  2000  and  1999  amounted  to
      $3,339,000, $5,098,000 and $7,825,000, respectively, or approximately 12%,
      10% and 20%,  respectively,  of Porta's sales for such years. Direct sales
      to FTEL  for the year  ended  December  31,  2001  and  2000  amounted  to
      $3,200,000, and $12,051,000,  respectively,  or approximately 11% and 24%,
      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. No other
      customers  account  for  10% or  more  of  Porta's  sales  for  any  year.
      Approximately 19% and 26%,  respectively,  of Porta's accounts  receivable
      are due from the five largest  customers as of December 31, 2001 and 2000,
      respectively.

                                                                     (Continued)

                                      F-24

<PAGE>

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

(19) 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.

(20) Net Loss Per Share

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

<TABLE>
<CAPTION>
                                                            2001           2000             1999
                                                            ----           ----             ----
      <S>                                              <C>             <C>             <C>
      Numerator-Basic and diluted
          Net loss per share:
              Net loss                                 $(14,774,000)   $(10,176,000)   $(13,686,000)
                                                       ============    ============    ============
      Denominator:

         Denominator for basic and diluted net loss
            per share -weighted-average shares            9,878,000       9,763,000       9,489,000
                                                       ============    ============    ============
         Basic per share amounts:
           Net loss per share of common stock          $      (1.50)   $      (1.04)   $      (1.44)
                                                       ============    ============    ============
         Diluted per share amounts:
           Net loss per share of common stock          $      (1.50)   $      (1.04)   $      (1.44)
                                                       ============    ============    ============
</TABLE>


   Options to purchase  806,705,  649,733 and 638,508 shares of common stock for
      2001, 2000 and 1999, respectively, with exercise prices ranging from $0.22
      to $5.00,  $1.69 to $5.00  and  $1.69 to $5.00  for  2001,  2000 and 1999,
      respectively,  were  outstanding  but not included in the  computation  of
      diluted net loss per share  because the exercise  prices were greater than
      the average market price of common stock during such years.

   Warrants to purchase  1,776,152,  195,500 and 913,000  shares of common stock
      for 2001, 2000 and 1999,  respectively,  with exercise prices ranging from
      $0.25 to $1.81,  $1.81 to $17.50  and $1.56 to $17.50  for 2001,  2000 and
      1999,  respectively,  were outstanding but not included in the computation
      of diluted net loss per share  because the  exercise  prices were  greater
      than the average market price of common stock during such years.

                                                                     (Continued)

                                      F-25


<PAGE>


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

(21) Legal Matters

   In July 2001,  the holder of a subordinated  note in the principal  amount of
      $500,000  commenced  an action  against the  Company in the United  States
      District  Court for the Southern  District of New York seeking  payment of
      the principal and accrued interest on their  subordinated notes which were
      payable in July 2001. The payment of the note is  subordinated  to payment
      of  the  Company's   senior  debt  and  the  Company   believes  that  the
      subordination  provision of the note prohibits payment by the Company. The
      plaintiffs' motion for a summary judgment was recently denied by the court
      on the grounds that the terms of the note did not give them  permission to
      obtain a judgment  while  Porta  remained  in  default to the senior  debt
      holder.  The  Company's  obligations  under  the  subordinated  notes  are
      reflected as current liabilities on the Company's balance sheet.

   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 Company's 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
      has filed an answer and counterclaim  against the plaintiffs.  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 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.

   See Note 16, in connection with a judgment by a former landlord, and Note 17,
      in connection with claims against the Company by creditors.

                                                                     (Continued)

                                      F-26


<PAGE>

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

(22) Cash Flow Information

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

                                                2001       2000      1999
                                                ----       ----      ----
      Cash paid for interest                   $ 933      3,763      3,117
                                               =====      =====      =====
      Cash paid for income taxes               $ 131        183        379
                                               =====      =====      =====

      (2) Non-cash transactions:

            (i) 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).

            (ii) 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 9).

            (iii) In 2000,  Porta  incurred a non-cash  charge of  $140,000 as a
            result of the issuance New Warrants (note 9).

            (iv) 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 7).

            (v) 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
            7).

            (vi) 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
            7).

            (vii) In 2001,  Porta  incurred  a  non-cash  charge of $39,000 as a
            result of the reduction in the exercise price of the Warrants issued
            to its senior  lender in  connection  with an  agreement  to add all
            current and future interest due to the principal balance through the
            loan expiration date (note 7).

                                                                     (Continued)

                                      F-27

<PAGE>

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

(23) 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.

