**UNITED
      STATES**


**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, 2005**





o **TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**


**SECURITIES
      EXCHANGE ACT OF 1934 [NO FEE REQUIRED]**


**Commission
      file number** **1-8191**




**PORTA
      SYSTEMS CORP** .


(Exact
      name of registrant as specified in its charter)





**Delaware**
            
            **11-2203988**(State
                or other jurisdiction of incorporation or organization)
            
            (IRS
                Employer Identification No.)**6851
                Jericho Turnpike, 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: None




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


Common
      Stock, par value $.01 per share


(Title
      of
      Class)





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes
o
      No x




Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act. Yes
o
      No x




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
o





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





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Check
      one:


Large
      accelerated filer o   Accelerated
      filer o   Non-accelerated
      filer x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act. o
      Yes x No




State
      aggregate market value of the voting stock held by non-affiliates of the
      registrant: $1,558,314 as of June 30, 2005.





Indicate
      the number of shares outstanding of each of the registrant's class of common
      stock, as of the latest practicable date: 10,053,638 shares of Common Stock,
      par
      value $.01 per share, as of March 15, 2006.





**DOCUMENTS
      INCORPORATED BY REFERENCE**





None









**Part
        I**
 
 **Item
        1.** **** **Business**
 
 Porta
        Systems Corp. develops designs, manufactures and markets a range of standard
        and
        proprietary telecommunications equipment for sale domestically and
        internationally. Our core products, focused on ensuring communications for
        service providers worldwide, fall principally into two categories:
 
 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.
 
 Through
        2004, we offered a third category of products - operations support systems,
        which we call OSS. During 2003 we began to scale back our OSS operations
        and we
        continued to scale back these operations through 2005. We now limit our OSS
        operations to the performance of maintenance on existing systems and the
        performance of warranty services. We are also seeking to sell our existing
        OSS
        inventory; however, such sales were not significant in 2005, and we do not
        plan
        to add additional inventory. 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
        are a Delaware corporation incorporated in 1972 as the successor to a New
        York
        corporation of the same name incorporated in 1969. Our principal offices
        are
        located at 6851 Jericho Turnpike, Syosset, New York 11791; telephone number,
        516-364-9300. References to “we,” “us,” “our,” and words of like import refer to
        Porta Systems Corp. and its subsidiaries, unless the context indicates
        otherwise.
 
 **Forward-Looking
        Statements**
 
 Statements
        in this Form 10-K annual report may be “forward-looking statements” within the
        meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
        statements include, but are not limited to, statements that express our
        intentions, beliefs, expectations, strategies, predictions or any other
        statements relating to our future activities or other future events or
        conditions. These statements are based on current expectations, estimates
        and
        projections about our business based, in part, on assumptions made by
        management. These statements are not guarantees of future performance and
        involve risks, uncertainties and assumptions that are difficult to predict.
        Therefore, actual outcomes and results may, and probably will, differ materially
        from what is expressed or forecasted in the forward-looking statements due
        to
        numerous factors, including those risks discussed from time to time in this
        Form
        10-K annual report, including the risks described under “Risk Factors” and the
        matters described under “Management’s Discussion and Analysis of Financial
        Condition and Results of Operations,” and in other documents which we file with
        the Securities and Exchange Commission. In addition, such statements could
        be
        affected by risks and uncertainties related to our financial conditions,
        our
        relationship with the holder of our senior debt, factors which affect the
        telecommunications industry, market and customer acceptance, competition,
        government regulations and requirements and pricing, as well as general industry
        and market conditions and growth rates, and general economic conditions.
        Any
        forward-looking statements speak only as of the date on which they are made,
        and
        we do not undertake any obligation to update any forward-looking statement
        to
        reflect events or circumstances after the date of this Form 10-K.
  -2-
 
 **Products**
 
 Telecommunications
        Connection Equipment .
        Our copper connection/protection equipment is used by domestic and international
        telephone operating companies, by owners of private telecommunications equipment
        and manufacturers and suppliers of telephone central office and customer
        premises equipment. Products of the types comprising our telecommunications
        connection equipment are included as integral parts of all domestic and foreign
        telephone and telecommunications systems.
  Our
        connection equipment consists of connection/protection blocks, building entrance
        terminals and protection modules. These products are used by telephone companies
        and installers of communications and data transmission equipment to interconnect
        copper-based subscriber lines to switching equipment lines. The protector
        modules protect central office and customer premises 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 private owners of telecommunications
        equipment now have the responsibility to protect their equipment, personnel
        and
        buildings from damage caused by electrical surges. Line connection/protection
        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, building entrance terminals
        and
        frames used in telephone central switching offices, PBX installations, multiple
        user facilities and customer premise applications.
 
 We
        also have developed a range 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 for the optimum placement of connections for telephone
        lines
        and connector blocks mounted on the frame.
 
 Our
        copper connection/protection products are used by many of the regional Bell
        and
        international operating companies as well as independent telephone operating
        companies in the United States, and owners of private telecommunications
        equipment providing communications and data transmission facilities and
        equipment. These products are also purchased by equipment manufacturers for
        integration with their systems. In addition, our telecommunications connection
        products have been sold to telephone operating companies in various foreign
        countries. This equipment is compatible with existing telephone systems both
        within and outside the United States and can generally be used without
        modification, although we do custom-design modifications to accommodate the
        specific needs of our customers.
 
 Signal
        Processing Products .
        Our signal processing products include data bus systems and wideband
        transformers. Data bus systems, which are the communication standard for
        military and aerospace systems, require an extremely high level of reliability
        and performance. Wideband transformers are required for ground noise elimination
        in video imaging systems and are used in the television and broadcast, medical
        imaging and industrial process control industries.
  -3-
 
 Operations
        Support Systems .
        Through 2004, we sold our OSS systems primarily to telephone operating companies in established
        and
        developing countries in Asia, South and Central America and Europe. Because
        of continuing losses in this division, combined with difficulties in marketing
        OSS products in view of our financial condition, we limited our OSS activities
        in 2005 to the performance of maintenance and warranty services. In addition,
        we
        are trying to sell our remaining OSS inventory, although such sales were
        not
        significant and we can give no assurance that we will be able to sell the
        remaining OSS inventory. We expect our OSS business to continue to decline
        in
        future years.
 
 The
        table below shows, for the last three fiscal years, the contribution made
        to our
        sales by each of our major categories of the telecommunications
        industry:
 
 Sales
        by Product Category
  Years
                  Ended December 31,2005
              
              2004
              
              2003(Dollars
                  in thousands)Line
                  Connecting/Protecting Equipment
              
              $
              21,982
              
              
              77
              %
              $
              21,545
              
              
              74
              %
              $
              11,334
              
              
              58
              %Signal
                  Processing
              
              
              5,710
              
              
              20
              %
              
              5,551
              
              
              19
              %
              
              4,253
              
              
              21
              %OSS
                  Systems
              
              
              785
              
              
              3
              %
              
              2,003
              
              
              7
              %
              
              3,249
              
              
              17
              %Other
              
              
              127
              
              
              0
              %
              
              69
              
              
              0
              %
              
              754
              
              
              4
              %Total
              
              $
              28,604
              
              
              100
              %
              $
              29,168
              
              
              100
              %
              $
              19,590
              
              
              100
              %
 
 **Markets**
 
 As
        a telephone company expands the number of its subscriber lines, it may require
        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
        2005, approximately
        77% of our sales were made to customers in this category.
  -4-
 
 Our
        line of signal processing products is supplied to customers in the military
        and
        aerospace industry as well as manufacturers of medical equipment and video
        systems. The primary communication standard in new military and aerospace
        systems is the MIL-STD-1553 Command Response Data Bus, an application which
        requires an extremely high level of reliability and performance. Our wideband
        transformers are required for ground noise elimination in video imaging systems
        and are used in the television and broadcast, medical imaging and industrial
        process control industries. If not eliminated, ground noise caused by poor
        electrical system wiring or power supplies, results in significant deterioration
        in system performance, including poor picture quality and process failures
        in
        instrumentation. The wideband transformers provide a cost-effective and quick
        solution to the problem without the need of redesign of the rest of the system. Products
        are designed to satisfy
        the specific requirements of each military or aerospace customer.
 
 During
        2005, signal processing equipment accounted for approximately 20% of our
        sales.
 
 During
        2005, approximately 3% of our sales consisted principally of maintenance
        services and, to a lesser extent, of the sale of existing OSS inventory.
        None of
        our current maintenance agreements extend beyond 2007, and we do not expect
        to
        enter into new maintenance agreements. As a result, we anticipate that the
        OSS
        sales will represent a declining percentage of total sales.
 
 **Marketing
        and Sales**
 
 We
        operate principally through two business units, which are organized by product
        line, and with each having responsibility for the sales and marketing of
        its
        products. We also continue to employ a modest staff of personnel to perform
        maintenance and warranty services on OSS systems.
 
 When
        appropriate to obtain sales in foreign countries, we may enter into business
        arrangements and technology transfer agreements covering our products with
        local
        manufacturers and participate in manufacturing and licensing arrangements
        with
        local telephone equipment suppliers.
 
 In
        the United States and throughout the world, we use independent distributors
        in
        the marketing of all copper based products to the regional Bell operating
        companies and the customer premises equipment market. All distributors marketing
        copper-based products also market directly competing products. In addition,
        we
        continue to promote the direct marketing relationships we developed in the
        past
        with telephone operating companies.
 
 British
        Telecommunications purchased line connecting/protecting products of $5,641,000
        (20% of sales) in 2005, $2,259,000 (8% of sales) in 2004, and $867,000 (4%
        of
        sales) in 2003. During these years, we also sold our products to unaffiliated
        suppliers for resale to British Telecommunications, the most significant
        of
        which was Fujitsu, a systems integrator for British Telecommunications, to
        whom
        we sold $3,170,000 in 2005, $4,772,000 in 2004, and $3,150,000 in 2003. We
        have
        an agreement with British Telecommunications which, in effect, enables British
        Telecommunications to use certain of our proprietary information to modify
        or
        enhance products provided to British Telecommunications and permits British
        Telecommunications to manufacture or engage others to manufacture those
        products.
  Our
        signal processing products are sold primarily to United States military and
        aerospace prime contractors, and domestic original equipment manufacturers
        and
        end users.
  -5-
  The
        following table sets forth, for the last three fiscal years, our sales to
        customers by geographic region:
 
 Sales
        to Customers by Geographic Region (1)
  Year
                  Ended December 31,2005
              
              2004
              
              2003(Dollars
                  in thousands)North
                  America
              
              $
              13,277
              
              
              46
              %
              $
              12,948
              
              
              45
              %
              $
              9,647
              
              
              49
              %United
                  Kingdom
              
              
              14,998
              
              
              53
              %
              
              14,911
              
              
              51
              %
              
              7,523
              
              
              38
              %Asia/Pacific
              
              
              10
              
              
              0
              %
              
              694
              
              
              2
              %
              
              954
              
              
              6
              %Other
                  Europe
              
              
              319
              
              
              1
              %
              
              457
              
              
              2
              %
              
              1,228
              
              
              6
              %Latin
                  America
              
              
              0
              
              
              0
              %
              
              158
              
              
              1
              %
              
              238
              
              
              1
              %Total
                  Sales
              
              $
              28,604
              
              
              100
              %
              $
              29,168
              
              
              100
              %
              $
              19,590
              
              
              100
              %
 
 (1)
              For
                  information regarding the amount of sales, operating profit or
                  loss and
                  identifiable assets attributable to each of our divisions and geographic
                  areas, see Note 19 of Notes to the Consolidated Financial
                  Statements.
 
 In
        selling to customers in foreign countries, we face inherent risks not normally
        present in the case of sales to United States customers, including risks
        associated with currency devaluation, inability to convert local currency
        into
        dollars, as well as local tax regulations and political
        instability.
 
 **Manufacturing**
  At
        present, our manufacturing and assembly operations are conducted at facilities
        located in Syosset, New York and Matamoros, Mexico. From time to time we
        also
        use subcontractors to augment various aspects of our production activities
        and
        periodically explore the feasibility of conducting operations at lower cost
        manufacturing facilities located abroad. We are no longer manufacturing or
        purchasing new inventory for OSS products.
 
 **Source
        and Availability of Components**
 
 We
        generally purchase the standard components used in the manufacture of our
        products from a number of suppliers. We attempt to assure ourselves that
        the
        components are available from more than one source.
  -6-
 
 **Significant
        Customers**
 
 Total
        sales for British Telecommunications, consisting of direct sales and sales
        to
        systems integrators for British Telecommunications (including Fujitsu) were
        $14,339,000 (50% of sales) for 2005, $14,055,000 (48%) for 2004 and $7,077,000
        (36%) for 2003. During 2005, sales to Telmex accounted for $3,157,000, or
        approximately 11% of sales and $3,139,000 or approximately 11% of sales for
        2004. No other customers account for 10% or more of our sales in 2005, 2004
        or
        2003.
 
