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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, 1999

      [ ]   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. [ ]

      State aggregate market value of the voting stock held by non-affiliates of
the registrant: $32,119,200 as of March 13, 2000.

      Indicate  the  number of shares  outstanding  of each of the  registrant's
class of common stock, as of the latest  practicable  date:  9,516,800 shares of
Common Stock, par value $.01 per share, as of March 13, 2000.

                       DOCUMENTS INCORPORATED BY REFERENCE

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

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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.  Porta's core
products,  focused on ensuring  communications for service providers  worldwide,
fall into three categories:

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

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

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

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

Forward-Looking Statements

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

Risk Factors

      We recently  incurred net losses from our  operations,  and our losses may
continue.  We incurred a net loss of $13,686,000,  or $1.44 per share (basic and
diluted),  on sales of $38,936,000 for 1999. The loss resulted from a decline in
sales of $20,407,000, or 34%, from 1998 combined with a reduced gross margin and
an increase in selling,  general  and  administrative  expenses.  We cannot give
assurance that we will be able to operate profitably in the future.


<PAGE>

      We have a need to finance our working  capital  requirements.  Our working
capital at December 31, 1999 was $6,135,000, compared to $14,262,000 at December
31,  1998.  However,  as of December  31,  1999,  our  long-term  debt  includes
$17,518,000  ($19,668,000  at April 10, 2000) due to our senior  lender,  all of
which is due and payable on July 3, 2001, at which time our  agreement  with the
senior lender will  terminate.  At December 31, 1999, we did not have sufficient
resources to pay the senior  lender at maturity and we do not expect to generate
the necessary  cash from our  operations  to enable us to make that payment.  In
addition,  $6,000,000 of subordinated  notes were outstanding as of December 31,
1999 that mature on January 3, 2001.  We can extend these Notes to July 3, 2001.
As of April 10, 2000  $5,100,000 of these notes can be extended by Porta to July
3, 2001.  The remaining  $900,000 can be extended under certain  conditions.  We
cannot give any assurance that we will be able to either pay our  obligations to
our senior or subordinated  lenders at their respective  maturity dates or renew
our  agreement  with our  senior  lender or enter into an  agreement  with a new
lender.  At December 31, 1999, we were in default on a covenant on our agreement
with our senior lender.  Such default was waived;  however, we cannot assure you
that any  future  defaults  will be waived,  in which  event the  principal  and
interest on our obligations to our senior lender may become  immediately due and
payable.  See "Management's  Discussion and Analysis of Financial  Condition and
Results of Operations."

      We are heavily dependent on foreign sales.  Approximately 62% of our sales
in 1999,  60% of our sales in 1998 and 69% of our  sales for 1997,  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 completing
and customer final payment for our Operational  Support Systems  contracts,  and
political  and  economic  change.  In  foreign  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 rely heavily on British  Telecommunications  for most of our sales. Our
largest customer in both 1999 and 1998 was British Telecommunications.  Sales to
British  Telecommunications  for 1999 were $7,825,000,  or approximately  20% of
sales,  and  sales in 1998  were$15,349,000,  or 26% of  sales.  Therefore,  any
significant  interruption or decline in sales to British  Telecommunications may
have a materially  adverse effect upon our operations.  Under our agreement with
British Telecommunications,  we give British Telecommunications the right to use
our  technology or have products  using our  technology  manufactured  for it by
others.

      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.

      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.
Lucent's  greater  resources,  extensive  research and  development  facilities,
long-standing  equipment supply  relationships  with the regional Bell operating
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.   Other  domestic  and  foreign  companies  also  have
significantly   greater  resources  than  we  do.  Furthermore,   in  the  past,
competitors  have used our financial  difficulties  as a sales tool and our loss
for 1999, combined with our reduced working capital and the scheduled expiration
of our  agreement  with our senior  lender in 2001 may place us in a competitive
disadvantage.


                                    2 of 25
<PAGE>

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

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

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

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.
Porta's  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.

      Porta's 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 including
flow-thru.  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.

      Porta  has  entered  into  a  number  of  agreements   with  suppliers  of
complementary  market ready products and plans to offer those  products  through
its  distribution  channels to its customer  base.  Those  products  enhance the
customers  Service  Delivery  and  Service  Assurance  initiatives  and  address
specific  operations  areas  such  as  Facility  and  Records  Verification  and
purification, Work Force scheduling and task mapping, and Call Fraud Detection.


                                    3 of 25
<PAGE>

      Porta's 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 operation
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. Such contracts  typically contain  performance
guarantees by Porta and clauses imposing  penalties on us 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.
Delays in purchaser  acceptance  of the systems and in Porta's  receipt of final
contract payments have occurred in connection with a number of foreign sales. In
addition,  Porta has not experienced a steady or predictable  flow of orders for
OSS systems.

      Telecommunications      Connection      Equipment.      Porta's     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   Porta's   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.

      Porta's  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.

      Porta also has 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.

      Porta's  copper  connection/protection  products  are  used by many of the
Regional Bell Operating  Companies (RBOC's) as well as by independent  telephone
operating  companies  (CLEC's)  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.  Porta's 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.


                                    4 of 25
<PAGE>


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

                            Sales by Product Category
                            Years Ended December 31,

                          1999                1998                 1997
                          ----                ----                 ----
                                    (Dollars in thousands)

OSS Systems         $14,254     37%      $27,318     46%      $29,561     48%

Line Connecting
/Protecting
Equipment            18,189     47%       24,291     41%       23,753     38%
Signal Processing     6,328     16%        7,539     13%        8,280     13%

Other                   165      0%          195      0%          636      1%
                    -------   ----       -------   ----       -------   ----
Total               $38,936    100%      $59,343    100%      $62,230    100%
                    =======   ====       =======   ====       =======   ====

Markets

      Porta  supplies  equipment  and  systems to  telephone  companies  used to
provide  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.

      Porta's 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 1999, approximately 37% of Porta's sales consisted of OSS products.


                                    5 of 25
<PAGE>

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

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

      During 1999,  approximately 47% of Porta's sales were made to customers in
this category.

      Porta's 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.

      Porta's 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 1999, signal processing  equipment  accounted for approximately 16%
of Porta's sales.

Marketing and Sales

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

      When appropriate to obtain sales in foreign  countries,  we may enter into
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 RBOC's and the
customer premises  equipment  market.  All distributors  marketing  copper-based
products also market directly competing products.  In addition,  Porta continues
to promote the direct  marketing  relationships  it  developed  in the past with
telephone operating companies.

      We have an agreement with British  Telecommunications  plc ("BT") covering
Porta's line connecting/protecting products. This agreement which will expire on
August 31, 2001,  provides,  among other things,  that Porta is a  non-exclusive
supplier  to BT for these  products.  BT  purchased  line  connecting/protecting
products  amounting to $6,566,000  (17% of sales) in 1999,  $11,345,000  (19% of
sales) in 1998, and $9,397,000  (15% of sales) in 1997.  During these years,  we
also sold our  products to  unaffiliated  suppliers  to BT for resale to BT. Our
agreement with BT provides for a cross license which,  in effect,  enables BT to
use  certain  of our  proprietary  information  to  modify or  enhance  products
provided to BT and permits BT to  manufacture  or engage  others to  manufacture
those products.


                                    6 of 25
<PAGE>

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

      Subsequent to December 31, 1999,  Porta  entered into a multi-year  sales,
marketing, and management co-operative agreement with Fujitsu Telecommunications
Europe LTD 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 (SELQ) for
broadband services and the sixth generation Sherlock remote test unit to telecom
service  operators  in the United  Kingdom and the  remainder  of Europe.  Porta
anticipates  this  significant  relationship  may result in up to $50,000,000 in
sales over the next four years.

      Porta's 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 the
Company's sales to customers by geographic region:

                   Sales to Customers By Geographic Region (1)

                                     Year Ended December 31,
                         1999                 1998                 1997
                         ----                 ----                 ----
                                     (Dollars in thousands)

North America       $14,664     38%      $20,830     35%      $19,269     31%

United Kingdom       15,673     40%       20,441     34%       18,640     30%

Asia/Pacific          4,159     11%        7,181     12%       10,278     17%

Other Europe          3,130      8%        3,377      6%       10,587     17%

Latin America         1,257      3%        7,463     13%        2,429      4%

Middle East              47      0%           51      0%          879      1%

Other                     6      0%           --      0%          148      0%
                    -------   ----       -------   ----       -------   ----
Total Sales         $38,936    100%      $59,343    100%      $62,230    100%
                    =======   ====       =======   ====       =======   ====

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


                                    7 of 25
<PAGE>

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

Manufacturing

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

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

      Porta develops software at its facilities in Syosset, New York, Charlotte,
North Carolina, and Coventry, United Kingdom.

Source and Availability of Components

      Porta generally  purchases the standard components used in the manufacture
of its products from a number of suppliers. Porta attempts to assure itself that
the components are available from more than one source.  Porta  purchases all of
its MKIII test units from two  suppliers.  Porta  purchases  the majority of its
minicomputers  used  in its  OSS  systems  from  Digital  Equipment  Corporation
("DEC").  However,  we could use other  computer  equipment in our systems if we
were  unable  to  purchase  DEC  products.  Other  components,  such  as PCs and
teleprinters,  used in connecting with our electronic products could be obtained
from alternate sources and readily integrated with our products.

Significant Customers

      During  1999,  Porta's  five  largest  customers  accounted  for  sales of
$19,700,000,  or  approximately  51% of sales,  and during 1998 its five largest
customers  accounted for sales of $28,797,000,  or  approximately  49% of sales.
Porta's largest customer in both 1999 and 1998 was BT. Sales to BT for 1999 were
$7,825,000 or approximately 20% of sales, and sales in 1998 were $15,349,000, or
26% of sales. Therefore,  any significant interruption or decline in sales to BT
may have a materially adverse effect upon our operations.  During 1998, sales to
a Chilean telephone  company were $6,834,000,  or approximately 12% of sales. No
other customers account for 10% or more of 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 Porta's
foreign  sales.  Porta's  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.


                                    8 of 25
<PAGE>

Backlog

      At December  31,  1999,  Porta's  backlog was  $23,800,000  compared  with
approximately $8,800,000 at December 31, 1998. Of the December 31, 1999 backlog,
approximately  $19,800,000  represented orders from foreign telephone  operating
companies.  We expect to ship substantially all of our December 31, 1999 backlog
during 2000.

Intellectual Property Rights

      Porta owns a number of domestic utility and design patents and has pending
patent  applications for these products.  In addition,  Porta has foreign patent
protection for a number of its products.

      From time to time Porta enters into  licensing and  technical  information
agreements under which it receives or grants rights to produce certain specified
subcomponents  used in Porta's 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  Porta  does  business  is
characterized by intense competition,  rapid technological change and a movement
to private ownership of telecommunications equipment. 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, Porta is functioning in a market characterized by distributors
and installers of equipment and by commodity pricing.

      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 its  line  connecting/protecting
equipment,  Porta has met with  significant  competition  from United States and
foreign  manufacturers  of comparable  equipment and expects this competition to
continue.  In addition to Lucent, a number of Porta's 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.


                                    9 of 25
<PAGE>


Research and Development Activities

      Porta spent  approximately  $6,100,000 in 1999,  $6,500,000  in 1998,  and
$5,400,000 in 1997 on its research and development activities.  All research and
development was company sponsored and is expensed as incurred.