                                           2001            2000            1999
                                           ----            ----            ----
      Revenue:
            Line                      $ 12,756,000    20,546,000     18,189,000
            OSS                          8,874,000    22,296,000     14,254,000
            Signal                       5,737,000     7,644,000      6,328,000
                                      ------------    ----------    -----------
                                      $ 27,367,000    50,486,000     38,771,000
                                      ============    ==========    ===========
      Segment profit:
            Line                      $  1,275,000     3,665,000      3,582,000
            OSS                        (10,518,000)   (6,201,000)   (10,650,000)
            Signal                       1,449,000     2,088,000      1,884,000
                                      ------------    ----------    -----------
                                      $ (7,794,000)     (448,000)    (5,184,000)
                                      ============    ==========    ===========
      Depreciation and amortization:
            Line                      $    374,000       424,000        505,000
            OSS                          1,262,000     1,262,000        881,000
            Signal                         166,000       162,000        199,000
                                      ------------    ----------    -----------
                                      $  1,802,000     1,848,000      1,585,000
                                      ============    ==========    ===========
      Total identifiable assets:
            Line                      $  5,990,000     8,508,000      7,921,000
            OSS                          4,268,000    14,942,000     21,637,000
            Signal                       5,557,000     6,591,000      7,965,000
                                      ------------    ----------    -----------
                                      $ 15,815,000    30,041,000     37,523,000
                                      ============    ==========    ===========
      Capital expenditures:
            Line                      $    132,000       340,000        415,000
            OSS                             55,000     1,132,000        670,000
            Signal                               0        45,000         27,000
                                      ------------    ----------    -----------
                                      $    187,000     1,517,000      1,112,000
                                      ============    ==========    ===========

                                                                     (Continued)


                                      F-28


<PAGE>


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

   The following table reconciles segment totals to consolidated totals:

<TABLE>
<CAPTION>
                                                             2001           2000            1999
                                                             ----           ----            ----
      <S>                                               <C>               <C>             <C>
      Revenue:
         Total revenue for reportable segments          $ 27,367,000      50,486,000      38,771,000
         Other revenue                                       695,000         654,000         165,000
                                                        ------------    ------------    ------------
      Consolidated total revenue                        $ 28,062,000      51,140,000      38,936,000
                                                        ============    ============    ============
      Operating loss:
         Total segment loss for reportable segments     $ (7,794,000)       (448,000)     (5,184,000)
         Corporate and unallocated                        (3,659,000)     (4,705,000)     (4,525,000)
                                                        ------------    ------------    ------------
      Consolidated total operating loss                 $(11,453,000)     (5,153,000)     (9,709,000)
                                                        ============    ============    ============
      Depreciation and amortization:
         Total for reportable segments                  $  1,802,000       1,848,000       1,585,000
         Corporate and unallocated                           107,000          63,000          92,000
                                                        ------------    ------------    ------------
      Consolidated total deprecation and amortization   $  1,909,000       1,911,000       1,677,000
                                                        ============    ============    ============
      Total assets:
         Total for reportable segments                  $ 15,815,000      30,041,000      37,523,000
         Corporate and unallocated                         2,018,000       4,133,000       5,925,000
                                                        ------------    ------------    ------------
      Consolidated total assets                         $ 17,833,000      34,174,000      43,448,000
                                                        ============    ============    ============
      Capital expenditures:
         Total for reportable segments                  $    187,000       1,517,000       1,112,000
         Corporate and unallocated                             9,000          16,000          79,000
                                                        ------------    ------------    ------------
      Consolidated total capital expenditures           $    196,000       1,533,000       1,191,000
                                                        ============    ============    ============
</TABLE>

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

                                           2001           2000          1999
                                           ----           ----          ----
      Revenue:
            United States               $12,999,000    17,225,000    14,368,000
            United Kingdom                8,060,000    20,244,000    15,673,000
            Asia/Pacific                  4,552,000     5,429,000     4,159,000
            Other Europe                  1,761,000     2,482,000     3,130,000
            Latin America                   288,000       146,000     1,257,000
            Other North America             357,000     5,570,000       296,000
            Other                            45,000        44,000        53,000
                                        -----------   -----------   -----------
      Consolidated total revenue        $28,062,000    51,140,000    38,936,000
                                        ===========   ===========   ===========

      Consolidated long-lived assets:
            United States               $ 5,301,000    12,115,000    12,011,000
            United Kingdom                  583,000     1,107,000     2,398,000
            Other North America             523,000       568,000       618,000
            Asia/Pacific                          0       612,000       200,000
            Latin America                     8,000        14,000        35,000
            Other                             2,000         3,000         8,000
                                        -----------   -----------   -----------
                                          6,417,000    14,419,000    15,270,000
         Current and other assets        11,416,000    19,755,000    28,178,000
                                        -----------   -----------   -----------
      Consolidated total assets         $17,833,000    34,174,000    43,448,000
                                        ===========   ===========   ===========

                                                                     (Continued)

                                      F-29

<PAGE>

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

(24) Quarterly Information (Unaudited)

   The following presents certain unaudited quarterly financial data:

<TABLE>
<CAPTION>
                                                               Quarter Ended
                                   --------------------------------------------------------------------
                                   March 31, 2001  June 30, 2001  September 30, 2001  December 31, 2001
                                   --------------  -------------  ------------------  -----------------
      <S>                            <C>            <C>              <C>                <C>
      Net sales                      $ 7,042,000    $ 8,915,000      $ 6,039,000        $ 6,066,000
      Gross profit                     1,414,000      2,925,000        1,503,000          2,250,000
      Net income (loss)               (3,233,000)    (2,511,000)      (1,898,000)        (7,132,000)
      Net income (loss) per share:
          Basic                           $(0.33)        $(0.25)          $(0.19)            $(0.73)
          Diluted                         $(0.33)        $(0.25)          $(0.19)            $(0.73)
</TABLE>

<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, 2001 reflects an impairment loss
      on goodwill of $5,802,000 associated with OSS operations (note 6).

   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-30