 Our five
        largest customers, consisting of British Telecommunications, Fujitsu and
        two
        other systems integrators for British Telecommunications, and Telmex, accounted
        for sales of $17,431,000, or approximately 61% of sales, for 2005; $15,443,000,
        or approximately 53% of sales, for
        2004;
        and $8,507,000,
        or approximately 43% of sales, for
        2003.  British
        Telecommunications was our largest customer for 2005, accounting for sales
        of
        $5,933,000, or approximately 21% of our
        revenue, and Fujitsu
        was our largest customer for 2004, accounting for sales of $4,772,000,
        or approximately 16%.
        Direct sales to British Telecommunications were
        $5,933,000, or 21% of sales for 2005; $2,652,000, or 9% of sales, for 2004;
        and
        $1,480,000, or 8% of sales, for 2003 .
        Almost
        all of these sales were sales of connection/protection products, with the
        balance being revenue for OSS maintenance contracts.
 
 Distributors
        of our customer premise equipment are the ultimate purchasers of a significant
        portion of our products sold in the United States, while sales to foreign
        telephone operating companies constitute the major portion of our foreign
        sales.
        Our contracts with these customers require no minimum purchases by such
        customers. Significant customers for the signal processing products include
        major United States aerospace companies, the Department of Defense and original
        equipment manufacturers in the medical imaging and process control equipment
        industries. We sell both catalog and custom designed products to these
        customers. Some contracts are multi-year procurements.
 
 **Backlog**
 
 At
        December 31, 2005, our backlog was approximately $4,188,000 compared with
        approximately $5,265,000 at December 31, 2004. The decrease in the backlog
        reflects our ability to manufacture and ship inventory during 2005 in a more
        timely manner than in 2004 because of our improved cash flow and a reduced
        level, as of December 31, 2005, of signal processing orders. Of the December
        31,
        2005 backlog, approximately $2,700,000 represented orders from foreign telephone
        operating companies. We expect to ship substantially all of our December
        31,
        2005 backlog during 2006.
 
 **Intellectual
        Property Rights**
 
 We
        own a number of domestic utility and design patents and have pending patent
        applications for these products. In addition, we have foreign patent protection
        for a number of our products.
 
 From
        time to time we enter into licensing and technical information agreements
        under
        which we receive or grant rights to produce certain subcomponents used in
        our
        products. These agreements are for varying terms and provide for the payment
        or
        receipt of royalties or technical license fees. There are no such arrangements
        as of December 31, 2005.
  -7-
 
 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.
 
 Under
        our agreement with British Telecommunications, we gave British
        Telecommunications the right to use our connection/protection technology
        or have
        products using our technology manufactured for it by others.
 
 **Competition**
 
 The
        telephone equipment market in which we do business is characterized by intense
        competition, rapid technological change and a movement to consolidation and
        private ownership of telecommunications networks. In competing for telephone
        operating company business, the purchase price of equipment and associated
        operating expenses have become significant factors, along with product design
        and long-standing equipment supply relationships. In the customer premises
        equipment market, we are functioning in a market characterized by distributors
        and installers of equipment and by price competition.
 
 We
        compete directly with a number of large and small telephone equipment
        manufacturers in the United States, with CommScope, Inc., which acquired
        the
        business from Lucent Technologies, being our principal United States competitor.
        CommScope’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, CommScope 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 achieve comparable performance
        and we
        endeavor to offer our products at prices that will make our products compete worldwide.
        However, our ability to compete is hampered by our historical financial
        condition, our continuing working capital deficit and our reliance on the
        agreement of the holder of our senior debt to continue to defer the maturity
        of
        our senior debt.
 
 In
        connection with overseas sales of our line connecting/protecting equipment,
        we
        have met with significant competition from United States and foreign
        manufacturers of comparable equipment and we expect this competition to
        continue. In addition to CommScope, a number of our overseas competitors
        have
        significantly greater resources than we do.
 
 **Research
        and Development Activities**
 
 We
        spent approximately $1,700,000 in 2005, $2,000,000 in 2004, and $2,100,000
        in
        2003 on research and development activities. Most of the research and
        development expenses in 2005 related to copper connection/protection
        products ,
        and was
        oriented toward development of new products.  All
        research and development was Company sponsored and is expensed as incurred.
        During 2005, we
        increased our research and development efforts in the connection/protection
        business and, as part of our scale-back of our OSS business, we terminated
        our
        research and development activities in that segment.
  -8-
  **Employees**
 
 As
        of
        December 31, 2005 we had 302 employees, of which 55 were employed in the
        United
        States, 233 in Mexico, 9 in the United Kingdom, and 5 in China. We believe
        that
        our relations with our employees are good, and we have never experienced
        a work
        stoppage. Our employees are not covered by collective bargaining agreements,
        except for our hourly employees in Mexico who are covered by two collective
        bargaining agreements that expire on May 20, 2006 and December 31,
        2006.
 
 
 **Item
        1 A. Risk Factors**
 
 **We
        require substantial financing to meet our working capital requirements and** **we
        have no access to such** **financing.** We
        had a working capital deficit at December 31, 2005
        of
        $33,778,000. As of December 31, 2005, our current liabilities included
        $24,675,000 due to the
        holder of our
        senior debt. We do not have sufficient resources to pay the senior debt or
        to
        pay principal and interest of $11,197,000 due at December 31, 2005 on the outstanding subordinated notes that became due
        on
        July 3, 2001, and we do not expect to generate the necessary cash from our
        operations to enable us to make those payments and we have no other source of outside financing .
        The holder of our senior debt is not advancing funds to us; and, at present
        our
        only source of funds is from operations. To the extent that either our
        operations do not generate sufficient funds to cover our expenses or the holders of our debt demand payments which we are unable to
        make ,
        it may be necessary for us to seek protection under the Bankruptcy Code.
        See
“Management’s Discussion and Analysis of Financial Condition and Results of
        Operations.”
 
 **Our
        senior debt holder has required us to agree to restructure our company, which
        may impair the rights of the holders of our common stock** . Our
        senior debt matures on May 1, 2006. The holder of our senior debt has required, as
        a
        condition to the extensions in the maturity date that we agree to take steps
        to
        effect a restructure of the senior debt in a manner which results in the
        payment
        of a significant portion of the senior debt. Any such restructure will require
        us to obtain financing from a new investor. Although we are seeking such
        an
        investor, we cannot give any assurance that we will be able to obtain an
        investor on terms that are acceptable to the senior debt holder. If the maturity
        of our senior debt is not extended beyond May 1, 2006, or if the holder of
        the
        senior debt demands payment of all or a significant portion of the senior
        debt
        when due, whether on May 1, 2006 or upon the expiration of a subsequent
        extension, we will not be able to continue in business, and it is likely
        that we
        will seek protection under the Bankruptcy Code. Any restructure of our company
        may result in very significant dilution to the holders of our common stock
        and
        it is possible that a restructure may involve a filing under the Bankruptcy
        Code.
 
 **Our
        independent registered public accounting firm has included an explanatory
        paragraph relating to our ability to** **continue
        as a going concern in its report on our financial statements.** Because
        we have suffered substantial losses from operations in previous years, and
        because of our stockholders’ deficit  of
        $30,185,000, our working capital deficit of $33,778,000 as of December 31,
        2005
        and our dependence upon the continued agreement of the holder of our senior
        debt
        to defer the maturity date of our senior debt, our accounting firm included
        in
        its report an explanatory paragraph about our ability to continue as a going concern.
 
 **Our
        sales in our copper connection/protection segment are based on specific market
        factors and the requirements of British Telecommunications, which may not
        continue.** Total
        sales to British Telecommunications, consisting of direct sales and sales
        to
        systems integrators for British Telecommunications (including Fujitsu
        Telecommunications Europe LTD), were $14,339,000 (50% of sales) for 2005,
        $14,055,000 (48% of sales) for 2004 and $7,077,000 (36%) for 2003. Almost
        all of
        such sales were sales of copper connection products. To the extent that British
        Telecommunications no longer requires products from us, we may be unable
        to
        operate profitably, and it may be necessary for us to seek protection under
        the
        Bankruptcy Code.
  -9-
 
 **Our
        sales are dependent upon the requirements of the telecommunications
        industry.** Our ability to operate profitably will be impaired by any factors which affect
        the telecommunications industry generally or to the extent that our customers’
needs, particularly British Telecommunications, change either as a result
        of
        regulatory conditions or changes in technology or the completion of projects
        which require our products.
 
 **We
        are heavily dependent on foreign sales** **.**  Approximately
        65% of our sales in 2005,  66%
        of
        our sales in 2004 and 56% of our sales in 2003, were made to foreign telephone
        operating companies, particularly British Telecommunications. 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 risks
        relating to political and economic changes ,
        including the decline in the value of the dollar against other major
        currencies .
        Furthermore, our historical financial condition has impaired and may continue
        to
        impair our ability to generate new business in the international market as
        potential customers express concern about our ability to perform.
 
 **We
        have granted to British Telecommunications rights to our
        technology.** Under our agreement with British Telecommunications, we gave British
        Telecommunications the right to use our connection/protection technology
        or have
        products using our technology manufactured for it by others. As a result,
        British Telecommunications may have the right to use our technology and purchase
        products based on our technology from others, which may result in a significant
        decline in our sales to British Telecommunications.
 
 **Because
        of our small size and our historical financial problems, we may have difficulty
        competing for business.** We
        compete directly with a number of large and small domestic
        and foreign telephone
        equipment manufacturers, with CommScope, Inc., which acquired the
        connection/protection business from Lucent Technologies, continuing to be
        our
        principal United States competitor. Our competitors have used our historical
        financial difficulties in successfully competing against us. We anticipate
        that
        our working capital deficit and our historical losses, combined with the
        absence
        of financing, may continue to place us in a competitive disadvantage .
  **We
        require access to current technological developments** .
        We rely primarily on the performance and design characteristics of our products in
        marketing our products, which requires access to state-of-the-art technology
        in
        order to be competitive. Our business could be adversely affected if we cannot develop
        or
        obtain licenses for state-of-the-art technology. Because
        of our historical financial problems, we were not able to devote a significant
        effort to research and development, which could increase our difficulties
        in
        making sales of our current products and introducing any significant new
        products.
  **We
        rely on certain key employees.** We
        are dependent upon the continued employment of certain key employees, including
        our senior executive officers and our operations and technical personnel .
        Our failure to retain such employees may have a material adverse effect upon
        our
        business. If we are unable to provide our customers with necessary service,
        our
        ability to operate profitably could be impaired.
  -10-
 
 **Because
        our stock is subject to the penny stock rules, our stockholders may have
        difficulty in selling our stock.** Because our stock is traded on the OTC Bulletin Board and our stock price
        is
        very low, our stock is subject to the Securities and Exchange Commission’s penny
        stock rules, which impose additional sales practice requirements on
        broker-dealers that sell our stock to persons other than established customers
        and institutional accredited investors. These rules may affect the ability
        of
        broker-dealers to sell our common stock and may affect the ability of our
        stockholders to sell any common stock they may own.
 
 **We
        do not pay dividends on common stock** .
        The holder of our senior debt has prohibited us from paying any dividends
        on our
        common stock.
 
 **Item
        1B.** **** **Unresolved
        Staff Comments**
 
 None.
 
 **Item
        2.** **** **Properties**
 
 We
        currently lease approximately 14,500 square feet of executive, sales, marketing
        and research and development space and 4,200 square feet of manufacturing
        space
        in Syosset, New York. These facilities represent substantially all of our
        office, plant and warehouse space in the United States. The Syosset, New
        York
        leases expire February 2008 and May 2007, respectively. The annual rental
        payable under these leases is approximately $305,000 and is subject to customary
        escalation clauses.
 
 Our
        wholly-owned United Kingdom subsidiary leases an approximately 11,000 square
        foot facility in Coventry, England, which facility comprises all of our office,
        plant and warehouse space. The lease expires in 2019. The aggregate current
        annual rental is approximately $375,000 and is subject to customary escalation
        clauses. In January 2006, we negotiated an agreement with the landlord to
        cancel
        the remaining approximate 16 years of the lease for three years rent plus
        a
        cancellation fee. We anticipate the signing of the agreement at the end of
        March
        2006.
 
 Our
        wholly-owned Mexican subsidiary owns an approximately 40,000 square foot
        manufacturing facility, and approximately 50,000 square feet of adjacent
        land,
        in Matamoros, Mexico.
 
 We
        believe our properties are adequate for our needs.
 
 **Item
        3.** **** **Legal
        Proceedings** ****
 
 In
        January 2006, we settled the previously reported arbitration proceeding by
        BMS
        Corp. against us. The settlement provides for us to pay $1,000,000 in monthly
        installments through March 2010, secured by a confession of judgment. Based
        on
        the settlement, we
        recorded a  liability
        of $824,000 at December 31, 2005, as per our estimate of the present value
        of
        our payments to BMS. Through March 23, 2006 we have paid $135,000 pursuant
        to
        the settlement agreement.
 