Employees

      As of  February  18,  2000,  Porta  had 477  employees  of which  112 were
employed in the United States,  272 in Mexico,  45 in the United  Kingdom,  5 in
Poland,  8 in Chile,  6 in China,  and 29 in Korea (in  connection  with Porta's
Korean joint venture).  Porta believes that its relations with its employees are
good, and it has never  experienced a work stoppage.  Porta's  employees are not
covered by collective bargaining agreements,  except for its hourly employees in
Mexico who are covered by a  collective  bargaining  agreement  that  expires on
December 31, 2001.

Item 2. Properties

      Porta  currently  leases  approximately  20,400  square feet of executive,
sales,  marketing and research and  development  space  located in Syosset,  New
York;  and 7,000  square  feet of office  space  used for  software  development
located  in  Charlotte,  North  Carolina.  We  also  own a  31,000  square  foot
manufacturing  and research and development  facility  located in Glen Cove, New
York.  These facilities  represent  substantially  all of our office,  plant and
warehouse  space in the United  States.  The  Syosset,  New York  lease  expires
December 2000, and the Charlotte, North Carolina lease expires in November 2004.
The aggregate annual rental is approximately $554,000.

      Our wholly-owned  United Kingdom subsidiary entered into a sale lease-back
agreement in 1999 whereby we sold our 34,300  square foot  facility in Coventry,
England,  which facility comprises all of our office,  plant and warehouse space
for  approximately  $400,000 and entered into a 20 year lease  arrangement.  The
purchaser  of the  property  committed  substantial  resources  to renovate  the
facility. The aggregate annual rental is approximately $250,000.

      Porta's  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.

Item 3. Legal Proceedings

      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.  The action is
currently in the discovery stage.

      In December  1999,  Porta was served with a request  for  arbitration  for
commissions  allegedly owed to a former sales  representative.  Porta terminated
its sales  representative  agreement in July 1999.  The request for  arbitration
alleges  that Porta's  termination  of the  agreement  was improper and that the
representative  is  entitled  to be paid  damages  based on the  commissions  he
allegedly  would have received for an  indefinite  term  beginning  August 1999.
Additionally,  the request for arbitration  alleges that the  representative was
not paid for certain unspecified  commissions that he was supposedly entitled to
receive  during the period from  February 1, 1986  through  July 31,  1999.  The
request for  arbitration  does not specify  the precise  amount of damages,  but
estimates  damages  approximating  $500,000.  The arbitration is in its earliest
stages and Porta intends to defend it vigorously.


                                    10 of 25
<PAGE>

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

      During the fourth  quarter of 1999,  there were no matters  required to be
submitted to a vote of security holders of the Company.

Item Pursuant to Instruction 3 of Item 401 (b) of Regulation S-K:
Executive Officers of the Company

Name and Position                                                     Age
-----------------                                                     ---
William V. Carney                                                      62
Chairman of the Board
Chief Executive Officer

Michael A. Tancredi                                                    70
Senior Vice President, and Secretary and Treasurer

Edward B. Kornfeld                                                     56
Senior Vice President - Operations
Chief Financial Officer

Ronald Wilkins                                                         43
Senior Vice President and Managing
Director - OSS

John J. Gazzo                                                          56
Senior Vice President

Michael Bahlo                                                          41
Senior Vice President

Prem G. Chandran                                                       47
Senior Vice President

David Rawlings                                                         56
Senior Vice President

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


                                    11 of 25
<PAGE>

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

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

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

      Mr. Wilkins was elected a Senior Vice President and Managing Director, OSS
Division in 1998.  Prior to joining Porta Systems Corp. in 1998, Mr. Wilkins was
involved in the  wireless  telecommunication  industry as  President  and CEO of
Sycom  Technologies  from  November 1997 to August 1998,  and Vice  President of
Strategic Planning and Alliances at Conxus  Communications from December 1995 to
October  1997.  Prior to October  1997,  Mr.  Wilkins  held  various  management
positions with Digital Equipment Corporation.

      Mr. Gazzo was elected  Senior Vice  President  in March 1996.  He was Vice
President-Marketing  since April 1993,  general manager of our Porta Electronics
Division  from  November  1989  to  April  1993,  Vice   President-Research  and
Development from March 1984 to November 1989 and Vice President-Engineering from
February 1978 to February 1984.

      Mr. Bahlo was elected  Senior Vice  President - OSS Sales and Marketing in
January 1999.  Prior to joining the Company,  Mr. Bahlo was the Vice  President,
Marketing and Sales for Daikin U.S. Comtec Laboratories from March 1997 to March
1999, and held various management and marketing positions with Digital Equipment
Corporation  from  October 1986 to March 1997 most  recently as Marketing  Group
Manager.

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

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


                                    12 of 25
<PAGE>

                                     Part II

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

      Porta's common stock is traded on the American Stock Exchange,  Inc. under
the symbol PSI. The following table sets forth, for 1998 and 1999, the quarterly
high  and  low  sales  prices  for  Porta's  common  stock  on the  consolidated
transaction reporting systems for American Stock Exchange listed issues.

                                                     High              Low
                                                     ----              ---
1998     First Quarter                               $4                $2  7/8
         Second Quarter                               5  3/8            3  1/2
         Third Quarter                                4  15/16          1  5/8
         Fourth Quarter                               2  1/4            1  1/4

1999

         First Quarter                               $2  1/2           $1  3/4
         Second Quarter                               2  3/16           1  1/2
         Third Quarter                                1  7/8               5/8
         Fourth Quarter                               1  1/4               5/8

      Porta did not declare or pay any cash dividends in 1999 or 1998. It is the
present  policy of Porta to retain  earnings,  if any, to finance the growth and
development of the business and therefore, Porta does 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  13,  2000,  Porta had  approximately  1,005  stockholders  of
record.

Item 6. Selected Financial Data

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


                                    13 of 25
<PAGE>

<TABLE>
<CAPTION>
                                                        Year Ended December 31,
                                          ---------------------------------------------------
                                          1999        1998        1997        1996       1995
                                          ----        ----        ----        ----       ----
                                                 (In thousands, except per share data)
<S>                                    <C>         <C>         <C>         <C>         <C>
Income Statement Data:

Sales                                  $ 38,936    $ 59,343    $ 62,230    $ 57,987    $ 61,181
Operating income (loss)                  (9,709)      4,566       6,101       3,982     (19,884)

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

Income (loss) before discontinued
   operations and extraordinary item    (13,686)        451      (7,021)      1,252     (29,297)

Net income (loss)                       (13,686)        527      (6,899)      5,174     (31,041)

Basic per share amounts:
      Continuing operations            $  (1.44)   $   0.05    $  (2.26)   $   0.57    $ (20.05)
      Net income (loss)                $  (1.44)   $   0.06    $  (2.22)   $   2.37    $ (21.25)

Diluted per share amounts:
      Continuing operations            $  (1.44)   $   0.04    $  (2.26)   $   0.23    $ (20.05)
      Net income (loss)                $  (1.44)   $   0.05    $  (2.22)   $   0.94    $ (21.25)

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

Number of shares used in
   calculating net income (loss)
   per share-basic                        9,489       9,281       3,111       2,184       1,461

Number of shares used in
   calculating net income (loss)
   per share-diluted                      9,489       9,785       3,111       5,528       1,461

Balance Sheet Data:

Total assets                           $ 43,448    $ 52,136    $ 51,000    $ 51,660    $ 60,591

Long-term debt excluding current
   maturities                          $ 21,902    $ 17,238    $ 18,858    $ 45,804    $ 55,839

Stockholders' equity (deficit)         $ (1,387)   $ 11,984    $  6,813    $(19,702)   $(29,323)
</TABLE>


                                    14 of 25
<PAGE>

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

      Porta's  consolidated  statements of operations  for the three years ended
December  31,  1999,  1998 and  1997,  respectively,  as a  percentage  of sales
follows:

                                                     Years Ended December 31,
                                                  -----------------------------
                                                  1999        1998        1997
                                                  ----        ----        ----
Sales                                              100%        100%        100%
Cost of sales                                       74%         59%         61%
                                                  ----        ----        ----
  Gross Profit                                      26%         41%         39%
Selling, general and
administrative expenses                             35%         22%         20%
Research and development expenses                   16%         11%          9%
                                                  ----        ----        ----
Operating income (loss)                            (25%)         8%         10%
Interest expense                                    (9%)        (6%)        (5%)
Other                                                1%          2%          2%
Debt conversion expense                             --          (2%)       (19%)
                                                  ----        ----        ----
Income (loss) from continuing
   operations before income

   taxes and minority interest                     (33%)         2%        (12%)
Income tax expense (benefit)
   and minority interest                             2%          1%         (1%)
                                                  ----        ----        ----

Net income (loss)                                  (35%)         1%        (11%)
                                                  ====        ====        ====


                                    15 of 25
<PAGE>

Results of Operations

Years Ended December 31, 1999 and 1998

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

      OSS  sales  for  1999  were   $14,254,000,   compared  to  1998  sales  of
$27,318,000,  a decrease of $13,064,000 (47%). Sales of OSS systems are not made
on a recurring basis to customers,  but are the result of extended  negotiations
that  frequently  cover many months and do not always  result in a contract.  In
addition,  OSS contracts  may include  conditions  precedent,  such as obtaining
financing  or bank  approval,  and the  contracts  are not  effective  until the
conditions  are satisfied.  During 1999,  OSS sales resulted  primarily from the
completion of OSS contracts,  which were in effect at the beginning of the year,
and our major new OSS contracts  were signed during the fourth  quarter of 1999.
The new  contracts,  which  total  $17,000,000  are  with the  Philippines  Long
Distance   Telephone   Co.   for   approximately    $5,000,000,    and   Fujitsu
Telecommunications Europe LTD for approximately $12,000,000.  We expect to begin
to recognize revenue from these new OSS contracts in 2000.

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

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

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

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

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

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

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


                                    16 of 25
<PAGE>

Results of Operations (continued)

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

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

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

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

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

      Based on our current backlog and recent forecasts,  we expect to return to
profitability in 2000.

Years Ended December 31, 1998 and 1997

      Sales  for 1998  were  $59,343,000  compared  to  $62,230,000  in 1997,  a
decrease of $2,887,000  (5%). The decrease in revenue is attributed  principally
to shortfalls from our OSS division.

      OSS  sales  for  1998  were   $27,318,000,   compared  to  1997  sales  of
$29,561,000, a decrease of $2,243,000 (8%). The decreased sales relate primarily
to delays in the installation of certain  contracts and delays in the receipt of
new anticipated orders.

      Line   connection/protection    equipment   sales   for   1998   increased
approximately  $538,000 (2%) from $23,753,000 in 1997 to $24,291,000  1998. This
increase relates to improved sales to a customer in Mexico, which were offset by
decreased  sales of a certain  product line to BT. During 1997,  Porta completed
delivery of products to BT under a prior  agreement and commenced  delivery of a
replacement  product.  The  decline  reflected  both a decrease in the number of
units sold and a lower selling price per unit for the replacement product.

      Signal processing  revenue for 1998 compared to 1997 decreased by $741,000
(9%) from  $8,280,000 to $7,539,000.  During 1997 revenue was generated from the
earlier than anticipated completion of military orders and non-recurring revenue
from certain engineering services, which was not repeated in 1998.

      Cost of sales for 1998,  as a percentage of sales,  decreased  from 61% in
1997 to 59% in 1998.  The  improvement  in gross margin is attributed to Porta's
continuing  effort to increase  manufacturing  productivity  and the decrease of
certain fixed expenses associated with the OSS contracts.


                                    17 of 25
<PAGE>

Results of Operations (continued)

      Selling,  general and  administrative  expenses increased by $261,000 (2%)
from  $12,818,000  to  $13,079,000  from December 31, 1998 compared to 1997. The
increase   relates    primarily   to   sales   commissions   on   certain   line
connection/protection equipment sales for 1998.

      Research  and  development  expenses  increased by  $1,149,000  (21%) from
$5,361,000  in 1997 to $6,510,000 in 1998.  The increased  expense  results from
Porta's  efforts to develop new products  primarily  related to the OSS business
including the MKIII test head.

      As a result of the above, Porta had operating income of $4,566,000 in 1998
versus $6,101,000 in 1997, a decrease of 25%. The decreased operating income for
1998, when compared to 1997, was primarily the result of lower levels of revenue
from OSS coupled with increased research and development expenses.

      Interest  expense for 1998 increased by $371,000 from  $3,379,000 for 1997
to  $3,750,000  in 1998.  The  increase  in  interest  expense  is  attributable
primarily to the issuance of $6,000,000  of 12%  subordinated  notes,  which was
slightly offset by repayments of principal to Porta's senior lender.

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

      During 1998 and 1997, Porta recorded debt conversion  expenses of $945,000
and  $11,458,000  as a result of the  exchange of zero coupon  notes into common
stock.  The debt  conversion  expense  represents  the  difference  between  the
original  conversion  price per share of $6.55 and the reduced  conversion price
per share of $3.65.

      Porta recorded an extraordinary gain from the early  extinguishment of its
debentures of $76,000 in 1998 and $122,000 in 1997.

      At December 31, 1998, income tax expenses of $606,000 primarily represents
income taxes  payable by the  Company's UK and Chilean  subsidiaries.  For 1997,
Porta  recorded an income tax benefit of  $585,000,  reflecting  the  difference
between a $802,000 deferred tax asset and tax expenses of $217,000.

      As the result of the  foregoing,  the 1998 net income was $527,000,  $0.06
per  basic  share  and  $0.05 per  diluted  share,  compared  with a net loss of
$6,899,000, $2.22 per share, for 1997.


                                    18 of 25
<PAGE>

Liquidity and Capital Resources

      At December  31, 1999 Porta had cash and cash  equivalents  of  $3,245,000
compared with  $3,044,000 at December 31, 1998. The working  capital at December
31, 1999 was  $6,135,000,  compared to  $14,262,000  at December 31,  1998.  The
decline in working  capital from December 31, 1998 to December 31, 1999 reflects
decreased  accounts  receivable  which was a result of reduced levels of revenue
for 1999.  During 1999,  we used  $3,027,000  in our  operations.  Our principal
source of funds during 1999 was borrowings from our senior lender.

      Porta had senior debt  outstanding  of $17,518,000 as of December 31, 1999
of which $1,242,000 was a non-interest bearing note,  $5,600,000 was outstanding
against the revolving line of credit, and $10,676,000 was a term loan agreement.
The Company's loan and security agreement with its senior secured lender expires
January  2, 2001.  The  agreement  requires a  quarterly  loan  amortization  of
$400,000. In addition,  the agreement requires all principal payments be applied
first to the non-interest bearing notes payable until the notes are paid in full
and then to the term loan.  Porta had a revolving line of credit and a letter of
credit facility of $9,000,000 as of December 31, 1999.  Availability  under this
facility as of that date was approximately $1,600,000.  During 1999, we borrowed
$6,150,000 and repaid $1,820,000 to the senior secured lender, of which $220,000
was provided  from the proceeds of the sale of our UK  facility.  Subsequent  to
December 31, 1999, we borrowed an  additional  $2,550,000  and repaid  $400,000,
resulting in a balance owed of approximately $19,668,000.

      In April 2000,  Porta and its senior  lender agreed to extend the loan and
security  agreement to July 3, 2001. As  consideration  Porta agreed to re-price
all outstanding warrants held by the senior lender to $2.00 per warrant.

      Porta was not in compliance with the interest  coverage covenant under the
agreement  and  obtained a waiver  from its senior  lender for the period  ended
December  31,  1999.  However,  if losses  continue  during 2000 Porta may be in
violation of its loan covenants at March 31, 2000 and the lender may not grant a
waiver,  which would result in all of Porta's  obligations  to the senior lender
becoming  due.  Any  action  by the  senior  lender to force  collection  of the
obligations  owed could  materially  and  adversely  affect  Porta's  ability to
continue in business.

      As of December 31, 1999,  Porta had remaining  outstanding  $371,000 of 6%
Debentures,  net of original  issue  discount of $14,000,  which  mature July 2,
2002.  The face  amount of the  outstanding  6%  Debentures  was  $385,000.  The
interest  accrued on the 6%  Debentures is payable on July 1 of each year and as
of December 31, 1999 was $12,000. At December 31, 1999, Porta was current on its
interest obligations.

      During  December  1999,   Porta  amended  the  terms  of  its  outstanding
$6,000,000 subordinated notes. The amended terms include a one-year extension to
January 3, 2001. Furthermore,  at Porta's option, Porta may extend the notes for
an additional  extension  period of six months to July 3, 2001 if Porta achieves
specific  financial goals. As consideration  for the amendment the interest rate
of the  subordinated  notes was  increased  from 12% to 14% per annum during the
initial term, and to 15% during the extended term, and the exercise price of the
outstanding  warrants  issued in  conjunction  with the  subordinated  notes was
reduced to $1.00. The amendment to the notes gives the holder the right to elect
to receive interest on the subordinated notes in new subordinated notes of Porta
in an amount equal to 125% of the interest then due on the subordinated notes on
which Porta is to pay  interest at 125% of the interest  rate of the  underlying
subordinated  note. 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
above,  Porta recorded a debt 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.
As of December 31, 1999, $6,013,000 of subordinated notes were outstanding which
includes  $64,000  of  additional  principal  from  paid  in  kind  options  and
unamortized debt discount of $51,000.

      In  April  2000,  Porta  and  the  holders  of  $5,100,000  or  85% of its
subordinated  notes agreed to eliminate the requirement that Porta meet specific
financial  goals for Porta to extend  the  maturity  date of their  subordinated
notes to July 3, 2001. In connection with this agreement,  Porta agreed to issue
to these  noteholders New Warrants to purchase 127,500 shares of Common Stock at
$3.00 per  share.  Porta may  issue to any other  noteholders  who agree to this
amendment  New Warrants to purchase up to 22,500 shares of Common Stock at $3.00
per share. The remaining New Warrants to purchase 150,000 shares of Common Stock
will be issued if the notes are extended.

                                    19 of 25
<PAGE>

      Porta believes that its current cash position,  internally  generated cash
flow and its  loan  facility  will be  sufficient  to  satisfy  our  anticipated
operating  needs for at least the ensuing twelve  months.  At December 31, 1999,
Porta's  long-term debt includes  $17,518,000  due to its senior lender,  all of
which are due and payable on July 3, 2001.  At December 31,  1999,  we do not
have sufficient  resources to pay the senior lender at maturity and it is likely
that we cannot generate such cash from our  operations.  Although we are seeking
to  refinance or  restructure  this debt and believe we will be able to prior to
the maturity date, no assurance can be given that we will be successful in these
efforts.  If we are unable to  refinance  or  restructure  our  business  may be
materially and adversely affected.

Year 2000 Issue

      Many existing  computer programs use only two digits to identify a year in
a date field. These programs were designed and developed without considering the
impact of the upcoming  change in the century.  If not corrected,  many computer
applications could fail or create erroneous results by or at the year 2000. This
is referred to as the "Year 2000  Issue."  Management  initiated a  company-wide
program  to  prepare  our  computer  systems  and  applications  for  year  2000
compliance. To date, we have not experienced any significant Year 2000 issues.

      Porta incurred internal staff costs as well as other expenses necessary to
prepare its systems for the year 2000.  We replaced  some  systems and  upgraded
others.  The  total  cost of  this  program  was  approximately  $500,000,  with
approximately  $200,000  representing  internal costs and $300,000  representing
external equipment and services.

      Statements  contained in this Year 2000  disclosure are subject to certain
protection under the Year 2000 Information and Readiness Disclosure Act.


                                    20 of 25
<PAGE>

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

      Not Applicable.

Item 8. Financial Statements and Supplementary Data.

      See Exhibit I

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

      Not Applicable

                                    Part III

Item 10, 11, 12, and 13.

      The information called for by Item 10 (Directors and Executive  Officers),
Item  11  (Executive  Compensation),  Item 12  (Security  Ownership  of  Certain
Beneficial  Owners  and  Management),  and Item 13  (Certain  Relationships  and
Related  Transactions)  is  incorporated  herein by reference from the Company's
definitive  proxy  statement for the Annual Meeting of  Shareholders to be filed
with the  Securities  and Exchange  Commission not later than 120 days after the
close of the year ended December 31, 1999.

                                     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.


                                    21 of 25
<PAGE>

(c)   Exhibits

Exhibit No.       Description of Exhibit
-----------       ----------------------
      3.1         Certificate  of  Incorporation  of the Company,  as amended to
                  date,  incorporated  by  reference  to  Exhibit  4 (a)  of the
                  Company's  Annual  Report  on Form  10-K  for the  year  ended
                  December 31, 1991.

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

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

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

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

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

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

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

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

     4.7.         Letter  Agreement dated as of February 13, 1995,  incorporated
                  by reference to Exhibit 4.7.1 of the  Company's  Annual Report
                  on Form 10K for the year ended December 31, 1995.

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


                                    22 of 25
<PAGE>

Exhibits (continued)

Exhibit No.       Description of Exhibit
-----------       ----------------------
      4.9         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.

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

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

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

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

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

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

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

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

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

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


                                    23 of 25
<PAGE>

Exhibits (continued)

Exhibit No.       Description of Exhibit
-----------       ----------------------
      10.4        Lease  dated  December  17,  1990  between the Company and LBA
                  properties,  Inc., incorporated by reference to Exhibit 10 (d)
                  of the Company's annual report on Form 10-K for the year ended
                  December 31, 1990.

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

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

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

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

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

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

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

      23          Consent of Independent Auditors.

      27          Financial Data Schedule


                                    24 of 25
<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, 2000                      By /s/ William V. Carney
                                                   -----------------------------
                                                   William V. Carney
                                                   Chairman of the Board and
                                                   Chief Executive Officer

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

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

 /s/ William V. Carney          Chairman of the Board,         April 12, 2000
---------------------------     Chief Executive Officer
     William V. Carney          and Director (Principal
                                Executive Officer)

 /s/ Edward B. Kornfeld         Senior Vice President and      April 12, 2000
---------------------------     Chief Financial Officer
     Edward B. Kornfeld         (Principal Financial and
                                Accounting Officer)

 /s/ Seymour Joffe              Director                       April 12, 2000
---------------------------
     Seymour Joffe

 /s/ Michael A. Tancredi        Director                       April 12, 2000
---------------------------
     Michael A. Tancredi

 /s/ Warren H. Esanu            Director                       April 12, 2000
---------------------------
     Warren H. Esanu

 /s/ Herbert H. Feldman         Director                       April 12, 2000
---------------------------
     Herbert H. Feldman

 /s/ Stanley Kreitman           Director                       April 12, 2000
---------------------------
     Stanley Kreitman

 /s/ Lloyd I. Miller, III       Director                       April 12, 2000
---------------------------
     Lloyd I. Miller, III

 /s/ Robert Schreiber           Director                       April 12, 2000
---------------------------
     Robert Schreiber


                                    25 of 25
<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, 1999 and 1998                                   F-3

         Consolidated Statements of Operations and
         Comprehensive Income (Loss),
         Years Ended December 31, 1999, 1998 and 1997                 F-4

         Consolidated Statements of Stockholders'
         Equity (Deficit),  Years Ended
         December 31, 1999, 1998 and 1997                             F-5

         Consolidated Statements of Cash Flows
         for the Years Ended December 31, 1999,
         1998 and 1997                                                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,  1999 and 1998,  and the  related
consolidated   statements  of  operations  and   comprehensive   income  (loss),
stockholders'  equity  (deficit),  and cash flows for each of the three years in
the period ended December 31, 1999. 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  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our 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,  1999 and 1998,  and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.