 In
        July
        2001, the holder of a subordinated note in the principal amount of $500,000
        commenced an action against us in the United States District Court for the
        Southern District of New York seeking payment of the principal and accrued
        interest on their subordinated note which was payable in July 2001. The payment
        of the note is subordinated to payment of our senior debt. The plaintiff's
        motion for a summary judgment was denied by the court in January 2002, on
        the
        grounds that the terms of the note did not give them permission to obtain
        a
        judgment while we remained in default to the senior debt holder. Since that
        time, the action has remained inactive. Our obligations under the subordinated
        notes are reflected as current liabilities on our balance sheet.
  -11-
 
 **Item
        4.** **** **Submission
        of Matters to a Vote of Securities Holders**
 
 During
        the fourth quarter of 2005, no matters were submitted to a vote of our security
        holders.
 
 **Part
        II**
 
 **Item
        5.** **** **Market
        for Registrant's Common Equity and Related Stockholder
        Matters**
  Our
        common stock is traded on the OTC Bulletin Board under the symbol PYTM. The
        following table sets forth, for 2005 and 2004, the quarterly high and low
        sales
        prices for our common stock on the OTC Bulletin Board.
 
 High
              
              Low2005
              
              
              First
                  Quarter
              
              $
              0.30
              
              $
              0.17Second
                  Quarter
              
              
              0.25
              
              
              0.14Third
                  Quarter
              
              
              0.56
              
              
              0.15Fourth
                  Quarter
              
              
              0.50
              
              
              0.122004
              
              
              First
                  Quarter
              
              $
              0.15
              
              $
              0.03Second
                  Quarter
              
              
              0.23
              
              
              0.05Third
                  Quarter
              
              
              0.23
              
              
              0.07Fourth
                  Quarter
              
              
              0.21
              
              
              0.08
 
 We
        did not declare or pay any cash dividends in 2005 or 2004, and we do not
        anticipate paying cash dividends in the foreseeable future. Our agreement
        with
        the holder of our senior debt prohibits us from paying cash dividends on
        our
        common stock.
 
 As
        of
        March 20, 2006, we had approximately 794 stockholders of record, and the
        closing
        price of our common stock was $0.15.
 
 We
        did
        not issue any unregistered securities during 2005.
 
 **Equity
        Compensation Plan Information**
 
 The
        following table summarizes the equity compensation plans under which our
        securities may be issued as of December 31, 2005.
 
 Equity
        Compensation Plan Information as of December 31, 2005
 
 Plan
                  Category
              
              Number
                  of securities to be issued upon exercise of outstanding options
                  andWarrants
              
              Weighted-average
                  exercise price of outstandingoptions
                  and warrants
              
              Number
                  of securities remaining available for future issuance underequity
                  compensation plansEquity
                  compensation plans approved by security holders
              
              
              337,780
              
              $
              1.3922
              
              
              962,220Equity
                  compensation plan not approved by security holders
              
              
              -0-
              
              
              -0-
              
              
              95,750337,780
              
              $
              1.3922
              
              
              1,057,970
 
 The
        plan that was not approved by security holders is a stock bonus plan that
        permits issuance of stock to employees on a discretionary basis.
  -12-
  **Item
        6** **.** **Selected
        Financial Data**
  The
        following table sets forth certain selected consolidated financial information.
        For further information, see the Consolidated Financial Statements and other
        information set forth in Item 8 and Management’s Discussion and Analysis of
        Financial Condition and Results of Operations set forth in Item 7.
 
 Year
                  Ended December 31,2005
              
              2004
              
              2003
              
              2002
              
              2001(In
                  thousands, except per share data)**Income
                  Statement Data:**Sales
              
              $
              28,604
              
              $
              29,168
              
              $
              19,590
              
              $
              21,417
              
              $
              28,062Operating
                  income (loss)
              
              
              2,
                  021
              
              
              4,153
              
              
              (2,352
              )
              
              (
                  2,881
              )
              
              (
                  11,453
              )Net
                  income (loss)
              
              
              810
              
              
              2,675
              
              
              (3,357
              )
              
              (
                  4,114
              )
              
              (
                  14,774
              )Basic
                  and diluted net income (loss) per share
              
              $
              0.08
              
              $
              0.27
              
              $
              (0.34
              )
              $
              (0.41
              )
              $
              (1.50
              )Number
                  of shares used in calculating net income (loss) per share:Basic
              
              
              10,054
              
              
              9,972
              
              
              9,972
              
              
              9,972
              
              
              9,878Diluted
              
              
              10,093
              
              
              9,988
              
              
              9,972
              
              
              9,972
              
              
              9,878**Balance
                  Sheet Data:**Total
                  assets
              
              $
              14,661
              
              $
              14,438
              
              $
              12,355
              
              $
              14,228
              
              $
              17,833Working
                  capital (deficit)
              
              $
              (33,778
              )
              $
              (34,150
              )
              $
              (36,825
              )
              $
              (34,199
              )
              $
              (31,236
              )Current
                  debt maturities, including accrued interest
              
              $
              36,384
              
              $
              36,736
              
              $
              35,479
              
              $
              34,238
              
              $
              30,124Long-term
                  debt, excluding current maturities
              
              $
              -0-
              
              $
              -0-
              
              $
              -0-
              
              $
              -0-
              
              $
              -0-Stockholders'
                  deficit
              
              $
              (30,185
              )
              $
              (30,661
              )
              $
              (33,238
              )
              $
              (29,935
              )
              $
              (25,849
              )
 
 **Item
        7** **.** **Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations** **.**
 
 **Critical
        Accounting Policies and Estimates**
 
 The
        discussion and analysis of our financial condition and results of operations
        are
        based on our consolidated financial statements, which have been prepared
        in
        conformity with accounting principles accepted in the United States. The
        preparation of these financial statements requires us to make estimates and
        assumptions that affect the reported amounts of assets, liabilities, revenues
        and expenses reported in those financial statements. These judgments can
        be
        complex and consequently actual results could differ from those estimates.
        Among
        the more significant estimates included in these consolidated financial
        statements are allowance for doubtful accounts receivable, inventory reserves,
        goodwill valuation and the deferred tax asset valuation allowance. A t
        December 31, 2005, we had outstanding senior debt of approximately $25 million
        and subordinated debt of approximately $11 million. Although we have received
        an
        extension to May 1,
        2006 ,
        if the senior debt is called, we will be unable to pay the note and it would
        be
        necessary for us to seek protection under the Bankruptcy Act. Note
        1 of Notes to Consolidated Financial Statements, included elsewhere in this
        annual report on Form 10-K, includes a summary of the significant accounting
        policies and methods used in the preparation of our consolidated financial
        statements. Because we have suffered substantial losses from operations in
        previous years, because of our stockholders’ deficit of $30,185,000 and working
        capital deficit of $33,778,000 as of December 31, 2005, and because we are dependent
        upon the holder of our senior debt continuing to extend the maturity of our
        senior debt, our independent registered public accounting firm included in
        its
        report an explanatory paragraph about our ability to continue as a going
        concern.
  -13-
 
 Allowance
        for Doubtful Accounts Receivable
 
 We
        record an allowance for doubtful accounts receivable based on specifically
        identified amounts that we believe to be uncollectible. We also record
        additional allowances based on certain percentages of our aged receivables,
        which are determined based on historical experience and our assessment of
        the
        general financial conditions affecting our customer base. If our actual
        collections experience changes, revisions to our allowance may be required.
        We
        have a limited number of customers with individually large amounts due at
        any
        given balance sheet date. Any unanticipated change in one of those customers’ creditworthiness ,
        or other matters affecting the collectability of amounts due from such
        customers, could have a material effect on our results of operations in the
        period in which such changes or events occur. After all attempts to collect
        a
        receivable have failed, the receivable is written off against the allowance.
 
 We established an allowance for doubtful accounts receivable of $256,000 at December 31, 2005 and $ 1,045,000
        at December 31, 2004. Our allowance for doubtful accounts is a subjective critical estimate that
        has a
        direct impact on reported net income. This reserve is based upon the evaluation
        of accounts receivable aging and specific exposures. The allowance was reduced
        after we wrote off approximately $778,000 in old Accounts Receivable for
        our OSS
        segment, which had previously been fully reserved.
 
 Inventory
        Reserves
 
 Inventories
        are stated at the lower of cost (on the average or first-in, first-out methods)
        or fair market value. Our stated inventory reflects an inventory obsolescence
        reserve that represents the difference between the cost of the inventory
        and its
        estimated market value. This reserve is calculated based on historical usage
        and
        forecasted sales. Actual results may differ from our estimates. Approximately
        $600,000 of inventory that is fully reserved and not required for current
        or
        future operations is included in the reserve of $2,583,000, and will be disposed
        of.
  Goodwill
 
 Goodwill
        represents the difference between the purchase price and the fair market
        value
        of net assets acquired in business combinations treated as purchases. Commencing
        January 1, 2002, goodwill is an indefinite lived asset and as such is not
        amortized. On an annual basis, we test the goodwill for impairment. We determine
        the market value of the reporting unit by considering the projected cash
        flows
        generated from the reporting unit to which the goodwill relates. As of December 31, 2005 and 2004, all of our goodwill related to our signal
        processing division. We cannot give assurances that further write-downs will
        not
        be necessary, although management believes that no additional goodwill
        impairment charges are necessary at this time.
  -14-
 
 Restructuring
        Costs
  Expenses
        for restructuring costs were $877,000. The costs were for investment banking,
        legal and accounting, including payment of legal fees and other expenses
        of the
        holder of our senior debt, resulting from the requirement of the holder of
        our
        senior debt that we restructure our company to provide payments on account
        of
        the senior debt.
 
 Deferred
        Income Tax Valuation Allowance
 
 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 United States Internal Revenue Code, and certain items accrued
        for financial reporting purposes in the year incurred but not deductible
        for tax
        purposes until paid. Due to our losses in previous years, a valuation allowance
        for the entire deferred tax asset was provided, which management believes
        is
        still appropriate, due to the uncertainty as to future realization and
        uncertainties associated with projections of future taxable income and the
        effects of a potential restructuring.
 
 **Other
        Matters**
 
 Senior
        Debt
 
 Our
        senior debt matures on May 1, 2006. During the fourth quarter of 2004, SHF
        IX
        LLC, an affiliate of Minnesota-based Stonehill Financial, LLC, purchased
        the
        Company’s senior debt of approximately $25,000,000 from Wells Fargo Foothill,
        Inc. Although SHF IX has given us extensions of the maturity of the debt,
        as a
        condition to the extensions, we agreed to take steps to effect a restructure
        of
        the senior debt in a manner which results in the payment of a significant
        portion of the senior debt. Any such restructure will require us to obtain
        financing from a new investor. Although we are seeking such an investor,
        we
        cannot give any assurance that we will be able to obtain an investor on terms
        that are acceptable to the senior debt holder. Pursuant to the agreement
        with
        the holder of the senior debt, we engaged an investment banker to assist
        us in
        exploring strategic alternatives, which could include a sale of our business.
        If
        the senior debt is not extended beyond May 1, 2006, or if the holder of the
        senior debt demands payment of all or a significant portion of the loan when
        due, whether on May 1, 2006 or upon the expiration of a subsequent extension,
        we
        will not be able to continue in business, and it is likely that we will seek
        protection under the Bankruptcy Code. Further, it is possible that a restructure
        may involve a filing under the Bankruptcy Code.
 
 Interest
 
 Under
        the
        terms of our senior debt agreements, we have not paid or accrued interest
        on
        $22,600,000 of senior debt since March 2002. As a result, our statement of
        operations does not reflect any interest charges on the senior debt for 2005,
        2004 and 2003. The holder of the senior debt has the right at any time to require us to
        pay
        interest at a rate of 12%, and in the case of a default, 14%; however, our
        obligation to pay interest will not require us to pay interest on such senior
        debt for periods prior to the date that we were required to commence interest
        payments. We continue to accrue interest on obligations to the holder of
        our
        senior debt which were incurred subsequent to March 2002.
  -15-
  Continuation
        of Our Businesses
 
 During
        the past several years we have, on a number of occasions, engaged in
        negotiations with respect to the sale of one or more of our divisions. None
        of
        our discussions resulted in an agreement. We may continue to engage in such
        negotiations in the future.
 
 Because
        of the decline in sales volume and margins, we have determined that we cannot
        operate our OSS business profitably. As a result, we currently perform
        contractual maintenance and warranty services for our existing customers
        and we
        are seeking to sell the balance of our OSS inventory to existing OSS
        users.
 