                                        /s/ BDO SEIDMAN, LLP
                                        ---------------------------
                                            BDO SEIDMAN, LLP

Melville, New York
March 15, 2000, except for Notes 2 and 6
as to which the date is April 10, 2000
as they relate to the Company's
senior and subordinated debt


                                       F-2
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
                           Consolidated Balance Sheets
                           December 31, 1999 and 1998
                             (Dollars in thousands)

                                                            1999          1998
                                                            ----          ----
                                 Assets
Current assets:
    Cash and cash equivalents                             $  3,245        3,044
    Accounts receivable - trade, less
       allowance for doubtful accounts of
       $1,879 in 1999 and $915 in 1998                      12,137       19,802
    Inventories                                              8,893        8,944
    Prepaid expenses and other current assets                1,373        1,716
                                                          --------      -------
          Total current assets                              25,648       33,506

Property, plant and equipment, net                           4,193        4,213
Deferred computer software, net                                 --           82
Goodwill, net of amortization of $4,284
  in 1999 and $3,763 in 1998                                11,076       11,597
Other assets                                                 2,531        2,738
                                                          --------      -------
          Total assets                                    $ 43,448       52,136
                                                          ========      =======

                 Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
    Current portion of senior debt                        $  2,000        2,000
    Accounts payable                                         8,831        6,893
    Accrued expenses                                         5,723        6,266
    Accrued interest payable                                   588          545
    Accrued commissions                                      1,864        2,438
    Accrued deferred compensation                              196          196
    Income taxes payable                                       267          762
    Short-term loans                                            44          144
                                                          --------      -------
          Total current liabilities                         19,513       19,244
                                                          --------      -------

Senior debt net of current maturities                       15,518       11,188
Subordinated notes                                           6,013        5,685
6% Convertible subordinated debentures                         371          365
Deferred compensation                                        1,004        1,021
Income taxes payable                                           352          719
Other long-term liabilities                                    971          776
Minority interest                                            1,093        1,154
                                                          --------      -------
          Total long-term liabilities                       25,322       20,908
                                                          --------      -------
          Total liabilities                                 44,835       40,152
                                                          --------      -------
Commitments and contingencies

Stockholders' equity (deficit):
    Preferred stock, no par value;
      authorized 1,000,000 shares,
      none issued                                               --           --
    Common stock, par value $.01;
      authorized 20,000,000 shares,
      issued 9,638,861 and 9,484,742
      shares in 1999 and 1998, respectively                     96           95
    Additional paid-in capital                              75,310       75,135
    Accumulated deficit                                    (70,959)     (57,273)
    Accumulated other comprehensive loss:
      Foreign currency translation adjustment               (3,896)      (3,754)
                                                          --------      -------
                                                               551       14,203
    Treasury stock, at cost, 30,940 shares                  (1,938)      (1,938)
    Receivable from directors and officers under
      stock purchase program                                 --           (281)
                                                          --------      -------
          Total stockholders' equity (deficit)              (1,387)      11,984
                                                          --------      -------
          Total liabilities and stockholders'
            equity (deficit)                              $ 43,448       52,136
                                                          ========      =======

          See accompanying notes to consolidated financial statements.


                                       F-3
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
      Consolidated Statements of Operations and Comprehensive Income (Loss)
                  Years ended December 31, 1999, 1998 and 1997
                    (in thousands, except per share amounts)

                                                    1999       1998       1997
                                                    ----       ----       ----

Sales                                            $ 38,936     59,343     62,230
Cost of sales                                      28,952     35,188     37,950
                                                 --------     ------   --------
      Gross profit                                  9,984     24,155     24,280
                                                 --------     ------   --------
Selling, general and administrative
  expenses                                         13,603     13,079     12,818
Research and development expenses                   6,090      6,510      5,361
                                                 --------     ------   --------
      Total expenses                               19,693     19,589     18,179
                                                 --------     ------   --------
      Operating income (loss)                      (9,709)     4,566      6,101

Interest expense                                   (3,571)    (3,750)    (3,379)
Interest income                                       188        272        259
Other income (expense), net                           218      1,028      1,047
Debt conversion expense                                --       (945)   (11,458)
                                                 --------     ------   --------
      Income (loss) before income
        taxes and minority interest               (12,874)     1,171     (7,430)

Income tax expense (benefit)                          873        606       (585)
Minority interest                                     (61)       114        176
                                                 --------     ------   --------
      Income (loss) before
        extraordinary item                        (13,686)       451     (7,021)

Extraordinary gain on early
  extinguishment of debt                               --         76        122
                                                 --------     ------   --------
      Net income (loss)                          $(13,686)       527     (6,899)
                                                 ========     ======   ========
Other comprehensive income (loss),
  net of tax:

  Foreign currency translation
    adjustments                                      (142)       273     (1,015)
                                                 --------     ------   --------
      Comprehensive income (loss)                $(13,828)       800     (7,914)
                                                 ========     ======   ========
Basic per share amounts:
  Income (loss) before extraordinary item        $  (1.44)      0.05      (2.26)
  Extraordinary item                                   --       0.01       0.04
                                                 --------     ------   --------
      Net income (loss) per share
        of common stock                          $  (1.44)      0.06      (2.22)
                                                 ========     ======   ========
  Weighted average shares of common
    stock outstanding                               9,489      9,281      3,111
                                                 ========     ======   ========
Diluted per share amounts:
  Income (loss) before extraordinary item        $  (1.44)      0.04      (2.26)
  Extraordinary item                                   --       0.01       0.04
                                                 --------     ------   --------
      Net income (loss) per share
        of common stock                          $  (1.44)      0.05      (2.22)
                                                 ========     ======   ========

  Weighted average shares of common
    stock outstanding                               9,489      9,785      3,111
                                                 ========     ======   ========


          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, 1999, 1998 and 1997
                                 (In thousands)

<TABLE>
<CAPTION>

                                                                   Accumulated                         Receivable     Total
                                      Common Stock                    Other      Retained                  for       Stock-
                                   ------------------- Additional Comprehensive  Earnings               Employee     holders'
                                   No. of    Par Value  Paid-in     Income    (Accumulated  Treasury     Stock      Equity/
                                   Shares      Amount    Capital     (Loss)      Deficit)      Stock    Purchases   (Deficit)
                                   ------------------------------------------------------------------------------------------
<S>                                <C>          <C>     <C>         <C>          <C>          <C>         <C>        <C>
Balance at December 31, 1996       2,224        $22     $ 36,561    $(3,012)     $(50,900)    $(2,066)    $(307)     $(19,702)

Net loss 1997                         --         --           --         --        (6,899)         --        --        (6,899)
Common stock issued                6,420         64       34,001         --            --          --        --        34,065
Warrants issued                       --         --          364         --            --          --        --           364
Foreign currency translation
  adjustment                          --         --           --     (1,015)           --          --        --        (1,015)
                                   ------------------------------------------------------------------------------------------

Balance at December 31, 1997       8,644         86       70,926     (4,027)      (57,799)     (2,066)     (307)        6,813

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

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

Net loss 1999                         --         --           --         --       (13,686)         --        --       (13,686)
Common stock issued                  154          1          119         --            --          --        --           120
Warrant repricing                     --         --           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)
                                   =====        ===     ========    =======      ========     =======     =====      ========
</TABLE>

           See accompanying notes to consolidated financial statements


                                       F-5
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
                 Consolidated Statements of Cash Flows (Note 21)
                  Years ended December 31, 1999, 1998 and 1997
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                       1999         1998          1997
                                                       ----         ----          ----
<S>                                                 <C>               <C>        <C>
Cash flows from operating activities:
  Net income (loss)                                 $(13,686)         527        (6,899)
  Adjustments to reconcile net income
   (loss) to net cash provided by
   (used in) operating activities:
    Extraordinary gain                                    --          (76)         (122)
    Non-cash debt conversion expense                      --          945        10,646
    Non-cash financing expenses                           18          473           274
    Non-cash compensation expense                          8          298            --
    Realized gain on litigation settlement                --           --          (229)
    Depreciation and amortization                      1,677        2,195         3,040
    Amortization of debt discounts                       326          323            40
    Minority interest                                    (61)         114          (176)
  Changes in operating assets and
   liabilities:
    Accounts receivable                                7,665       (4,911)        1,143
    Inventories                                           51         (785)         (735)
    Prepaid expenses                                     343         (450)         (484)
    Other receivables                                     --           --            31
    Other assets                                         113          962          (122)
    Accounts payable, accrued expenses
     and other liabilities                               238          276          (999)
                                                    --------       ------       -------
      Net cash provided by (used in)
       operating activities                           (3,308)        (109)        5,408
                                                    --------       ------       -------
Cash flows from investing activities:
  Repayment of receivables from stock purchase
   program                                               281           --            --
  Proceeds from disposal of assets held
   for sale, net                                          --           --           500
  Capital expenditures, net                             (951)        (665)         (409)
                                                    --------       ------       -------
      Net cash provided by (used in)
       investing activities                             (670)        (665)           91
                                                    --------       ------       -------

Cash flows from financing activities:
  Proceeds from senior debt                            6,150            6           306
  Repayments of senior debt                           (1,820)      (4,780)       (3,013)
  Proceeds from Subordinated debentures
   and warrants                                           64        6,000            --
  Repayment of zero coupon senior
   subordinated convertible notes                         --       (2,796)           --
  Proceeds (repayments) of notes
   payable/short-term loans                             (100)          24            89
                                                    --------       ------       -------
      Net cash provided by (used in)
       financing activities                            4,294       (1,546)       (2,618)
                                                    --------       ------       -------
Effect of exchange rate changes on cash                 (115)         273          (374)
                                                    --------       ------       -------
Increase (decrease) in cash and cash
 equivalents                                             201       (2,047)        2,507
Cash and equivalents - beginning of year               3,044        5,091         2,584
                                                    --------       ------       -------
Cash and equivalents - end of year                  $  3,245        3,044         5,091
                                                    ========       ======       =======
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       F-6
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                           December 31, 1998 and 1997

(1)   Summary of Significant Accounting Policies

      Nature of Operations and Principles of Consolidation

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

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

      Revenue Recognition

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

      Concentration of Credit Risk

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

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

      Cash Equivalents

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

      Inventories

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

      Property, Plant and Equipment

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

                                                                     (Continued)


                                       F-7
<PAGE>

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

      Deferred Computer Software

      Software  costs  incurred for specific  customer  contracts are charged to
      cost of sales at the  time  revenues  on such  contracts  are  recognized.
      Software  development  costs  relating to products the Company  offers for
      sale are deferred in  accordance  with  Statement of Financial  Accounting
      Standards (SFAS) No. 86 "Accounting for the Costs of Computer  Software to
      Be Sold, Leased, or Otherwise Marketed". These costs are amortized to cost
      of sales over the periods that the related  product will be sold,  up to a
      maximum of four years.  Amortization of computer software costs, which all
      relate to products the Company offers for sale,  amounted to approximately
      $82,000, $461,000 and $1,133,000 in 1999, 1998, and 1997, respectively.

      Goodwill

      Goodwill represents the difference between the purchase price and the fair
      market value of net assets  acquired in business  combinations  treated as
      purchases. Goodwill is amortized on a straight-line basis over a remaining
      life  of 13 to 31  years.  During  1999,  in view  of  recent  competitive
      developments in the  telecommunications  market place and Porta's changing
      business  model in response,  management has reassessed the useful life of
      certain of its goodwill. While in management's opinion, there is currently
      no impairment in the carrying value of this  long-lived  intangible  asset
      (based upon an analysis of undiscounted future cash flows), management has
      determined  that the useful life of the goodwill should be shortened to be
      more  reflective of the current rate of technology  change and competitive
      conditions.  Accordingly,  management changed the estimated useful life of
      certain  goodwill from an original life of 40 years to a remaining life of
      13 years,  which change was applied  prospectively from the fourth quarter
      of 1999. This change in accounting estimate increased amortization expense
      in 1999 by approximately  $58,000. At December 31, 1999, $7,053,000 of the
      goodwill is being  amortized  over a remaining  life of  approximately  13
      years  and  $4,024,000  is  being  amortized  over  a  remaining  life  of
      approximately  31  years.  The  Company  assesses  the  recoverability  of
      unamortized  goodwill using the  undiscounted  projected future cash flows
      from the related businesses.

      Income Taxes

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

      Foreign Currency Translation

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

                                                                     (Continued)


                                       F-8
<PAGE>

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

      Net Income (Loss) Per Share

      Basic net income (loss) per share is based on the weighted  average number
      of shares outstanding. Diluted net income (loss) per share is based on the
      weighted  average  number of shares  outstanding  plus dilutive  potential
      shares of common stock, if such shares had been issued. The calculation of
      the diluted  net income per share for the year ended  December  31,  1998,
      assumes the exercise of dilutive  options and warrants and the  conversion
      of  the 6%  Subordinated  Debentures.  For  1999  and  1997,  no  dilutive
      potential  shares of common  stock were added to compute  diluted loss per
      share because the effect was anti-dilutive.

      Reclassifications

      Certain   reclassifications   have  been  made  to  conform  prior  years'
      consolidated financial statements to the 1999 presentation.

      Accounting for Stock-Based Compensation

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

      Accounting for the Impairment of Long-Lived Assets

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

      Use of Estimates

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

                                                                     (Continued)


                                       F-9
<PAGE>

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

(2)   Liquidity

      As of December 31, 1999, Porta's debt includes $17,500,000 of senior debt,
      which  matures on January 2, 2001,  and  $6,000,000 of  subordinated  debt
      which  matures in January  2001.  Subsequent  to December 31, 1999,  Porta
      borrowed an additional  $2,550,000  of senior debt and repaid  $400,000 of
      senior debt,  resulting in a balance owed of approximately  $20,000,000 to
      the senior lender at March 15, 2000. The subordinated  lenders have agreed
      to  extend  the  maturity  date  for six  months  if Porta  meets  certain
      financial milestones.  At December 31, 1999, Porta did not have sufficient
      resources to pay either the senior lender or the  subordinated  lenders at
      maturity  and it is  likely  that it  cannot  generate  such cash from its
      operations.  In April 2000,  the Company and its senior  lender  agreed to
      extend the loan and security  agreement to July 3, 2001. As  consideration
      Porta  agreed to  re-price  all  outstanding  warrants  held by its senior
      lender to $2.00 per warrant.  In addition,  in April 2000, the Company and
      the holders of $5,100,000,  or 85%, of its subordinated  notes,  agreed to
      eliminate the  requirement  that Porta meet specific  financial  goals for
      Porta to extend the maturity date of their  subordinated  notes to July 3,
      2001. In connection  with this  agreement,  Porta agreed to issue to these
      noteholders  New  Warrants to purchase  127,500  shares of Common Stock at
      $3.00 per  share.  Porta may issue to any other  noteholders  who agree to
      this  amendment  New  Warrants to  purchase up to 22,500  shares of Common
      Stock at $3.00 per share.  The remaining New Warrants to purchase  150,000
      shares of Common Stock will be issued if the notes are extended.  Although
      Porta is  seeking  to  refinance  or  restructure  this debt  prior to the
      maturity date, its business may be impaired if it is unable to do so.

      Porta's  backlog  at  December  31,  1999 was  $23,800,000  compared  with
      approximately  $8,800,000  at December 31, 1998.  Of the December 31, 1999
      backlog,   approximately   $19,800,000  represented  orders  from  foreign
      telephone operating companies.  Porta expects to ship substantially all of
      its December 31, 1999 backlog during 2000. Porta believes that its current
      cash position,  internally  generated cash flow from its existing backlog,
      anticipated orders and its loan facility will be sufficient to satisfy its
      anticipated operating needs for at least 2000.

      Porta is responding to its liquidity problems by:

      o     Negotiating  with its senior lender for an increase in its available
            credit;

      o     Developing  relationships with strategic partners who would continue
            the development of new products to reduce Porta's cash  requirements
            for its OSS business; and

      o     Scaling back its operations to reduce the cash requirements.


                                                                     (Continued)
                                     F-10
<PAGE>


(3)   Accounts Receivable

      Accounts  receivable included  approximately  $3,211,000 and $5,657,000 at
      December 31, 1999 and 1998,  respectively,  of revenues earned but not yet
      contractually  billable  relating to long-term  contracts for  specialized
      products.  All such amounts at December 31, 1999 are expected to be billed
      in  the  subsequent  year.  In  addition,   accounts  receivable  included
      approximately  $1,252,000  and  $2,860,000  at December 31, 1999 and 1998,
      respectively,  of retainage  balances due on various long-term  contracts.
      All such amounts are expected to be collected  during the subsequent year.
      The allowance for doubtful accounts receivable was $1,879,000 and $915,000
      as of December 31, 1999 and 1998, respectively. The allowance for doubtful
      accounts was increased by provisions of $1,070,000, $210,000, and $107,000
      and decreased by write-offs  of $106,000,  $353,000,  and $599,000 for the
      years ended December 31, 1999, 1998, and 1997, respectively.  In 1999, the
      increase in the provision was adjusted during the fourth quarter.

(4)   Inventories

      Inventories consist of the following:

                                                       December 31,
                                              ----------------------------
                                                  1999             1998
                                              ----------         ---------
      Parts and components                    $5,558,000         4,959,000
      Work-in-process                            584,000           743,000
      Finished goods                           2,751,000         3,242,000
                                              ----------         ---------
                                              $8,893,000         8,944,000
                                              ==========         =========


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

(5)   Property, Plant and Equipment

      Property, plant and equipment consists of the following:

                                            December 31
                                       ---------------------        Estimated
                                       1999             1998       useful lives
                                       ----             ----       ------------
Land                               $   246,000          246,000         --
Buildings                            2,284,000        2,585,000     20-50 years
Machinery and equipment              9,079,000        7,947,000      3-8 years
Furniture and fixtures               2,825,000        3,566,000     5-10 years
Transportation equipment               151,000          129,000       4 years
Tools and molds                      3,474,000        3,124,000       8 years
Leasehold improvements                 871,000          805,000    Term of lease
                                   -----------      -----------
                                    18,930,000       18,402,000
Less accumulated depreciation
   and amortization                 14,737,000       14,189,000
                                   -----------      -----------
                                   $ 4,193,000        4,213,000
                                   ===========      ===========

      Total  depreciation  and  amortization  expense  for 1999,  1998 and 1997,
      related  to  property,  plant  and  equipment  amounted  to  approximately
      $998,000, $1,197,000 and $1,468,000, respectively.

                                                                     (Continued)
                                      F-11
<PAGE>


(6)   Senior Debt

      On December 31, 1999 and 1998,  Porta's long-term debt consisted of senior
      debt  under  its  credit   facility  in  the  amount  of  $16,276,000  and
      $10,682,000,  respectively,  and non-interest bearing deferred funding fee
      notes  payable  to the senior  lender in the  amounts  of  $1,242,000  and
      $2,512,000,  respectively.  Of these amounts  outstanding  $2,000,000  are
      classified  as the current  portion of senior debt as of December 31, 1999
      and  1998,  respectively.  The  credit  facility  consists  of a  combined
      revolving line of credit and letter of credit  availability of $9,000,000.
      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.

      The  agreement,  which  expires  on January  2,  2001,  provides  for loan
      principal  payments of $400,000 on the last day of each quarter during the
      term of the  agreement.  As part of the agreement,  the loan  amortization
      shall first be applied to the  non-interest  bearing  notes  payable until
      these notes are paid in full and then to the term loan. The agreement also
      requires  Porta to pay  additional  principal  payments  if its cash  flow
      exceeds  certain  amounts.  A monthly  facility  fee  payment  of  $50,000
      continuing to the end of the agreement is also required.

      Pursuant to the November 30, 1997 extension of the credit facility,  Porta
      agreed to amend the terms of the warrants  previously issued to its senior
      lender.  The  82,500  and  200,000  warrants,  after  adjustment  for  the
      antidilution  provisions contained in the warrant agreement,  provides for
      the purchase of 164,627 and 295,441  shares of common stock,  respectively
      and are immediately  exercisable at $3.00 per share and expire on November
      30,  2002.  The value of the change in warrant  terms is  estimated  to be
      $45,000 and was recorded as a deferred  financing  expense and  additional
      paid in capital in 1997.

                                                                     (Continued)


                                      F-12
<PAGE>

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

      Financial  debt  covenants  include an interest  coverage  ratio  measured
      quarterly with limitations on the incurrence of indebtedness,  limitations
      on capital  expenditures,  and prohibitions on declarations of any cash or
      stock  dividends or the repurchase of the Company's  stock. As of December
      31, 1999, Porta was not in compliance with the interest  coverage covenant
      and has obtained a waiver of such non-compliance from its senior lender.

      In April 2000, the Company and its senior lender agreed to extend the loan
      and security  agreement to July 3, 2001. As consideration  Porta agreed to
      re-price  all  outstanding  warrants  to its  senior  lender  to $2.00 per
      warrant.

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

                        2000                 $ 2,000,000
                        2001                  21,531,000
                        2002                     371,000
                                             -----------
                                             $23,902,000

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

      As of  December  31,  1999 and 1998  Porta had  outstanding  $371,000  and
      $365,000 of its 6%  convertible  subordinated  debentures due July 1, 2002
      (the "Debentures"), net of original issue discount of $14,000 and $20,000,
      respectively.  The face amount of the outstanding  Debentures was $385,000
      at both December 31, 1999 and 1998. The Debentures are  convertible at any
      time prior to maturity  into Common  Stock of the Company at a  conversion
      rate of 8.333 shares for each $1,000 face amount of Debentures, subject to
      adjustment under certain circumstances.

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

      Interest on the Debentures is payable on July 1 of each year. The interest
      accrued amounted to $12,000 as of both December 31, 1999 and 1998.

      On November  30,  1995,  Porta  offered the holders of its  Debentures  an
      exchange of such debt for common stock and zero coupon senior subordinated
      convertible  notes (the "Notes") due January 2, 1998.  The exchange  ratio
      was 19.4  shares of common  stock and  $767.22  of  principal  of Notes in
      exchange for each $1,000 principal amount of Debentures converted. Accrued
      interest on the Debentures, which were exchanged was eliminated.

      The Notes were unsecured and did not bear interest.  There were no sinking
      fund  requirements  for the Notes.  Each Note was convertible  into common
      stock at a conversion  price of $6.55 prior to the  amendment as discussed
      below.

                                                                     (Continued)


                                      F-13
<PAGE>

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

      As of December 31, 1996,  Porta had  exchanged  approximately  $33,770,000
      principal amount of the Debentures,  net of related  unamortized  discount
      and accrued interest expense,  for 655,000 shares of stock and $25,909,000
      of Notes. In addition,  as of December 31, 1996, $24,000 of Notes had been
      converted into 3,600 shares of stock.