 Recent
        Increase in Copper Sales; Dependence on British
        Telecommunications
 
 Since
        the
        fourth quarter of 2003, we have experienced an increase in our copper connection
        business primarily as a result of the requirements of British Telecommunications
        to provide increased DSL service in the United Kingdom and, in 2005, as a
        result
        of British Telecommunications’ implementation of the local loop unbundling
        program, demanded by regulators to enable third party providers of telephone
        service to gain access to British Telecommunications’ systems. We anticipate
        that British Telecommunications will continue to require our copper connection
        products while it is expanding its DSL service and providing the required
        local
        loop unbundling services. During the past three years, sales to British
        Telecommunications, consisting of both direct sales and sales to systems
        integrators for British Telecommunications (including Fujitsu), represented
        an
        increasing percentage of our total sales, accounting for 50% of sales for
        2005,
        48% of sales for 2004 and 36% of sales for 2003. Almost all of such sales
        were
        sales of copper connection products. We cannot predict how long British
        Telecommunications will continue to place orders with us. If British
        Telecommunications and its systems integrators cease or significantly reduce
        purchases from us, we may be unable to operate profitably, and it may be
        necessary for us to seek protection under the Bankruptcy Code.
  -16-
  **Results
        of Operations**
 
 The
        following table sets forth our consolidated statements of operations for the three years ended December
        31,
        2005, 2004 and 2003, as a percentage of sales:
 
 Years
                  Ended December 31,2005
              
              2004
              
              2003Sales
              
              
              100
              %
              
              100
              %
              
              100
              %Cost
                  of sales
              
              
              64
              %
              
              61
              %
              
              72
              %Gross
                  profit
              
              
              36
              %
              
              39
              %
              
              28
              %Selling,
                  general and administrative expenses
              
              
              20
              %
              
              18
              %
              
              29
              %Research
                  and development expenses
              
              
              6
              %
              
              7
              %
              
              11
              %Restructuring
                  expenses
              
              
              3
              %
              
              —
              
              
              —Operating
                  income (loss)
              
              
              7
              %
              
              14
              %
              
              (12
              %)Interest
                  expense
              
              
              (4
              )%
              
              (4
              %)
              
              (6
              %)Income
                  (loss) before income taxes
              
              
              3
              %
              
              10
              %
              
              (18
              %)Income
                  tax benefit (expense)
              
              
              (1
              %)
              
              (1
              %)
              
              1
              %Net
                  income (loss)
              
              
              3
              %
              
              9
              %
              
              (17
              %)
  ***Years
        Ended December 31, 2005 and 2004***
 
 Our
        sales for 2005 were $28,604,000 compared to $29,168,000 in 2004, which is a
        decrease of $564,000 (2%).  Although
        both copper protection/connection and signal processing sales increased from
        2004 to 2005, the decrease in sales of OSS products more than offset those
        increases.
 
 Line
        connection/protection equipment sales for 2005 increased
        $564,000 (3%) from $21,545,000 in 2004 to $22,109,000 in 2005. This increase
        resulted primarily
        from sales to British Telecommunications as a result of British
        Telecommunications’ continuing rollout of the availability of DSL lines, and its
        requirement to provide local loop unbundling service demanded by the regulatory
        authority in the United Kingdom. During 2005, direct sales to
        British Telecommunications increased 150% from $2,259,000 to
        $5,641,000 ,
        while sales to systems integrators decreased from $11,403,000 to $8,406,000,
        or
        26%, for the same period .
        Both of
        these changes were due to a change in product mix from an increase in sales
        to
        British Telecommunications of local loop unbundling products and a decrease
        in
        sales of DSL products to the systems integrators. The direct sales to
        British Telecommunications do not include sales to Fujitsu and other systems integrators
        for British Telecommunications **** (see
        “Significant Customers”). **** Sales of
        connection/protection products also increased, to a lesser extent, in the
        U.S.
        and other international markets.
 
 Signal
        processing revenue for 2005 compared to 2004 increased slightly by
        $159,000 (3%) from $5,551,000 to $5,710,000. The
        increase in sales primarily reflects our ability to meet targeted shipment
        dates
        due to our improved ability to secure materials.
 
 OSS
        sales for 2005 were $785,000, compared to 2004 sales of $2,003,000, a decrease
        of $1,218,000 (61%). The decline
        in OSS sales in 2005 reflects our strategic business decision to scale back
        our
        product offering and limit the markets we are servicing. During 2005, 100%
        of
        the OSS revenue resulted from maintenance services for existing OSS
        installations. During 2004, 91% of the OSS revenue resulted from maintenance
        for
        existing OSS installations.
  -17-
 
 Gross
        margin decreased from 39% in 2004 to 36% in 2005. **** The
        decrease is directly related to a change in products sold to British
        Telecommunications from the higher gross margin DSL products to the lower
        margin
        local loop unbundling products during the second half of 2005.
 
 Selling,
        general and administrative expenses increased by $590,000 (11%) from $5,254,000
        in 2004 to $5,844,000 in 2005. This increase relates primarily to an additional
        accrual related to the scaleback of the OSS division (approximately $230,000)
        as
        well as the recording of the lease termination in the UK (approximately
        $715,000).
  Research
        and development expenses decreased by $257,000 (13%) from $1,921,000 in 2004
        to
        $1,664,000 in 2005. This decrease was primarily due to the scale-back of
        the OSS
        division, which was offset by additional spending by our line
        connection/protection division to enhance our existing line products and
        develop
        new products. Our absence of significant research and development could impair
        our business over the long term.
  Expenses
        for restructuring costs were $877,000. The costs were for investment banking,
        legal and accounting, including payment of legal fees and other expenses
        of the
        holder of our senior debt, resulting from the requirement of the holder of
        our
        senior debt that we restructure our company to provide payments on account
        of
        the senior debt.
 
 As
        a result of the above, we had an operating income of $2,021,000 in 2005 versus
        an operating income of $4,153,000 in 2004.
 
 Interest
        expense for 2005 decreased by $261,000 from $1,317,000 in 2004 to $1,056,000
        in
        2005 primarily because of an adjustment for interest expense accrued in prior
        periods. Such interest excludes interest on our old term loan, in the principal
        amount of approximately $23,000,000, as our related loan agreement provides
        that
        no interest is due commencing March 1, 2002, until such time as the holder
        of
        the debt, in its sole discretion, notifies us that interest, at a rate of
        12%
        or, in the case of default 14%, shall be payable.
 
 The
        tax
        provisions for 2005 and 2004 were lower
        than the statutory rate principally as a result of the utilization of available
        net operating loss carryforwards.
 
 As
        the result of the foregoing, the 2005 net income was $810,000, $0.08 per
        share
        (basic and diluted), compared with a net income of $2,675,000, $0.27 per
        share
        (basic and diluted) for 2004.
 
 Even
        though we were profitable in 2005, we cannot assure you that we will be able
        to
        operate profitably in the future. If we are unable to operate profitably,
        it may
        be necessary for us to seek protection under the Bankruptcy Code.
  -18-
  ***Years
        Ended December 31, 2004 and 2003***
 
 Our
        sales for 2004 were $29,168,000 compared to $19,590,000 in 2003, an increase
        of
        $9,578,000 (49%). The
        increase in revenue is primarily attributed to an increase in sales of DSL
        line
        products to British Telecommunications.
 
 Line
        connection/protection equipment sales for 2004 increased approximately
        $10,211,000 (90%) from $11,334,000 in 2003 to $21,545,000 in 2004. The
        increased sales level resulted
        primarily from an increased level of sales to British Telecommunications
        and
        systems integrators, as a result of British Telecommunications increasing
        the
        availability of DSL lines in the United Kingdom. Direct
        sales to British Telecommunications increased 161% from $867,000 to $2,259,000.
        Sales to systems integrators increased from $5,597,000 to $11,403,000, or
        104%,
        from 2003 to 2004. Sales also increased, to a lesser extent, in the U.S.
        and
        other international markets. The direct sales to British Telecommunications
        do
        not include sales to Fujitsu and other systems integrators for British
        Telecommunications **** (see
        “Significant Customers”). ****
 
 Signal
        processing revenue for 2004 compared to 2003 increased by $1,298,000 (31%)
        from
        $4,253,000 to $5,551,000. The increase in sales primarily reflects increased
        demand for our products and our ability to meet targeted shipment dates due
        to
        our improved ability to secure materials.
 
 OSS
        sales for 2004 were $2,003,000, compared to 2003 sales of $3,249,000, a decrease
        of $1,246,000 (38%). The decline
        in OSS sales in 2004 reflects our strategic business decision to scale back
        our
        product offering and limit the markets we are servicing. During 2004, 91%
        of the
        OSS revenue resulted from maintenance services for existing OSS installations.
        During 2003, 44% of the OSS revenue resulted from sales and 56% from maintenance
        for existing OSS installations.
 
 Gross
        margin increased from 28% in 2003 to 39% in 2004. **** The
        line protection/connection and signal processing margins increased, but were
        offset by lower OSS margins. The gains were the result of better absorption
        of
        manufacturing overhead created by the increased copper connection and signal
        processing levels of business.
 
 Selling,
        general and administrative expenses decreased by $475,000 (8%) from $5,729,000
        in 2003 to $5,254,000 in 2004. This decrease relates primarily to our scale-back
        in our OSS division.
  Research
        and development expenses decreased by $145,000 (7%) from $2,066,000 in 2003
        to
        $1,921,000 in 2004. This decrease was primarily due to the scale-back of
        the OSS
        division. Prior to 2004, a significant portion of our research and development
        was dedicated to new and enhanced OSS products. The research and development
        for
        our line and signal divisions was not substantial, and was oriented more
        toward
        modest enhancements on our existing products rather than development of new
        technology. Our absence of significant research and development could impair
        our
        business over the long term.
 
 As
        a result of the above, we had an operating income of $4,153,000 in 2004 versus
        an operating loss of $2,352,000 in 2003.
 
 Interest
        expense for 2004 increased by $39,000 from $1,278,000 for 2003 to $1,317,000
        in
        2004. Such interest excludes interest on our old term loan, in the principal
        amount of approximately $23,000,000, as our related loan agreement provides
        that
        no interest is due commencing March 1, 2002, until such time as the holder
        of
        the debt, in its sole discretion, notifies us that interest, at a rate of
        12%
        or, in the case of default 14%, shall be payable.
  -19-
 
 The
        tax
        provision for 2004 is lower than the statutory rate principally as a result
        of
        the utilization of available net operating loss carryforwards. The
        tax benefit for 2003 resulted principally from the settlement of an outstanding
        tax obligation of $274,000 of one of our subsidiaries for $30,000.
 
 As
        the result of the foregoing, the 2004 net income was $2,675,000, $0.27 per
        share
        (basic and diluted), compared with a net loss of $3,357,000, $0.34 per share
        (basic and diluted) for 2003.
 
 **Liquidity
        and Capital Resources**
  At
        December 31, 2005, we had cash and cash equivalents of $1,254,000 compared
        with
        $2,040,000 at December 31, 2004. Our working capital deficit was $33,778,000
        at
        December 31, 2005, compared to a working capital deficit of $34,150,000 at
        December 31, 2004, a
        reduction of $372,000 in our working capital deficit .
        This improvement was a result of our positive operating results for 2005.
        During
        2005 our operations generated net cash of $1,095,000 as compared with 2004,
        in
        which we generated cash of $1,659,000 in our operations. Since
        late 2003, neither our senior lender nor the present holder of our senior
        debt,
        which acquired the senior debt in the fourth quarter of 2004, advanced us
        any
        funds. Furthermore, in connection with seven extensions of our senior debt
        during 2004 and 2005, we made payments to the holder of our senior debt in
        the
        amount of $1,425,000 in 2005 and $50,000 in 2004, of which $1,125,000
        represented payments on account of principal ($788,000) and interest ($337,000)
        on our senior debt, and $300,000 represented payment on account of expenses
        incurred by the holder of the senior debt in connection with the extensions
        and
        related matters. As a result, our only source of funds was from operations.
        To
        the extent that we are not able to generate sufficient funds to cover our
        expenses, including payments required by the holder of our senior debt, we
        may
        have to consider protection under the Bankruptcy Code.
 
 As
        of December 31, 2005, our debt includes $24,675,000 of senior debt which
        matures
        on May 1, 2006, and $6,144,000 principal amount of subordinated debt which
        became due on July 3, 2001. We were unable to pay the interest payment on
        the
        subordinated notes of approximately $5,053,000 which represents interest
        from
        July 2000 through December 2005. As
        of December 31, 2005, we also had $385,000 outstanding of 6% debentures which matured July 2, 2002. The
        interest accrued on the 6% debentures at December 31, 2005 was $127,000. At
        December 31, 2005, we did not have sufficient resources to pay either the
        senior
        debt or the subordinated debt and it is unlikely that we can generate such
        cash
        from our operations in the foreseeable future. Further, the holder of our
        senior
        debt has precluded us from making payments on the subordinated
        debt.
 
 On
        February 24, 2006 the holder of our senior debt agreed to an extension of
        the
        maturity date of our senior debt to May 1, 2006. As of December 31, 2005,
        we did
        not have resources to pay the senior debt, and, in the event that the holder
        of
        the senior debt does not grant an extension, it may be necessary for us to
        seek
        protection under the Bankruptcy Code.
 
 We have
        sought to
        address our need for liquidity by exploring alternatives, including the possible
        sale of one or more of our divisions. During 2003 and 2004, we were engaged
        in
        discussions with respect to the possible sale of our divisions; however,
        those
        negotiations were terminated without an agreement having been reached, and
        we
        may not be able to sell those divisions on acceptable, if any, terms.
        Furthermore, if we sell a division, we anticipate that a substantial
        portion ,
        if not
        all, of the
        net proceeds will be paid to the holder of our senior debt, and we will not
        receive any significant amount of working capital from such a sale. We continue
        our efforts to reduce costs while we seek additional business from new and
        existing customers. The significant reduction in the operations of our OSS
        division will impair our ability to sell that division, and such reduction,
        and
        the dependence of our copper business on British Telecommunications and its
        systems integrators, are major factors which may impair our ability to sell
        the
        copper division or our business as a whole.
  -20-
 
 Because
        of our present stock price, we cannot raise funds through the sales of our
        equity securities, and our financial condition prevents us from issuing debt
        securities. In the event that we are unable to extend our debt obligations
        and
        sell one or more of our divisions, we cannot assure you that we will be able
        to
        continue in operations. Furthermore, we believe that our financial position
        is
        having, and will continue to have, an adverse effect upon our ability to
        develop
        new business as competitors and potential customers question our ability
        both to
        perform our obligations under any agreements we may enter and to continue
        in
        business.
  As
        a condition to the extension of our senior debt, we
        agreed
        to take steps to effect a restructure of the senior debt in a manner which
        results in the payment of a significant portion of the senior debt and the
        potential issuance of secured debt and equity for the balance of the senior
        debt
        on specified terms. Any such restructure will require us to obtain financing
        from a new investor, and may involve the sale of our business. Although we
        are
        seeking such an investor, we cannot give any assurance that we will be able
        to
        obtain an investor on terms that are acceptable to the senior debt holder.
        Pursuant to the agreement with the holder of the senior debt, we engaged
        an
        investment banker to assist us in exploring strategic alternatives. Further,
        it
        is possible that such reorganization may involve a sale of our assets in
        a
        reorganization under the Bankruptcy Code.
  As
        of December 31, 2005, we did not have any off-balance sheet arrangements
        that
        have or are reasonably likely to have a material effect on our current or
        future
        financial condition, results of operations, liquidity, or capital
        resources.
 
 The
        following table summarizes our principal contractual obligations as of December
        31, 2005 and the effects such obligations are expected to have on our liquidity
        and cash flow in future periods.
   Payments
                  Due by PeriodContractual
                  Obligations
              
              2006
              
              2007-2008
              
              2009-2010
              
              ThereafterTotal
                  debt, includingaccrued
                  interest
              
              $
              36,383
              
              $
              —
              
              $
              —
              
              $
              —Operating
                  leases
              
              
              620
              
              
              885
              
              
              528
              
              
              2,445Deferred
                  compensationobligations
              
              
              109
              
              
              217
              
              
              181
              
              
              905Purchase
                  obligations
              
              
              2,914
              
              
              —
              
              
              —
              
              
              —Total
              
              $
              40,026
              
              $
              1,102
              
              $
              709
              
              $
              3,350
 
 **Recently
        Issued Accounting Standards**
 
 In
        December 2004, the FASB issued SFAS 123R which requires the measurement of
        all
        employee share based payments to employees, including grants of employee
        stock
        options, using a fair-value-based method and the recording of such expense
        in
        our consolidated statements of operations. The accounting provisions of SFAS
        123R were originally effective for reporting periods beginning after June
        15,
        2005. On April 14, 2005 the U.S. Securities and Exchange Commission (the
“SEC”)
        announced a deferral of the effective date of SFAS 123R for calendar year
        companies until the beginning of 2006. The pro forma disclosures previously
        permitted under SFAS 123 will no longer be an alternative to financial statement
        recognition beginning in the first fiscal quarter of 2006. See “Stock-Based
        Compensation” (Note 1) for the pro forma net income (loss) and net income (loss)
        per share amounts, for the years ended December 31, 2005, 2004, and 2003,
        as if
        we had used a fair-value method similar to the methods required under SFAS
        123
        to measure compensation expense for employees stock incentive awards. Although
        we have not yet determined whether the adoption of SFAS 123R will result
        in
        amounts that are similar to the current pro forma disclosures under SFAS
        123R,
        to the extent that we use options or other equity-based incentives as an
        element
        of employee compensation, we do not expect the adoption to have a material
        impact on our consolidated statements of operations and net income (loss)
        per
        share.
  -21-
  In
        November 2004, the FASB issued SFAS No. 151, “Inventory Costs - an amendment of
        ARB No. 43, Chapter 4” (“SFAS No. 151”). SFAS No. 151 requires all companies to
        recognize a current-period charge for abnormal amounts of idle facility expense,
        freight, handling costs and wasted materials. This statement also requires
        that
        the allocation of fixed production overhead to the costs of conversion be
        based
        on the normal capacity of the production facilities. SFAS No. 151 will be
        effective for fiscal years beginning after June 15, 2005. We are currently
        evaluating the effect that this statement will have on our consolidated
        financial statements, but do not expect it to be material.
  In
        May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections”
which replaces Accounting Principles Board Opinion No. 20 “Accounting Changes”
and SFAS 3, “Reporting Accounting Changes in Interim Financial Statements - An
        Amendment of APB Opinion No. 28.” SFAS 154 provides guidance on the accounting
        for and reporting of accounting changes and error corrections. It establishes
        retrospective application, or the earliest practicable date, as the required
        method for reporting a change in accounting principle and restatement with
        respect to a correction of an error. SFAS 154 is effective for accounting
        changes and corrections of errors made in fiscal years beginning after December
        15, 2005 and is required to be adopted by the Company in the first fiscal
        quarter of 2006. The implementation of SFAS 154 is not expected to have a
        material impact on the Company’s operations.
 
 **Item
        7A.**  **Quantitative
        and Qualitative Disclosure About Market Risk.**
 
 We
        conduct certain operations outside the United States. A substantial portion
        of
        our revenue and expenses from our United Kingdom operations are denominated
        in
        Sterling. Any Sterling-denominated receipts are promptly converted into United
        States dollars. We do not engage in any hedging or other currency transactions.
        For 2005 and 2004, the currency translation adjustment was not significant
        in
        relation to our total revenue.
  -22-
 
 **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
 
 **Item
        9A.** **** **Controls
        and Procedures.**
 
 **Disclosure
        Controls and Procedures**
  As
        of the
        end of the period covered by this report, our chief executive officer and
        chief
        financial officer evaluated the effectiveness of our disclosure controls
        and
        procedures. Based on his evaluation, the chief executive officer and chief
        financial officer concluded that our disclosure controls and procedures
        are effective in alerting him to material information that is required to
        be
        included in the reports that we file or submit under the Securities Exchange
        Act
        of 1934.
  **Internal
        Control Over Financial Reporting**
  There
        has been no change in our internal control over financial reporting that
        occurred during our last fiscal quarter that has materially affected, or
        is
        reasonably likely to materially affect, our internal control over financial
        reporting.
  **Item
        9B.** **** **Other
        Information.**
  None
  -23-
  **Part
        III**
 
 **Item
        10.** **** **Directors
        and Executive Officers**
 
 Set
        forth below is information concerning our directors and executive
        officers:
 
 Name
              
              Positions
              
              AgeEdward
                  B. Kornfeld
              
              Chief
                  executive officer and chief financial officer
              
              62William
                  V. Carney1
              
              Chairman
                  of the board, director and consultant
              
              69Michael
                  A. Tancredi
              
              Senior
                  vice president, secretary, treasurer and director
              
              76Warren
                  H. Esanu1,2
              
              Director
              
              63Herbert
                  H. Feldman1,2
              
              Director
              
              72Marco
                  M. Elser2
              
              Director
              
              47
 
 1
              Member
                  of the executive committee
 2
              Member
                  of the audit and compensation committees.
  Mr.
        Kornfeld, 62, has been an executive officer of the Company since 1995. Mr.
        Kornfeld was president and chief operating officer from April 2004 until
        March
        2006 and he has been chief financial officer since October 1995. He was senior
        vice president-operations from 1996 until April 2004 and vice president-finance
        from October 1995 until 1996. Since June 2002, Mr. Kornfeld has also been
        a
        partner of the firm of Tatum CFO Partners, which provides chief financial
        officer services to medium and large companies; however, he continues to
        devote
        full-time effort to the Company’s business for which we pay Tatum CFO
        partners.
 
 Mr.
        Carney has been chairman of the board since October 1996, chief executive
        officer from October 1996 until March 2006, and a consultant since March
        2006.
        As chairman of the board, Mr. Carney is not an executive officer. He was
        vice
        chairman from 1988 to October 1996, senior vice president from 1989 to October
        1996, chief technical officer since 1990 and secretary from 1977 to October
        1996. He also served as senior vice president-mechanical engineering from
        1988
        to 1989, senior vice president-connector products from 1985 to 1988, senior
        vice
        president-manufacturing from 1984 to 1985 and senior vice president-operations
        from 1977 to 1984. From December 2002 through March 13, 2006, Mr. Carney
        worked
        for us on a part-time basis. In March 2006, Mr. Carney resigned as an officer
        of
        the Company but has been engaged as a consultant to the Company in the area
        of
        product development. Mr. Carney has been a director since 1970.
 
 Mr.
        Tancredi has been a director since 1970, senior vice president and secretary
        since 1997 and treasurer since 1978. He has been vice president-administration
        since 1995 having served as vice president-finance and administration from
        1989
        to 1995 and vice president-finance from 1984 to 1989.
 
 Mr.
        Esanu has been a director since April 1997 and also served as a director
        from
        1989 to 1996. He was also our chairman of the board from March 1996 to October
        1996. He is senior counsel to Katsky Korins LLP, attorneys at law, and was
        counsel for such firm for more than the past five years. Mr. Esanu is also
        a
        founding partner and chairman of Paul Reed Smith Guitars Limited Partnership
        (Maryland), a leading manufacturer of premium-priced electrical guitars.
        He is
        also a senior officer and director of a number of privately held real estate
        investment and management companies.
  -24-
 
 Mr.
        Elser has been a director since 2000 and the managing director of Advicorp,
        PLC,
        an investment advisory firm, for more than the past five years. He has also
        been
        associated with Northeast Securities, a US-based broker dealer and is
        responsible for the Italian office, which he founded in 1994.
 
 Mr.
        Feldman has been a director since 1989. He has been president of Alpha Risk
        Management, Inc., independent risk management consultants, for more than
        the
        past five years.
 
 All
        of our officers serve at the pleasure of the board of directors. There is
        no
        family relationship between any of the executive officers listed
        above.
 
 We
        maintain a code of ethics that applies to all of our executive officers,
        including our principal executive, financial and accounting officers, our
        directors, our financial managers and all employees. Any waiver of the code
        must
        be approved by the Audit Committee and must be disclosed in accordance with
        SEC
        rules. We also have a standard of conduct which is applicable to all
        employees.
  Our
        board of directors has determined that Mr. Marco Elser, based on his experience
        as a financial investment advisor, is an audit committee financial expert,
        as
        defined in Item 402(h) of Regulation S-K.
  **Section
        16(a) Beneficial Ownership Reporting Compliance**
 
 Pursuant
        to our stock option plans, our non-employee directors receive an automatic
        grant
        of options to purchase 5,000 shares of common stock on May 1 of each year.
        The
        exercise price of such shares is the average of the closing price on the
        ten
        trading days prior to May 1. These non-employee directors are Mr. Esanu and
        Mr.
        Feldman from 1999 through 2005 and Mr. Elser from 2001 through 2005. All
        Form
        4’s for 2005, if required, were filed on time.
  **Item
        11.** **** **Executive
        Compensation**
 
 The
        following table shows the compensation we paid to our chief executive officer
        and the only executive officer, other than the chief executive officer, whose
        salary and bonus earned exceeded $100,000 for the year ended December 31,
        2005.
 
 SUMMARY
        COMPENSATION TABLE
 Annual
                  Compensation
              
              Long-TermCompensation
                  (Awards)Name
                  and Principal Position
              
              Year
              
              Salary
              
              Bonus
              
              Restricted
                  Stock Awards (Dollars)
              
              Options,
                  SARs
                (Number)
              
              All
                  other
                CompensationWilliam
                  V. Carney,
                Chairman
                  of the board and
                chief
                  executive officer
              
              
              2005
                2004
                2003
              
              $
              128,000
                122,000
                133,000
              
              $
              10,000
                5,000
                —
              
              
              —
                —
                —
              
              
              —
                —
                —
              
              $
              6,257
                6,101
                7,734Edward
                  B. Kornfeld,
                President,
                  chief operating officer and
                chief
                  financial officer
              
              
              2005
                2004
                2003
              
              
              237,000
                206,000
                192,000
              
              
              50,000
                15,000
                —
              
              
              —
                —
                —
              
              
              —
                —
                —
              
              
              6,714
                6,639
                5,022
   -25-
  “All
        Other Compensation” includes a payment to the executive’s account pursuant to
        our 401(k) Plan, group life insurance in amounts greater than that available
        to
        all employees and special long term disability coverage.
 