      During 1997, Porta exchanged  approximately  $410,000  principal amount of
      the Debentures,  net of related unamortized  discount and accrued interest
      expense, for 8,000 shares of common stock and $315,000 principal amount of
      Notes.

      Effective  November 13, 1997, Porta amended the terms of the Notes.  Under
      the amended terms,  the conversion price of the Notes was reduced to $3.65
      from $6.55. As of December 31, 1997,  approximately  $23,400,000 principal
      amount of Notes  was  converted  into  approximately  6,412,000  shares of
      common stock. The conversion of the Notes for common stock reduced debt by
      $23,400,000,  increased  equity by $34,049,000 and resulted in a primarily
      non-cash  charge of  $11,458,000.  The  non-cash  charge  was based on the
      difference  between the value of the shares  issuable  under the  original
      terms of the Notes and the value of the shares  issued with respect to the
      Notes under the amended  terms.  In connection  with the conversion of the
      Notes,  Porta issued to its  investment  banking  firm  120,000  shares of
      common stock.

      During 1998, Porta (i) repaid the remaining  balance of the Notes from the
      proceeds  of the  Subordinated  Notes  (note  8) (ii)  exchanged  $250,000
      additional  principal  amount of the Debentures for 5,000 shares of common
      stock and $192,000  principal amount of Notes which were then converted to
      53,000  shares of common stock based on the amended  terms of the Notes as
      described  above and (iii) issued  approximately  330,000 shares of common
      stock in  exchange  for  $1,260,000  principal  amount of  Debentures  and
      accrued   interest.   Porta   recorded  a  debt   conversion   expense  of
      approximately  $945,000, net of interest forgiven, in the first quarter of
      1998. After giving effect to these  transactions,  as of December 31, 1998
      Porta has no Notes outstanding and $385,000 principal amount of Debentures
      outstanding.

      The  exchange  of the  Debentures  for the  Notes  and  common  stock  was
      accounted  for  as  a  troubled  debt  restructuring  in  accordance  with
      Statement  of  Financial  Accounting  Standards  No. 15.  Since the future
      principal and interest  payments under the Notes is less than the carrying
      value of the  Debentures,  the Notes were  recorded  for the amount of the
      future cash  payments,  and not  discounted,  the common  stock issued was
      recorded at the market value at the time of issuance, and an extraordinary
      gain on restructuring was recorded of approximately  $76,000 and $122,000,
      for 1998 and 1997, respectively.  Accordingly,  no future interest expense
      was recorded on the Notes, subsequent to the time of issuance.

                                                                     (Continued)


                                      F-14
<PAGE>

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

(8)   Subordinated Notes

      In January 1998, Porta raised  $6,000,000 from the private placement of 60
      units at $100,000 per unit.  Each unit  consisted of (a) 12%  Subordinated
      Note in the principal amount of $100,000,  and (b) a Series B Common Stock
      Purchase  Warrant (a "Series B  Warrant")  to  purchase  10,000  shares of
      Common Stock at $3.00 per share  through  December 31, 2002.  In the event
      that any Subordinated Note was outstanding one year from the date on which
      such  Subordinated  Note was issued (the  "Anniversary Date of the Note"),
      Porta agreed to the holder of such  Subordinated  Note on the  Anniversary
      Date of the Note a Series C Common  Stock  Purchase  Warrant ( a "Series C
      Warrant") to purchase 25 shares of Common Stock for each $1,000  principal
      amount of Subordinated  Notes  outstanding on the Anniversary  Date of the
      Note.  The Series C Warrant  has an  exercise  price  equal to the average
      closing  prices  of the  Common  Stock  on each of the five  trading  days
      preceding  the  Anniversary  Date of the Note  with  respect  to which the
      Series C Warrant is being issued and will expire on December 31, 2003.

      As of December 31, 1998, the Series B and Series C Warrants were valued at
      $630,000  and  were  recorded  as  part  of  additional  paid-in  capital.
      Accordingly,  Porta  recorded  the net  Subordinated  Notes  at a value of
      $5,370,000.  As of December 31, 1998, the Company had  Subordinated  Notes
      outstanding of $5,685,000,  net of original issue discount of $315,000. In
      1999,  pursuant  to the  terms of the  Notes,  the  Company  issued to the
      holders  of the  Subordinated  Notes  Series C  Warrants  to  purchase  an
      aggregate of 150,000  shares of common stock at an average  exercise price
      of $1.94.

      During  December  1999,  Porta  (a)  extended  its  maturity  date  of the
      $6,000,000  outstanding  principal  amount of Subordinated  Notes with the
      right to extend the maturity date for an  additional  period of six months
      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 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 Noteholder 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.  As of December 31, 1999,  $6,013,000 of Subordinated  Notes were
      outstanding  which includes  $64,000 of additional  principal from paid in
      kind options and unamortized debt discount of $51,000.

      In April 2000,  the Company and the holders of  $5,100,000  or 85%, of the
      subordinated  notes agreed to eliminate  the  requirement  that Porta meet
      specific  financial  goals for Porta to extend the maturity  date of their
      subordinated  Notes to July 3, 2001.  In connection  with this  agreement,
      Porta  agreed  to issue to these  noteholders  New  Warrants  to  purchase
      127,500 shares of Common Stock at $3.00 per share.  Porta may issue to any
      other  noteholders who agree to this amendment New Warrants to purchase up
      to 22,500  shares of Common Stock at $3.00 per share.  The  remaining  New
      Warrants to purchase  150,000 shares of Common Stock will be issued if the
      notes are extended.

                                                                     (Continued)


                                      F-15
<PAGE>

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

(9)   Joint Venture

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

(10)  Stockholders' Equity

      Porta had  outstanding  warrants to its senior lender to purchase  460,068
      shares of common stock,  which are  immediately  exercisable  at $3.00 per
      share and expire on November 30, 2002.

      In 1997, in consideration for advisory  services by an investment  banking
      firm,  Porta issued warrants to purchase 400,000 shares of common stock at
      $1.56 per share until April 2002. In addition,  in  consideration  for the
      advisory  services  related to the debt  conversion,  Porta  issued to the
      investment  banking firm 120,000 shares of common stock (note 7). In 1997,
      Porta  recorded  deferred  consulting  of  approximately  $80,000 and debt
      conversion expense of approximately $580,000.

      See Note 8 in connection  with the issuance of the Series B and C Warrants
      as  part  of the  private  placement  of  the  subordinated  Notes  in the
      principal  amount  of  $6,000,000  and the  amendment  of the terms of the
      Subordinated Notes and Series B and C Warrants.

      As  of  December  31,  1999,  Porta  also  had  stock  purchase   warrants
      outstanding to purchase 53,000 shares of common stock at an exercise price
      of $17.50 per share until November 2001.

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

                                                                     (Continued)


                                      F-16
<PAGE>

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

      During 1998, the Board of Directors  adopted a Stock Purchase Program (the
      "program") for senior executive officers and directors of the Company. The
      program was  established  to increase the direct equity  investment in the
      Corporation of the senior executives and directors. The program sets forth
      that each participant  shall purchase common stock equal to ten percent of
      the  participant's  salary for those who are  officers  and  $30,000  with
      respect to those who are outside directors. The number of shares purchased
      is based on the fair market value per share of Common stock of $1.50.  The
      stock  purchase  for  each  officer  is  payable  to  the  Company  on  an
      installment  basis.  Porta is holding the shares as  security  against the
      outstanding  obligation  until it is paid in full.  The maximum  number of
      shares to be issued  pursuant  to the  program  is  186,000.  The  initial
      receivable  related to the program was  $279,000.  As of December 31, 1999
      and 1998, the receivable balance was $0 and $268,000, respectively.

(11)  Stockholder Rights Plan

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

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

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

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

                                                                     (Continued)


                                      F-17
<PAGE>

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

(12)  Employee Benefit Plans

      Porta has  deferred  compensation  agreements  with  certain  officers and
      employees,  with benefits  commencing  at  retirement  equal to 50% of the
      employee's base salary, as defined.  Payments under the agreements will be
      made for a period of fifteen years  following the earlier of attainment of
      age 65 or death.  During 1999, 1998 and 1997, Porta accrued  approximately
      $180,000, $185,000 and $203,000, 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, 1999, 1998 and 1997, Porta's  contribution  amounted to
      $93,000, $96,000 and $96,000, 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 15%.
      Porta has reserved  1,000,000 shares of Porta stock for issuance under the
      plan. The first quarterly period under the Purchase Plan commenced October
      1999.  Subsequent to December 31, 1999, Porta issued  approximately 28,000
      shares  of  stock  to the  participants  of  the  Purchase  Plan  at a 10%
      discount, resulting in a purchase price $0.675.

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

(13)  Incentive Plans

      During 1999, Porta  established an Employee Stock Bonus Plan whereby stock
      may be given to non-officers  or directors to recognize the  contributions
      of employees.  A maximum of 100,000 shares of common stock is reserved for
      issuance pursuant to the Bonus Plan. During 1999 Porta issued 4,250 shares
      of common  stock  pursuant  to the  Bonus  Plan and  recorded  a charge of
      approximately $8,000.

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

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

                                                                     (Continued)


                                      F-18
<PAGE>

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

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

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

      During 1998,  pursuant to an employment  contract  with an officer,  Porta
      issued  options to  purchase  30,000  shares of common  stock at $1.25 per
      share, which approximated market value on the date of issuance, and expire
      on August 2004. As of December 31, 1999, options to purchase 10,000 shares
      of common stock had vested.

      During  1999,  pursuant to  employment  contracts  with 4 officers,  Porta
      issued options to purchase  95,000 shares of common stock at $2.06,  as to
      60,000  shares  and  $1.75,  as to  35,000  shares.  The  exercise  prices
      approximated  market value on the date of issuance.  The options expire in
      January 2004 and May 2005,  respectively.  As of December 31, 1999 none of
      the options are vested.

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

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

                                                                     (Continued)


                                      F-19
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued
                  (Dollars in thousands, except per share data)

                                                  1999         1998       1997
                                                  ----         ----       ----
       Pro forma net income (loss)             $(14,280)      $ 237     $(7,026)
       Pro forma net income (loss)
        per share (basic and diluted)          $  (1.50)      $0.03     $ (2.26)

      The  weighted-average  fair value of options granted was $1.36, $ 1.47 and
      $0.35 per share in 1999, 1998 and 1997, 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 1999, 1998 and 1997:

      Dividends:                                  $0.00 per share
      Volatility:                                 45.8%-80.00%
      Risk-free interest:                         4.50%-6.40%
      Expected term:                              5 years

      A summary of the status of Porta's  1986 stock  option plan as of December
      31, 1999,  1998,  and 1997,  and changes  during the years ending on those
      dates is presented below:

<TABLE>
<CAPTION>
                                               1999                      1998                      1997
                                      ----------------------    ----------------------    ----------------------
                                      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         15,527  $    57            16,392    $57             16,397     $57

Granted                                   --                         --                        --
Exercised                                 --                         --                        --
Forfeited                            (12,527)      70              (865)    63                 (5)     38
                                     -------                     ------                    ------

Outstanding end of year                3,000  $     5            15,527    $57             16,392     $57
                                     =======                     ======                    ======     ===
Options exercisable at year-end        3,000                     15,527                    16,392
                                     =======                     ======                    ======
</TABLE>

      The following table summarizes information about stock options outstanding
      under the 1986 Plan at December 31, 1999:

<TABLE>
<CAPTION>
                                Options Outstanding                       Options Exercisable
                  ------------------------------------------------   ------------------------------
Range of          Outstanding   Remaining         Weighted-average   Exercisable   Weighted-Average
Exercise Prices   at 12/31/99   Contractual Life  Exercise Price     at 12/31/99   Exercise Price
---------------   -----------   ----------------  ----------------   -----------   ----------------
<S>               <C>           <C>               <C>                    <C>             <C>
$ 5               3,000         2.8 years         $ 5                    3,000           $ 5
                  =====                                                  =====
</TABLE>

                                                                     (Continued)


                                      F-20
<PAGE>

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

      A summary of the status of Porta's  1996 stock  option plan as of December
      31, 1999, 1998 and 1997, and changes during the year is presented below:

<TABLE>
<CAPTION>
                                               1999                      1998                      1997
                                      ----------------------    ----------------------    ----------------------
                                      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         447,938  $  1.73          437,988   $1.67           79,448     $2.45
Granted                                    --       --           12,000    3.85          358,780      1.50
Exercised                                  --       --               --      --               --        --
Forfeited                             (35,100)    1.77          (2,050)    1.51             (240)     2.00
                                      -------                   -------                  -------

Outstanding end of year               412,838  $  1.73          447,938   $1.73          437,988     $1.67
                                      =======                   =======                  =======
  Options exercisable at year-end     412,838                   447,938                  333,488
                                      =======                   =======                  =======
</TABLE>

      The following table summarizes information about stock options outstanding
      under the 1996 Plan at December 31, 1999:

<TABLE>
<CAPTION>
                                Options Outstanding                       Options Exercisable
                  ------------------------------------------------   ------------------------------
Range of          Outstanding   Remaining         Weighted-average   Exercisable   Weighted-Average
Exercise Prices   at 12/31/99   Contractual Life  Exercise Price     at 12/31/99   Exercise Price
---------------   -----------   ----------------  ----------------   -----------   ----------------
<S>               <C>           <C>               <C>                    <C>             <C>
$ 1 to 5          412,838       6.5 years         $ 1.73                 412,838         $ 1.73
                  =======                                                =======
</TABLE>

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

                                          1999                     1998
                                 ----------------------   ----------------------
                                 Shares  Weighted         Shares  Weighted
                                 Under   Average          Under   Average
                                 Option  Exercise Price   Option  Exercise Price
                                 ------  --------------   ------  --------------

Outstanding beginning of year    444,500    $3.25               0   $0.00
Granted                            2,200     1.96         448,000    3.25
Exercised                             --      --               --     --
Forfeited                        (17,500)    2.32          (3,500)   3.25
                                 -------                  -------
Outstanding end of year          429,200    $3.28         444,500   $3.25
                                 =======                  =======
  Options exercisable at
   year-end                      358,400                     -0-
                                 =======                  =======
      The following table summarizes information about stock options outstanding
      under the 1998 Plan at December 31, 1999:

<TABLE>
<CAPTION>
                                Options Outstanding                       Options Exercisable
                  ------------------------------------------------   ------------------------------
Range of          Outstanding   Remaining         Weighted-average   Exercisable   Weighted-Average
Exercise Prices   at 12/31/99   Contractual Life  Exercise Price     at 12/31/99   Exercise Price
---------------   -----------   ----------------  ----------------   -----------   ----------------
<S>               <C>           <C>               <C>                <C>           <C>
$ 1 to 5          429,200       4.1 years         $ 3.28             358,400       $ 2.64
                  =======                                            =======
</TABLE>

                                                                     (Continued)


                                      F-21
<PAGE>

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

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

                                                             1999
                                                 -----------------------------
                                                 Shares         Weighted
                                                 Under          Average
                                                 Option         Exercise Price
                                                 ------         --------------
Outstanding beginning of year                         0          $0.00
Granted                                          25,500           1.72
Exercised                                            --             --
Forfeited                                          -0-
                                                 ------
Outstanding end of year                          25,500          $1.72
                                                 ======
   Options exercisable at year-end               25,000
                                                 ======

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

<TABLE>
<CAPTION>
                                Options Outstanding                       Options Exercisable
                  ------------------------------------------------   ------------------------------
Range of          Outstanding   Remaining         Weighted-average   Exercisable   Weighted-Average
Exercise Prices   at 12/31/99   Contractual Life  Exercise Price     at 12/31/99   Exercise Price
---------------   -----------   ----------------  ----------------   -----------   ----------------
<S>               <C>           <C>               <C>                <C>           <C>
$ 1 to 5          25,500        9.3 years         $ 1.72             25,000        $ 1.73
                  ======                                             ======
</TABLE>

(14)  Income Taxes

      The provision for income taxes consists of the following:

                         1999                 1998                 1997
                         ----                 ----                 ----
                   Current   Deferred   Current   Deferred   Current   Deferred

Federal            $    --   716,000         --    (8,000)    40,000   (708,000)
State and foreign   62,000    95,000    615,000    (1,000)   177,000    (94,000)
                   -------   -------    -------    ------    -------   --------
      Total        $62,000   811,000    615,000    (9,000)   217,000   (802,000)
                   =======   =======    =======    ======    =======   ========

                                                                     (Continued)


                                      F-22
<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 income
      (loss) from continuing operations before income taxes is as follows:

<TABLE>
<CAPTION>
                                                                   1999            1998            1997
                                                                   ----            ----            ----
<S>                                                            <C>               <C>          <C>
Tax expense (benefit) at statutory rate                        $(4,356,000)      398,000      (2,526,000)
Increase (decrease) in income tax benefit resulting from:
   Increase (decrease) in valuation allowance                    5,486,000    (4,097,000)    (22,740,000)
   State and foreign taxes, less applicable federal benefits      (368,000)      615,000          83,000
   Debt conversion expense not deductible for tax                       --       411,000       3,620,000
   Other expenses not deductible for tax                           152,000       136,000         206,000
   Foreign income taxed at rates
       lower than U.S. statutory rate                               (5,000)     (239,000)       (730,000)
   Utilization of net operating loss carryforward                       --      (118,000)       (669,000)
   Expiration of capital loss and investment
       tax credit carryforwards                                         --     4,387,000         642,000
   Estimated NOL in excess of 382 limitation                            --      (719,000)     21,500,000
   Other                                                           (36,000)     (168,000)         29,000
                                                               -----------    ----------    ------------
                                                               $   873,000       606,000        (585,000)
                                                               ===========    ==========    ============
</TABLE>

      Porta has unused United States tax net operating loss (NOL)  carryforwards
      of  approximately  $74,593,000  expiring at various dates between 2007 and
      2019.  No tax  benefit or  expense  was  apportioned  to the 1997 and 1998
      extraordinary gains, as such amounts are immaterial.  Due to the change in
      ownership  which  resulted  from the  conversion  of Porta's  Zero  coupon
      subordinated  convertible notes to common stock,  Porta's usage of its NOL
      will be limited in  accordance  with  Internal  Revenue  Code section 382.
      Porta's  carryforward  utilization of the NOL is limited to $1,767,000 per
      year.  The  carryforward  amounts  are  subject to review by the  Internal
      Revenue Service (IRS). The capital loss carryforwards  expired during 1998
      and, as a result of the section 382 limitation, no benefit from tax credit
      carryforwards  will be  available.  In  addition,  Porta has  foreign  NOL
      carryforwards  of  approximately  $5,300,000  with  indefinite  expiration
      dates.

      Porta's United States net operating loss carryforwards expire in the
      following years:

                      2009                       $  4,105,000
                      2010                         18,880,000
                      2011                            884,000
                      2018                             37,000
                      2019                          5,912,000
                                                 ------------
                                                 $ 29,818,000
                                                 ============
                                                                     (Continued)


                                      F-23
<PAGE>

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

      The components of the deferred tax assets and liabilities, the net balance
      of which is included in prepaid and other current  assets,  as of December
      31, 1999 and 1998 are as follows:

                                                       1999             1998
                                                  ------------      -----------
Deferred tax assets:
   Inventory                                      $  1,193,000        1,488,000
   Allowance for doubtful accounts
     receivable                                        723,000          345,000
   Benefits of tax loss carryforwards               13,285,000        9,056,000
   Benefit plans                                       819,000          871,000
   Accrued commissions                                 718,000          913,000
   Other                                               449,000          290,000
   Depreciation                                        906,000          487,000
                                                  ------------      -----------
                                                    18,093,000       13,450,000
   Valuation allowance                             (18,903,000)     (12,607,000)
                                                  ------------      -----------
                                                            --          843,000
Deferred tax liabilities:
   Capitalized software costs                               --          (32,000)
                                                  ------------      -----------
                                                  $         --          811,000
                                                  ============      ===========

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

      Because  of Porta's  tax losses in 1999,  a  valuation  allowance  for the
      entire deferred tax asset was provided due to the uncertainty as to future
      realization.  During  the years  ended  December  31,  1998 and 1997,  the
      valuation allowance was carried at an amount that reflected a net deferred
      tax  asset  equal  to  the   anticipated  tax  benefit  of  the  temporary
      differences, which were expected to be realized within one year.

      The income tax  returns of Porta and its  subsidiary  operating  in Puerto
      Rico were  examined by the IRS for the tax years ended  December  31, 1989
      and 1988.  As a result of this  examination,  the IRS increased the Puerto
      Rico subsidiary's taxable income resulting from intercompany transactions,
      with a  corresponding  increase  in  Porta's  net  operating  losses.  The
      settlement  amounted to  approximately  $953,000.  Porta is currently in a
      structured  settlement with the IRS, which is reviewed  annually,  whereby
      monthly  payments  will be made to  liquidate  the  settlement.  Aggregate
      annual amounts payable by Porta,  including interest on the unpaid amounts
      at a current  rate of 7%, is $240,000 in 1999.  As of December  31,  1999,
      Porta has made all the  required  payments  through  that  date  under the
      settlement and approximately $586,000 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, 1999,  undistributed  earnings of the foreign subsidiaries amounted to
      approximately $2,908,000. It is not practicable to determine the amount of
      income or  withholding  tax that would be payable upon the  remittance  of
      those earnings.

                                                                     (Continued)


                                      F-24
<PAGE>

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

(15)  Leases

      At December 31, 1999, 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
      1999,  1998,  and 1997 amounted to  approximately  $874,000,  $716,000 and
      $827,000,  respectively.  Minimum rental commitments,  exclusive of future
      escalation charges, for each of the next five years are as follows:

                         2000                      $    758,000
                         2001                           445,000
                         2002                           436,000
                         2003                           414,000
                         2004                           385,000
                         Thereafter                   3,631,000
                                                   ------------
                                                   $  6,069,000
                                                   ============
(16)  Contingencies

      At  December  31,  1999,  Porta was  contingently  liable for  outstanding
      letters of credit and surety bonds  aggregating  approximately  $1,780,000
      and $1,323,000,  respectively,  as security for the performance of certain
      long-term contracts.

      In  December  1999,  Porta  entered  into a series  of  agreements  with a
      non-affiliated party relating to the proposed licensing and development of
      certain new products and the performance by the other party of maintenance
      services  for certain of Porta's  clients.  Porta has  determined  that it
      cannot  recognize  income or expense  under these  contracts  and that the
      contracts do not reflect  correctly  the fair market value of the licenses
      exchanged  and  that the  contracts  are null  and  void.  However,  it is
      possible  that the other party may assert  claims  against Porta under the
      contracts. Although Porta believes that it has valid defenses to any claim
      under the contracts, if there is litigation concerning the contracts,  the
      other party may prevail.