 Compensation
        to Mr. Kornfeld does not include fees of $36,000 paid in each of 2005 and
        2004
        to Tatum CFO Partners, of which Mr. Kornfeld is a partner, for services rendered
        to us by Mr. Kornfeld. We are continuing to pay Tatum CFO Partners for Mr.
        Kornfeld’s services.
 
 Set
        forth below is a chart that shows, for 2005, the components of “All Other
        Compensation” listed in the Summary Compensation Table.
 
 Mr.Carney
              
              Mr.Kornfeld401(k)
                  Match
              
              $
              2,065
              
              $
              3,150Supplemental
                  Insurance
              
              
              4,191
              
              
              3,564
  During
        2005, we did not grant Mr. Carney or Mr. Kornfeld any options, and neither
        of
        them exercised any options to purchase shares of our common stock. As of
        December 31, 2005, Mr. Carney held options to purchase 86,250 shares of common
        stock and Mr. Kornfeld held options to purchase 23,000 shares of common stock.
        All of these options are currently exercisable and, because the exercise
        price
        is greater than the market price of the common stock, they were not in-the-money
        options and, accordingly, their options had nominal value at December 31,
        2005.
 
 **Employment
        Agreements** *.* During 2003, we amended our employment agreement with Mr. Carney whereby
        he is
        required to work at a rate of two and one-half days per week, and half of
        his
        current base pay is deferred until the termination of his amended employment
        agreement on March 13, 2006. On
        March 14, 2006, Mr. Carney resigned as an officer of the Company but has
        been
        engaged as a consultant to the Company in the area of product
        development.
 
 We
        have an employment agreement and a salary continuation agreement with Mr.
        Kornfeld. The employment agreement has a term which expires December 31,
        2006
        and continues on a year-to-year basis thereafter unless terminated by either
        party on not less than 90 days’ prior written notice. Salary is determined by
        the board, except that the salary may not be reduced except as a part of
        a
        salary reduction program applicable to all executive officers. In March 2006,
        Mr. Kornfeld was elected as chief executive officer and his annual salary
        rate
        was increased from $245,000 to $260,000. Upon death or termination of employment
        as a result of a disability, Mr.
        Kornfeld or his estate is to receive a payment equal to three months salary. Upon
        a
        termination without cause, Mr. Kornfeld is entitled to receive his then current
        salary for twelve months plus one month for each full year of service up
        to a
        maximum aggregate of 36 months. In the event that Mr.
        Kornfeld is covered by an executive severance agreement, including the salary
        continuation agreements (as described below), which provides for payments
        upon
        termination subsequent to a “change of control,” Mr. Kornfeld would be entitled
        to the greater of the severance arrangements as described in this paragraph
        or
        the severance payments under the executive severance agreements. We also
        have a
        month-to-month agreement with Tatum CFO Partners of which Mr. Kornfeld is
        a
        partner, pursuant to which we pay Tatum CFO Partners $3,000 per month for
        Mr.
        Kornfeld’s services.
  -26-
 
 The
        salary continuation agreement provides that, in the event that a change of
        control occurs and Mr.
        Kornfeld ’s
        employment with us is subsequently terminated by us other than for cause,
        death
        or disability, or is terminated by Mr.
        Kornfeld as a result of a substantial alteration in his duties, compensation or other benefits, the executive shall be entitled to
        the
        payment of an amount equal to his monthly salary at the rate in effect as
        of the
        date of his termination (or, if higher, as in effect immediately prior to
        the
        change in control) plus the pro rata monthly amount of his most recent annual
        bonus paid immediately before the change of control multiplied by 36. For
        purposes of the salary continuation agreement, a change of control is defined
        as
        one which would be required to be reported in response to the proxy rules
        under
        the Securities Exchange Act of 1934, as amended, the acquisition of beneficial
        ownership, directly or indirectly, by a person or group of persons of our
        securities representing 25% or more of the combined voting power of our then
        outstanding securities, or, during any period of two consecutive years, if
        individuals who at the beginning of such period constituted the board cease
        for
        any reason to constitute at least a majority thereof unless the election
        of each
        new director was nominated or ratified by at least two-thirds of the directors
        then still in office who were directors at the beginning of the period. The
        change of control must occur during the term of the salary continuation
        agreement, which is currently through December 31, 2006 and
        is renewed automatically unless we give timely notice prior to January 1
        of any
        year of our election not to renew the agreement. If such a change of control
        occurs during the effectiveness of the salary continuation agreement, any
        termination of Mr. Kornfeld during the 18 months following the change of
        control
        will result in the payment of the compensation described above.
 
 **Directors’
        Fees** **.** On
        March
        22, 2005, directors’ fees payable to the non-management directors were increased
        from $4,250 per quarter to $6,250 per quarter, and meeting fees were increased
        from $1,200 to $1,500. On March 23, 2006, directors’ fees were set at $6,875 per
        quarter plus $1,650 per meeting.
  In
        2000,
        we authorized the issuance of an aggregate of 175,630 shares of common stock
        in
        lieu of the cash payment of directors’ fees, based on the fair market value of
        the shares on August 8, 2000. These shares were issued in the second quarter
        of
        2005 to those individuals who were non-employee directors in 2000.  Mr.
        Esanu and Mr. Feldman were directors for all of 2000, and they received 35,938
        and 39,630 shares, respectively. Mr. Elser was a director for a portion of
        2000, and he received 5,784 shares. The remaining shares will be issued to
        individuals who are no longer our directors.
  -27-
  **Item
        12.** **** **Principal
        Holders of Securities and Security Holdings of
        Management**
 
 The
        following table and discussion provides information as to the shares of common
        stock beneficially owned on March 15, 2006 by:
 
 •
                  each
                      director;
 •
                    each
                        officer named in the summary compensation
                        table;
 •
                  each
                      person owning of record or known by us, based on information
                      provided to
                      us by the persons named below, to own beneficially at least
                      5% of our
                      common stock; and
 •
                  all
                      directors and executive officers as a group.
 
 **Name**
              
              **Shares
                  of Common**
                **Stock
                  Beneficially**
                **Owned**
              
              **Percentage
                  of Outstanding**
                **Common
                  Stock**William
                  V. Carney
              
              
              209,272
              
              
              2.1
              %Michael
                  A. Tancredi
              
              
              81,768
              
              
              *Warren
                  H. Esanu
              
              
              139,938
              
              
              1.4
              %Herbert
                  H. Feldman
              
              
              115,631
              
              
              1.1
              %Marco
                  M. Elser
              
              
              341,376
              
              
              3.4
              %Edward
                  B. Kornfeld
              
              
              49,317
              
              
              *All
                  directors and executiveofficers
                  as a group (6individuals)
              
              
              937,302
              
              
              9.3
              %
 
 *
              Less
                  than 1%
 
 Except
        as
        otherwise indicated, each person has the sole power to vote and dispose of
        all
        shares of common stock listed opposite his name.
 
 The
        number of shares owned by our directors and officers named in the summary
        compensation table includes shares of common stock which are issuable upon
        exercise of options and warrants that are exercisable at March 15, 2006 or
        will
        become exercisable within 60 days after that date. Set forth below is the
        number
        of shares of common stock issuable upon exercise of those options and warrants
        for each of these directors and officers.
 
 **Name**
              
              **Shares**William
                  V. Carney
              
              
              86,250Michael
                  A. Tancredi
              
              
              42,530Warren
                  H. Esanu
              
              
              54,000Herbert
                  H. Feldman
              
              
              56,000Marco
                  M. Elser
              
              
              25,000Edward
                  B. Kornfeld
              
              
              23,000All
                  officers and directorsas
                  a group
              
              
              286,780
   -28-
 
 **Item
        13.** **** **Certain
        Relationships and Related Transactions**
 
 During
        2005, Warren H. Esanu, a director, served as a member of our audit and
        compensation committees. During 2005, the law firm of Katsky Korins LLP to
        which
        Mr. Esanu is senior counsel, provided legal services to us, for which it
        received fees of $490,703. Katsky Korins LLP is continuing to render legal
        services to us during 2006.
 
 **Item
        14.** **** **Principal
        Accountant Fees and Services.**
 
 The
        following is a summary of the fees for professional services rendered by
        our
        independent accountants, BDO Seidman, LLP, for the years ended December 31,
        2005 and December 31, 2004:
 
 **Fees****Fee
                  Category**
              
              **2005**
              
              **2004**Audit
                  fees
              
              $
              177,623
              
              $
              153,700Audit-related
                  fees
              
              
              15,031
              
              
              10,650Tax
                  fees
              
              
              55,899
              
              
              12,490Total
                  Fees
              
              $
              248,553
              
              $
              176,840
  *Audit
        fees.* Audit
        fees represent fees for professional services performed by BDO Seidman, LLP
        for
        the audit of our annual financial statements and the review of our quarterly
        financial statements, as well as services that are normally provided in
        connection with statutory and regulatory filings or engagements. **
  *Audit-related
        fees.* Audit-related
        fees represent fees for assurance and related services performed by BDO Seidman,
        LLP that are reasonably related to the performance of the audit or review
        of our
        financial statements. The specific service was the audit of our retirement
        plan.
  *Tax
        Fees.* Tax
        fees
        represent fees for tax compliance services performed by BDO Seidman,
        LLP.
  *All
        other fees.* BDO
        Seidman, LLP did not perform any services other than the services described
        above.
  **Policy
        on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services
        of
        Independent Auditors**
  The
        Audit
        Committee’s policy is to pre-approve all audit and permissible non-audit
        services provided by the independent registered public accounting firm. These
        services may include audit services, audit-related services, tax services
        and
        other services. The independent registered public accounting firm and management
        are required to periodically report to the Audit Committee regarding the
        extent
        of services provided by the independent registered public accounting firm
        in
        accordance with this pre-approval, and the fees for the services performed
        to
        date. The Audit Committee may also pre-approve particular services on a
        case-by-case basis. All services were pre-approved by the Audit
        Committee.
  -29-
  **Part
        IV**
 
 **Item
        15.** **** **Exhibits,
        Financial Statements Schedules.**
 
 (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)
              Exhibits
 
 Exhibit
                  No.
              
              Description
                  of Exhibit3.1
              
              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
              
              By-laws
                  of the Company, as amended to date, incorporated by reference to
                  Exhibit
                  3.3 of the Company’s Annual Report on Form 10-K for the year ended
                  December 31, 1995.4.1
              
              Amended
                  and Restated Loan and Security Agreement dated as of November 28,
                  1994,
                  between the Company and Foothill ("Foothill") Capital Corporation,
                  incorporated by reference to Exhibit 2 to the Company’s Current Report on
                  Form 8-K dated November 30, 1994.4.2
              
              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, 1995.4.3
              
              Warrant
                  to Purchase Common Stock of the Company dated November 28, 1994
                  executed
                  by the Company in favor of Foothill, incorporated by reference
                  to Exhibit
                  6 to the Company’s Current Report on Form 8-K dated November 30, 1994.
   -30-
  Exhibit
                  No.
              
              Description
                  of Exhibit
 4.4
              
              Lockbox
                  Operating Procedural Agreement dated as of November 28, 1994 among
                  Chemical Bank, the Company and Foothill, incorporated by reference
                  to
                  Exhibit 7 to the Company’s Current Report on Form 8-K dated November 30,
                  1994.4.5
              
              Amendment
                  Number Twenty Two to the Amended and Restated Loan and Security
                  Agreement
                  between the Company and SHF IX, LLC, dated February 1, 2006.10.1
              
              Form
                  of Executive Salary Continuation Agreement, incorporated by reference
                  to
                  Exhibit 19 (cc) of the Company’s Quarterly Report on Form 10-Q for the
                  quarter ended September 30, 1985.10.2
              
              Lease
                  dated November 6, 2002 between the Company and Long Island Industrial
                  Group LLC., incorporated by reference to Exhibit 10.2 of the Company’s
                  Annual Report on Form 10K for the year ended December 31,
                  2002.10.3
              
              Lease
                  dated May 1, 2002 between the Company and Long Island Industrial
                  Group
                  LLC., incorporated by reference to Exhibit 10.3 of the Company’s Annual
                  Report on Form 10K for the year ended December 31,
                  2002.10.4
              
              Employment
                  Agreement between the Company and Edward B. Kornfeld dated April
                  1,
                  2004.10.5
              
              Amendment
                  to Employment Agreement between the Company and William V. Carney,
                  dated
                  July 21, 2003.14.1
              
              Code
                  of Ethics of the Company, dated March 23, 2004, incorporated by
                  reference
                  to Exhibit 14.1 of the Company’s Annual Report on Form 10K for the year
                  ended December 31, 2003.14.2
              
              Standard
                  of Conduct of the Company.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 Registered Public Accounting Firm.31.1
              
              Certification
                  of chief executive officer and chief financial officer pursuant
                  to Section
                  302 of the Sarbanes-Oxley Act of 2002.32.1
              
              Certification
                  of chief executive officer and chief financial officer pursuant
                  to Section
                  906 of the Sarbanes-Oxley Act of
                  2002.
   -31-
  **SIGNATURES**
 
 Pursuant
        to the requirements of Section 13 or 15(b) of the Securities Exchange Act
        of
        1934, the Registrant has duly caused this report to be signed on its behalf
        by
        the undersigned thereunto duly authorized.
 