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

(17)  Major Customers

      During the years ended  December  31,  1999,  1998 and 1997,  Porta's five
      largest customers accounted for sales of $19,700,000, or approximately 51%
      of sales, $28,797,000,  or approximately 49% of sales, and $30,633,000, or
      approximately  48% of sales,  respectively.  Porta's  largest  customer is
      British  Telecommunications  plc  ("BT").  Sales to BT for the year  ended
      December 31, 1999,  1998 and 1997 amounted to $7,825,000,  $15,349,000 and
      $13,876,000,   respectively,   or   approximately   20%,   26%  and   22%,
      respectively,  of Porta's sales for such years. Therefore, any significant
      interruption  or  decline  in sales to BT may  have a  materially  adverse
      effect upon Porta's operations.  During 1998, sales to a Chilean telephone
      company were $6,834,000, or approximately 12% of sales. No other customers
      account for 10% or more of Porta's sales for any year.  Approximately 28%,
      64% and 64%, respectively, of Porta's accounts receivable are due from the
      five  largest   customers  as  of  December  31,  1999,   1998  and  1997.
      respectively.

(18)  Fair Values of Financial Instruments

      Cashequivalents,  accounts receivable, accounts and notes payable, accrued
      expenses 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.

                                                                     (Continued)


                                      F-25
<PAGE>

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

(19)  Net Income (Loss) Per Share

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

<TABLE>
<CAPTION>
Numerator-Basic and diluted
 net income (loss) per share:                      1999            1998           1997
                                               ------------      --------     ------------
<S>                                            <C>               <C>          <C>
  Income (loss) from continuing operations     $(13,686,000)     $451,000     $ (7,021,000)
  Extraordinary item                                     --        76,000          122,000
                                               ------------      --------     ------------
  Net income (loss)                            $(13,686,000)     $527,000     $ (6,899,000)
                                               ============      ========     ============
Denominator:

   Denominator for basic net income (loss)
    per share-weighted-average shares             9,489,000      9,281,000       3,111,000
   Effect of dilutive securities:
      Options and Warrants                               --       452,000               --
      6% Convertible Subordinated Notes                  --        52,000               --
                                               ------------      --------     ------------
   Denominator for diluted net income (loss)
    per share-adjusted weighted-average
    shares and assumed conversions                9,489,000      9,785,000       3,111,000
                                               ============      ========     ============
   Basic per share amounts:
      Continuing operations                    $      (1.44)     $   0.05     $      (2.26)
      Extraordinary item                                 --          0.01             0.04
                                               ------------      --------     ------------
        Net income (loss) per share
         of common stock                       $      (1.44)     $   0.06     $      (2.22)
                                               ============      ========     ============

   Diluted per share amounts:
      Continuing operations                    $      (1.44)     $   0.04     $      (2.26)
      Extraordinary item                                 --          0.01             0.04
                                               ------------      --------     ------------
        Net income (loss) per share
         of common stock                       $      (1.44)     $   0.05     $      (2.22)
                                               ============      ========     ============
</TABLE>

      In November  1997,  approximately  $23,400,000 of the Notes were converted
      into  approximately  6,412,000 shares of common stock. Had this conversion
      taken place as of January 1, 1997, the  denominator for the basic net loss
      per share (the weighted-average shares) and the diluted net loss per share
      (adjusted  weighted-average shares and assumed conversion) would have been
      8,639,000 for 1997.

      Options to purchase 638,508, 486,577 and 25,442 shares of common stock for
      1999, 1998 and 1997, respectively, with exercise prices ranging from $1.69
      to $5.00,  $3.25 to $86.25  and $3.69 to $86.25  for 1999,  1998 and 1997,
      respectively,  were  outstanding  but not included in the  computation  of
      diluted  net income  (loss) per share  because  the  exercise  prices were
      greater than the average market price of common stock during such years.

                                                                     (Continued)


                                      F-26
<PAGE>

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

      Warrants to purchase  860,000,  53,000 and 548,668  shares of common stock
      for 1999, 1998 and 1997,  respectively,  with exercise prices ranging from
      $1.56 to  $3.00,  $17.50  and $3.00 to  $50.00  for  1999,  1998 and 1997,
      respectively,  were  outstanding  but not included in the  computation  of
      diluted  net income  (loss) per share  because  the  exercise  prices were
      greater than the average market price of common stock during such years.

(20)  Legal Matters

      In 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.

      In December  1999,  Porta was served with a request  for  arbitration  for
      commissions  allegedly  owed  to  a  former  sales  representative.  Porta
      terminated  its sales  representative  agreement in July 1999. The request
      for  arbitration  alleges that Porta's  termination  of the  agreement was
      improper and that the  representative is entitled to be paid damages based
      on the commissions he allegedly would have received for an indefinite term
      beginning August 1999.  Additionally,  the request for arbitration alleges
      that the representative was not paid for certain  unspecified  commissions
      that he was supposedly entitled to receive during the period from February
      1, 1986  through  July 31,  1999.  The  request for  arbitration  does not
      specify the precise amount of damages, but estimates damages approximating
      $500,000.  The  arbitration is in its earliest stages and Porta intends to
      defend it vigorously.

(21)  Cash Flow Information

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

                                                 1999         1998         1997
                                                ------        -----        -----
Cash paid for interest                          $3,117        2,629        2,757
                                                ======        =====        =====
Cash paid for income taxes                      $  379          223          117
                                                ======        =====        =====

      (2)   Non-cash transactions:

            (i)  During  1998 and  1997,  the  Company  exchanged  approximately
            $250,000 and $410,000  principal  amount of its  Debentures,  net of
            unamortized  discount  and  accrued  interest,  for  5,000 and 8,000
            shares  of  common  stock,  and  $192,000  and  $315,000  of  Notes,
            respectively (note 7).

                                                                     (Continued)


                                      F-27
<PAGE>

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

            (ii) During 1998 and 1997,  the Company  issued 53,000 and 6,412,000
            shares of common stock,  respectively,  upon the conversion of Notes
            valued at approximately $280,000 and $34,000,000, respectively (note
            7).

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

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

            (v) In connection  with the November 1997 extension of the Company's
            credit  facility  with its senior  lender,  the Company  amended the
            terms of  previously  issued  warrants to purchase  common  stock to
            reduce  the  exercise  price.  The  value  of the  reduction  in the
            exercise  price,  approximately  $45,000  was  recorded  as deferred
            financing and additional paid in capital.

            (vi) In  connection  with advisory  services  provided in 1997 by an
            investment banking firm, the Company issued 120,000 shares of common
            stock in 1998  valued at  approximately  $340,000  and  warrants  to
            purchase  400,000  shares of common  stock  valued at  approximately
            $160,000 were issued in 1997 (notes 7 and 10).

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

            (viii) 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).

            (ix) In 1999, in connection  with the amendment to the  subordinated
            notes, Porta reduced the exercise price of the Series B and Series C
            Warrants,  which  was  valued at  $56,000  and  recorded  as part of
            additional paid in capital and debt discount (note 8).

(22)  Segment and Geographic Data

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

                                                                     (Continued)


                                      F-28
<PAGE>

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

      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.

                                            1999           1998          1997
                                       ------------    -----------    ----------
Revenue:
      Line                             $ 18,189,000     24,291,000    23,753,000
      OSS                                14,254,000     27,318,000    29,561,000
      Signal                              6,328,000      7,539,000     8,280,000
                                       ------------    -----------    ----------
                                       $ 38,771,000     59,148,000    61,594,000
                                       ============    ===========    ==========
Segment profit:
      Line                             $  3,582,000      6,580,000     7,091,000
      OSS                               (10,650,000)      (365,000)      634,000
      Signal                              1,884,000      1,953,000     2,325,000
                                       ------------    -----------    ----------
                                       $ (5,184,000)     8,168,000    10,050,000
                                       ============    ===========    ==========
Depreciation and amortization:
      Line                             $    505,000        722,000       831,000
      OSS                                   881,000      1,170,000     1,850,000
      Signal                                199,000        200,000       215,000
                                       ------------    -----------    ----------
                                       $  1,585,000      2,092,000     2,896,000
                                       ============    ===========    ==========
Total identifiable assets:
      Line                             $  7,921,000     10,330,000     9,329,000
      OSS                                21,637,000     28,283,000    25,018,000
      Signal                              7,965,000      8,176,000     8,273,000
                                       ------------    -----------    ----------
                                       $ 37,523,000     46,789,000    42,620,000
Capital expenditures:                  ============    ===========    ==========
      Line                             $    415,000        280,000       277,000
      OSS                                   670,000        283,000        97,000
      Signal                                 27,000         93,000        12,000
                                       ------------    -----------    ----------
                                       $  1,112,000        656,000       386,000
                                       ============    ===========    ==========

                                                                     (Continued)


                                      F-29
<PAGE>

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

      The following table reconciles segment totals to consolidated totals:

<TABLE>
<CAPTION>
                                                          1999           1998           1997
                                                     ------------    -----------    -----------
<S>                                                  <C>              <C>            <C>
Revenue:
      Total revenue for reportable segments          $ 38,771,000     59,148,000     61,594,000
      Other revenue                                       165,000        195,000        636,000
                                                     ------------    -----------    -----------
   Consolidated total revenue                        $ 38,936,000     59,343,000     62,230,000
                                                     ============    ===========    ===========
Operating income:
      Total segment profit for reportable segments   $ (5,184,000)     8,168,000     10,050,000
      Corporate and unallocated                        (4,525,000)    (3,602,000)    (3,949,000)
                                                     ------------    -----------    -----------
   Consolidated total operating income               $ (9,709,000)     4,566,000      6,101,000
                                                     ============    ===========    ===========
Depreciation and amortization:
      Total for reportable segments                  $  1,585,000      2,092,000      2,896,000
      Corporate and unallocated                            91,000        103,000        144,000
                                                     ------------    -----------    -----------
   Consolidated total deprecation and amortization   $  1,676,000      2,195,000      3,040,000
                                                     ============    ===========    ===========
Total assets:
      Total for reportable segments                  $ 37,523,000     46,789,000     42,620,000
      Corporate and unallocated                         5,925,000      5,347,000      8,380,000
                                                     ------------    -----------    -----------
   Consolidated total assets                         $ 43,448,000     52,136,000     51,000,000
                                                     ============    ===========    ===========
Capital expenditures:
      Total for reportable segments                  $  1,112,000        656,000        386,000
      Corporate and unallocated                            79,000          9,000         23,000
                                                     ------------    -----------    -----------
   Consolidated total capital expenditures           $  1,191,000        665,000        409,000
                                                     ============    ===========    ===========
</TABLE>

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

                                             1999          1998          1997
                                         -----------    ----------    ----------
Revenue:
      United States                      $14,368,000    18,951,000    17,980,000
      United Kingdom                      15,673,000    20,441,000    18,640,000
      Asia/Pacific                         4,159,000     7,181,000    10,278,000
      Other Europe                         3,130,000     3,377,000    10,587,000
      Latin America                        1,257,000     7,463,000     2,429,000
      Other North America                    296,000     1,879,000     1,289,000
      Other                                   53,000        51,000     1,027,000
                                         -----------    ----------    ----------
Consolidated total revenue               $38,936,000    59,343,000    62,230,000
                                         ===========    ==========    ==========
Consolidated long-lived assets:
      United States                      $12,011,000    12,317,000    13,044,000
      United Kingdom                       2,398,000     2,520,000     2,776,000
      Other North America                    618,000       663,000       650,000
      Asia/Pacific                           200,000       273,000       245,000
      Latin America                           35,000        26,000             0
      Other                                    8,000        11,000        11,000
                                         -----------    ----------    ----------
                                          15,270,000    15,810,000    16,726,000
   Current and other assets               28,178,000    36,326,000    34,274,000
                                         -----------    ----------    ----------
Consolidated total assets                $43,448,000    52,136,000    51,000,000
                                         ===========    ==========    ==========


                                      F-30