 **PORTA
        SYSTEMS CORP.**
 Dated:
        March 30, 2006
 By: 
        /s/ Edward B. Kornfeld
 Chief
        Executive Officer and Chief
        Financial 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 Edward B. Kornfeld 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/Edward
                  B. Kornfeld
              
              Chief
                  Executive Officer and Chief
                  Financial Officer
              
              March
                  30, 2006Edward
                  B. Kornfeld
              
              (Principal
                  Executive, Financial and Accounting
                  Officer)/s/William
                  V. Carney
              
              Director
              
              March
                  30, 2006William
                  V. Carney/s/Warren
                  H. Esanu
              
              Director
              
              March
                  30, 2006Warren
                  H. Esanu/s/Michael
                  A. Tancredi
              
              Director
              
              March
                  30, 2006Michael
                  A. Tancredi/s/Herbert
                  H. Feldman
              
              Director
              
              March
                  30, 2006Herbert
                  H. Feldman/s/Marco
                  Elser
              
              Director
              
              March
                  30, 2006Marco
                  Elser
  
 -32-




**Exhibit
      I**





**Item
      8. Financial Statements and Supplementary Data**




Index
            PageConsolidated
                Financial Statements and Notes:Report
              of Independent Registered Public Accounting
              Firm
            F-2Consolidated
                Balance Sheets, December 31, 2005 and
                2004
            F-3Consolidated
                Statements of Operations and Comprehensive Income
                (Loss), Years Ended December 31, 2005, 2004 and 2003
            F-4Consolidated
                Statements of Stockholders’ Deficit, Years Ended
                December 31, 2005, 2004 and 2003
            F-5Consolidated
                Statements of CashFlows
                forthe Years Ended December 31, 2005, 2004 and2003
            F-6Notes
                to Consolidated Financial
                Statements
            F-7Financial
                Statement Schedule:Report
                of Independent Registered Public Accounting
                Firm
            F-27Financial
              Statement Schedule II - Valuation and Qualifying
              Accounts
            F-28






F-1




Report
        of Independent Registered Public Accounting
        Firm
 
 The
        Board of Directors and Stockholders
 Porta
        Systems Corp.
 Syosset,
        New York
 
 We
        have audited the accompanying consolidated balance sheets of Porta Systems
        Corp.
        and subsidiaries as of December 31, 2005 and 2004, and the related consolidated
        statements of operations and comprehensive income (loss), stockholders’ deficit,
        and cash flows for each of the three years in the period ended December 31,
        2005. These financial statements are the responsibility of the Company’s
        management. Our responsibility is to express an opinion on these financial
        statements based on our audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. The Company is not required
        to
        have, nor were we engaged to perform, an audit of its internal control over
        financial reporting. Our
        audits included consideration of internal control over financial reporting
        as a
        basis for designing audit procedures that are appropriate in the circumstances,
        but not for the purpose of expressing an opinion on the effectiveness of
        the
        Company’s internal control over financial reporting. Accordingly, we express no
        such opinion. An
        audit also includes examining, on a test basis, evidence supporting the amounts
        and disclosures in the financial statements, 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, 2005 and 2004, and the results of their
        operations and their cash flows for each of the three years in the period
        ended
        December 31, 2005, in conformity with accounting principles generally accepted
        in the United States of America.
 
 The
        accompanying financial statements have been prepared assuming that the Company
        will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company
        has
        suffered substantial losses from operations in previous years, as of December
        31, 2005, has a stockholders’ deficit of $30,185,000 and a working capital
        deficit of $33,778,000, and is dependent on the continued agreement of the
        holder of its senior debt to defer the maturity date of such debt. These
        factors
        raise substantial doubt about the Company’s ability to continue as a going
        concern. Management’s plans in regard to these matters are also described in
        Note 2. The financial statements do not include any adjustments that might
        result from the outcome of this uncertainty.
 
 /s/BDO
        SEIDMAN, LLP
 BDO
        SEIDMAN, LLP
 
 Melville,
        New York
 March
        10,
        2006
  F-2




PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Consolidated
      Balance Sheets


December
      31, 2005 and 2004


(in
      thousands, except shares and par value)


Assets
            
            2005
            
            2004Current
                assets:Cash
                and cash equivalents
            
            $
            1,254
            
            
            2,040Accounts
                receivable - trade, less allowance for doubtful accountsof
                $256 in 2005 and $1,045 in 2004
            
            
            3,655
            
            
            3,076Inventories
            
            
            4,851
            
            
            4,576Prepaid
                expenses and other current assets
            
            
            481
            
            
            382Total
                current assets
            
            
            10,241
            
            
            10,074Property,
                plant and equipment, net
            
            
            1,409
            
            
            1,334Goodwill
            
            
            2,961
            
            
            2,961Other
                assets
            
            
            50
            
            
            69Total
                assets
            
            $
            14,661
            
            
            14,438Liabilities
                and Stockholders’ DeficitCurrent
                liabilities:Senior
                debt, including accrued interest
            
            $
            24,675
            
            
            25,674Subordinated
                notes
            
            
            6,144
            
            
            6,1446%
                Convertible subordinated debentures
            
            
            385
            
            
            385Accounts
                payable
            
            
            4,614
            
            
            4,728Accrued
                expenses and other
            
            
            3,021
            
            
            2,760Other
                accrued interest payable
            
            
            5,180
            
            
            4,533Total
                current liabilities
            
            
            44,019
            
            
            44,224Deferred
                compensation
            
            
            827
            
            
            875Total
                liabilities
            
            
            44,846
            
            
            45,099Commitments
                and contingenciesStockholders’
                deficit:Preferred
                stock, no par value; authorized 1,000,000 shares, none
                issued
            
            
            —
            
            
            —Common
                stock, par value $.01; authorized 20,000,000 shares,issued
                10,084,577 shares in 2005 and 10,003,244 in 2004
            
            
            101
            
            
            100Additional
                paid-in capital
            
            
            76,124
            
            
            76,059Accumulated
                deficit
            
            
            (99,895
            )
            
            (100,705
            )Accumulated
                other comprehensive loss:Foreign
                currency translation adjustment
            
            
            (4,577
            )
            
            (4,177
            )(28,247
            )
            
            (28,723
            )Treasury
                stock, at cost, 30,940 shares
            
            
            (1,938
            )
            
            (1,938
            )Total
                stockholders’ deficit
            
            
            (30,185
            )
            
            (30,661
            )Total
                liabilities and stockholders’ deficit
            
            $
            14,661
            
            
            14,438






See
      accompanying notes to consolidated financial statements.




F-3





PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Consolidated
      Statements of Operations and Comprehensive Income
      (Loss)


Years
      ended December 31, 2005, 2004 and 2003


(in
      thousands, except per share amounts)


2005
            
            2004
            
            2003Sales
            
            $
            28,604
            
            
            29,168
            
            
            19,590Cost
                of sales
            
            
            18,198
            
            
            17,840
            
            
            14,147Gross
                profit
            
            
            10,406
            
            
            11,328
            
            
            5,443Selling,
                general and administrative expenses
            
            
            5,844
            
            
            5,254
            
            
            5,729Research
                and development expenses
            
            
            1,664
            
            
            1,921
            
            
            2,066Reorganization
                expense
            
            
            877
            
            
            —
            
            
            —Total
                expenses
            
            
            8,385
            
            
            7,175
            
            
            7,795Operating
                income (loss)
            
            
            2,021
            
            
            4,153
            
            
            (2,352
            )Interest
                expense
            
            
            (1,056
            )
            
            (1,317
            )
            
            (1,278
            )Interest
                income
            
            
            —
            
            
            —
            
            
            1Other
                income, net
            
            
            5
            
            
            8
            
            
            —Income
                (loss) before income taxes
            
            
            970
            
            
            2,844
            
            
            (3,629
            )Income
                tax benefit (expense)
            
            
            (160
            )
            
            (169
            )
            
            272Net
                income (loss)
            
            $
            810
            
            
            2,675
            
            
            (3,357
            )Other
                comprehensive income (loss):Foreign
                currency translation adjustments
            
            
            (400
            )
            
            (98
            )
            
            54Comprehensive
                income (loss)
            
            $
            410
            
            
            2,577
            
            
            (3,303
            )Basic
                per share amounts:Net
                income (loss) per share of common stock
            
            $
            0.08
            
            
            0.27
            
            
            (0.34
            )Weighted
                average shares of common stock outstanding
            
            
            10,054
            
            
            9,972
            
            
            9,972Diluted
                per share amounts:Net
                income (loss) per share of common stock
            
            $
            0.08
            
            
            0.27
            
            
            (0.34
            )Weighted
                average shares of common stock outstanding
            
            
            10,093
            
            
            9,988
            
            
            9,972




See
      accompanying notes to consolidated financial statements.




F-4




PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Consolidated
      Statements of Stockholders’ Deficit


Years
      ended December 31, 2005, 2004 and 2003


(In
      thousands)


Accumulated
            
            
            
            
            
            TotalCommon
                Stock
            
            Additional
            
            Other
            
            
            
            
            
            Stock-No.
                of
            
            Par
                Value
            
            Paid-in
            
            Comprehensive
            
            Accumulated
            
            Treasury
            
            holders’Shares
            
            Amount
            
            Capital
            
            (Loss)
            
            Deficit
            
            Stock
            
            DeficitBalance
                at December 31, 2002
            
            
            10,003
            
            $
            100
            
            $
            76,059
            
            $
            (4,133
            )
            $
            (100,023
            )
            $
            (1,938
            )
            $
            (29,935
            )Net
                loss 2003
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (3,357
            )
            
            —
            
            
            (3,357
            )Foreign
                currency translation adjustment
            
            
            —
            
            
            —
            
            
            —
            
            
            54
            
            
            —
            
            
            —
            
            
            54Balance
                at December 31, 2003
            
            
            10,003
            
            
            100
            
            
            76,059
            
            
            (4,079
            )
            
            (103,380
            )
            
            (1,938
            )
            
            (33,238
            )Net
                income 2004
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            2,675
            
            
            —
            
            
            2,675Foreign
                currency translation adjustment
            
            
            —
            
            
            —
            
            
            —
            
            
            (98
            )
            
            —
            
            
            —
            
            
            (98
            )Balance
                at December 31, 2004
            
            
            10,003
            
            
            100
            
            
            76,059
            
            
            (4,177
            )
            
            (100,705
            )
            
            (1,938
            )
            
            (30,661
            )Net
                income 2005
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            810
            
            
            —
            
            
            810Common
                stock issued
            
            
            81
            
            
            1
            
            
            65
            
            
            --
            
            
            —
            
            
            —
            
            
            66Foreign
                currency translation adjustment
            
            
            —
            
            
            —
            
            
            —
            
            
            (400
            )
            
            —
            
            
            —
            
            
            (400
            )Balance
                at December 31, 2005
            
            
            10,084
            
            $
            101
            
            $
            76,124
            
            $
            (4,577
            )
            $
            (99,895
            )
            $
            (1,938
            )
            $
            (30,185
            )






See
      accompanying notes to consolidated financial statements.




F-5




PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Consolidated
      Statements of Cash Flows (Note 18)


Years
      ended December 31, 2005, 2004 and 2003


(In
      thousands)


2005
            
            2004
            
            2003Cash
                flows from operating activities:Net
                income (loss)
            
            $
            810
            
            
            2,675
            
            
            (3,357
            )Adjustments
                to reconcile net income (loss) to net cash provided by (used in)
                operating
                activities:Depreciation
                and amortization
            
            
            407
            
            
            409
            
            
            483Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (579
            )
            
            822
            
            
            756Inventories
            
            
            (275
            )
            
            (1,572
            )
            
            359Prepaid
                expenses
            
            
            (99
            )
            
            91
            
            
            (143
            )Other
                assets
            
            
            19
            
            
            17
            
            
            255Accounts
                payable, accrued expenses and other liabilities
            
            
            812
            
            
            (783
            )
            
            1,122Net
                cash provided by (used in) operating activities
            
            
            1,095
            
            
            1,659
            
            
            (525
            )Cash
                flows from investing activities:Capital
                expenditures, net
            
            
            (482
            )
            
            (259
            )
            
            (72
            )Net
                cash used in investing activities
            
            
            (482
            )
            
            (259
            )
            
            (72
            )Cash
                flows from financing activities:Increase
                in senior debt
            
            
            337
            
            
            357
            
            
            317Repayments
                of senior debt
            
            
            (1,336
            )
            
            (70
            )
            
            —Repayments
                of notes payable/short-term loans
            
            
            —
            
            
            —
            
            
            (8
            )Net
                cash (used in) provided by financing activities
            
            
            (999
            )
            
            287
            
            
            309Effect
                of exchange rate changes on cash and cash equivalents
            
            
            (400
            )
            
            (116
            )
            
            (22
            )(Decrease)
                increase in cash and cash equivalents
            
            
            (786
            )
            
            1,571
            
            
            (310
            )Cash
                and equivalents - beginning of year
            
            
            2,040
            
            
            469
            
            
            779Cash
                and equivalents - end of year
            
            $
            1,254
            
            
            2,040
            
            
            469






See
      accompanying notes to consolidated financial statements.




F-6






PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Notes
      to Consolidated Financial Statements


December
      31, 2005 and 2004





(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.





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.





Accounts
      Receivable





Accounts
      receivables are customer obligations due under normal trade terms. The Company
      sells its products directly to customers, to distributors and original equipment
      manufacturers involved in a variety of industries, principally
      telecommunications and military/aerospace. The Company performs continuing
      credit evaluations of its customers ’ financial condition and although it generally does not require collateral,
      letters of credit may be required from customers in certain
      circumstances.





(Continued)


F-7





PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Notes
      to Consolidated Financial Statements, continued








The
      Company records an allowance for doubtful accounts receivable based on
      specifically identified amounts that it believes to be uncollectible. The
      Company also records additional allowances based on certain percentages of
      its
      aged receivables, which are determined based on historical experience and its
      assessment of the general financial conditions affecting its customer base.
      If
      the Company’s actual collection experience changes, revisions to its allowance
      may be required. The Company has a limited number of customers with individually
      large amounts due at any given balance sheet date.





Inventories





Inventories
      are stated at the lower of cost (on the average or first-in, first-out methods)
      or fair market value. Our stated inventory reflects an inventory obsolescence
      reserve that represents the difference between the cost of the inventory and
      its
      estimated market value. This reserve is calculated based on historical usage
      and
      forecasted sales. Actual results may differ from our estimates. As of December
      31, 2005, approximately $600,000 of inventory that is fully reserved and not
      required for current or future operations is included in the reserve of
      $2,583,000, and will be disposed of.





Property,
      Plant and Equipment





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





Goodwill





Goodwill
      represents the difference between the purchase price and the fair market value
      of net assets acquired in business combinations. Commencing January 1, 2002,
      goodwill is an indefinite lived asset and as such is not amortized. On an annual
      basis, or more frequently if certain events occur, the Company tests the
      goodwill for impairment. The Company determines the estimated fair value of
      the
      goodwill by considering the projected cash flows generated from the reporting
      unit to which the goodwill relates. Goodwill at December 31, 2005 and 2004,
      related only to the Company’s signal processing division.





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, and tax
      benefits of net operating loss carryforwards. 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. A valuation allowance is
      recorded to reduce net deferred tax assets to amounts that are more likely
      than
      not to be realized (note 12).




(Continued)


F-8




PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Notes
      to Consolidated Financial Statements, continued








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
      operations.





Shipping
      and Handling Costs





Shipping and handling costs are included as a component of cost of sales.





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 the dilutive effect of potential
      shares of common stock, as if such shares had been issued.





Reclassifications





Certain
      reclassifications have been made to conform prior years’ consolidated financial
      statements to the 2005 presentation.





Accounting
      for Stock-Based Compensation





The
      Company applies the intrinsic value method as outlined in Accounting Principles
      Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to
      Employees, ” and related Interpretations in accounting for stock options granted to
      employees. Under the intrinsic value method, no compensation expense is
      recognized if the exercise price of the Company’s employee stock options equals
      the market price of the underlying stock on the date of the grant. Accordingly,
      no compensation cost has been recognized. Statement of Financial Accounting
      Standard (“SFAS”) No. 123, “Accounting for Stock-Based Compensation, ” requires the Company to provide pro forma information regarding net income
      (loss) and net income (loss) per share of common stock as if compensation cost
      for the Company’s stock option programs had been determined in accordance with
      the fair value method prescribed therein. The following table illustrates the
      effect on net income (loss) and income (loss) per share of common stock as
      if
      the fair value method had been applied to all outstanding and unvested awards
      in
      each period presented.




(Continued)


F-9




PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Notes
      to Consolidated Financial Statements, continued


**Year
                Ended****December
                31****2005**
            
            **2004**
            
            **2003****(In
                thousands, except per share data)**Net
                income (loss),
                as reported
            
            $
            810
            
            $
            2,675
            
            $
            (3,357
            )Deduct:
                Total stock-based employee compensation expense
              determined
                under
                fair value method for all awards
            
            
            (2
            )
            
            (1
            )
            
            (1
            )Pro
                forma net income (loss)
            
            $
            808
            
            $
            2,674
            
            $
            (3,358
            )**Income
                (loss) per share of common stock:**Basic
                and diluted - as reported
            
            $
            .08
            
            $
            0.27
            
            $
            (0.34
            )Basic
                and diluted - pro forma
            
            $
            .08
            
            $
            0.27
            
            $
            (0.34
            )




Accounting
      for the Impairment of Long-Lived Assets





The
      Company follows SFAS No. 144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets.” Long-lived assets other than goodwill are evaluated for
      impairment when events or changes in circumstances indicate the carrying amount
      of the assets may not be recoverable through the estimated undiscounted future
      cash flows from the use of these assets.





Restructuring
      Costs





Expenses
      for restructuring costs were $877,000. The
      costs were for investment banking, legal and accounting, including payment
      of
      legal fees and other expenses of the holder of our
      senior debt, resulting from the requirement of the holder of our senior debt
      that we restructure our company to provide payments on account of the senior debt.




(Continued)


F-10





PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Notes
      to
      Consolidated Financial Statements, continued






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





New
      Accounting Pronouncements





In
      December 2004, the FASB issued SFAS 123R which requires the measurement of
      all
      employee share based payments to employees, including grants of employee stock
      options, using a fair-value-based method and the recording of such expense
      in
      the Company’s consolidated statements of operations. The accounting provisions
      of SFAS 123R were originally effective for reporting periods beginning after
      June 15, 2005. On April 14, 2005 the U.S. Securities and Exchange Commission
      (the “SEC”) announced a deferral of the effective date of SFAS 123R for calendar
      year companies until the beginning of 2006. The pro forma disclosures previously
      permitted under SFAS 123 will no longer be an alternative to financial statement
      recognition beginning in the first fiscal quarter of 2006. See “Stock-Based
      Compensation” (Note 1) for the pro forma net income (loss) and net income (loss)
      per share amounts, for the years ended December 31, 2005, 2004, and 2003, as
      if
      the Company had used a fair-value method similar to the methods required under
      SFAS 123 to measure compensation expense for employees stock incentive awards.
      Although the Company has not yet determined whether the adoption of SFAS 123R
      will result in amounts that are similar to the current pro forma disclosures
      under SFAS 123R and, to the extent that it includes options or other
      equity-based incentives as part of compensation to employees, the Company does
      not expect the adoption to have a material impact on its consolidated statements
      of operations and net income (loss) per share.





(Continued)


F-11





PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Notes
      to Consolidated Financial Statements, continued





In
      November 2004, the FASB issued SFAS No. 151, “Inventory Costs - an amendment of
      ARB No. 43, Chapter 4” (“SFAS No. 151”). SFAS No. 151 requires all companies to
      recognize a current-period charge for abnormal amounts of idle facility expense,
      freight, handling costs and wasted materials. This statement also requires
      that
      the allocation of fixed production overhead to the  costs
      of
      conversion be based on the normal capacity of the production facilities. SFAS
      No. 151 will be effective for fiscal years beginning after June 15, 2005. The
      Company is currently evaluating the effect that this statement will have on
      its
      consolidated financial statements, but presently anticipates that such effect
      will be immaterial.





In
      May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections”
which replaces Accounting Principles Board Opinion No. 20 “Accounting Changes”
and SFAS 3, “Reporting Accounting Changes in Interim Financial Statements - An
      Amendment of APB Opinion No. 28.” SFAS 154 provides guidance on the accounting
      for and reporting of accounting changes and error corrections. It establishes
      retrospective application, or the earliest practicable date, as the required
      method for reporting a change in accounting principle and restatement with
      respect to a correction of an error. SFAS 154 is effective for accounting
      changes and corrections of errors made in fiscal years beginning after December
      15, 2005 and is required to be adopted by the Company in the first fiscal
      quarter of 2006. The implementation of SFAS 154 is not expected to have a
      material impact on the Company’s operations.





(2)
            Liquidity





As
      of December 31, 2005, the Company ’ s
      debt included (a) $24,675,000 of senior debt, including principal and interest, as a result of a February 24, 2006 extension, which matures **** on May
      1,  2006;
      (b) $6,144,000 principal
      amount of
      subordinated debt, which matured on July 3, 2001;
      and (c)  $385,000
      of 6% Debentures which matured on July 2, 2002 . The Company was unable to pay the principal ($6,144,000) or accrued interest
      ($ 5,053,000) on the subordinated notes or the principal ($385,000) or interest ($127,000) on the 6% Debentures.  Accordingly,
      the senior debt and subordinated debt are classified as current liabilities
      (notes 7, 8 and 9). In addition, the Company can not give any assurance that
      the
      holder of its senior debt will extend the loan beyond May 1, 2006. If the holder
      of the senior debt does not extend the maturity date of the obligations or
      demands payment of all or a significant portion of the obligations due to the
      holder of the senior debt, the Company will not be able to continue in
      business.





Although
      the Company has realized profits from operations in each of the last two years, after incurring losses
      in
      several previous years, its liquidity is impaired by both its working capital
      deficit, which was $33,778,000 at December 31, 2005, as well as its dependence
      upon the willingness of the holder of its senior debt to continue to extend
      the
      maturity of the senior debt.




(Continued)


F-12




PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Notes
      to Consolidated Financial Statements, continued




As
      a result of its continuing financial difficulties:





•
            the
                Company is having and may continue to have difficulty performing
                its
                obligations under its contracts, which could result in the cancellation
                of
                contracts or the loss of future business and penalties for
                non-performance;





•
            the
                Company significantly scaled back its Operating Support Systems (“OSS”)
                operations,so that the operations of that division are currently limited almost
                exclusively to performing warranty and maintenance services.





The
      Company is seeking to address its need for liquidity by exploring alternatives,
      including the possible sale of one or more of its divisions. If
      the Company sells any or all of its divisions ,
      the
      agreement with the Company’s holder of its senior debt requires it to pay the
      net proceeds to the holder of its senior debt. As a result of this provision
      and
      the Company’s obligations to the holders of subordinated debt, unless the
      lenders consent to the Company retaining a portion of the net proceeds from
      any
      sale of its operations, the Company will not receive any significant amount,
      and
      may not receive any of the net proceeds from any such sale for working
      capital . During
      2005, 2004 and 2003, the Company was engaged in discussions with respect to the possible sale of
      either its business or one or more of its divisions; however, those negotiations
      were terminated without an agreement having been reached .




During
      2005 and 2006, the maturity date of the Company’s obligations to the holder of
      its senior debt was extended seven times, most recently to May 1, 2006, at
      which
      time, the entire principal and interest on the senior debt becomes due and
      payable. The
      extension of the senior debt was granted by SHF IX LLC, an affiliate of
      Stonehill Financial, LLC who purchased the Company’s senior debt from Wells
      Fargo Foothill, Inc during the third quarter of 2004. As
      a
      condition to the most recent extensions, the Company agreed to take steps to
      effect a restructure of the senior debt in a manner which results in the payment
      of a significant portion of the senior debt. Any such restructure will require
      the Company to obtain financing from a new investor, although the holder of
      its
      senior debt, or its designee, has certain rights to acquire a debt and equity
      interest in the Company or require the Company to sell its businesses. Although
      the Company is seeking an investor, the Company cannot give any assurance that
      it will be able to obtain an investor on terms that are acceptable to the senior
      debt holder. Pursuant to the agreement with the holder of the senior debt,
      the
      Company engaged an investment banker to assist it in exploring strategic
      alternatives. If the agreement is not extended beyond May 1, 2006, or if the
      holder of the senior debt demands payment of all or a significant portion of
      the
      loan when due, the Company will not be able to continue in business, and it
      is
      likely that the Company will seek protection under the Bankruptcy Code. Further,
      if the Company does find a buyer for its business on terms acceptable to the
      holder of the senior debt, a sale of the Company’s business may involve
      reorganization under the Bankruptcy Code.




(Continued)


F-13




PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Notes
      to Consolidated Financial Statements, continued





At
      December 31, 2005, the Company did not have sufficient resources to pay either
      the holder of the senior debt or the subordinated lenders; and it is unlikely
      that it can generate such cash from its operations, and the holder of the senior
      debt continues to preclude the Company from making payments on any subordinated
      indebtedness, other than accounts payable in the normal course of business.
      Accordingly, all senior and subordinated debts are classified as current
      liabilities (note 7).





The
      holder of the senior debt has granted the Company extensions in the
      past . However, at each maturity date, the holder of the senior debt reviews the
      Company’s financial condition, business plan and prospects, including prospects
      relating to restructuring the senior debt or selling the Company’s business. The
      Company cannot determine whether the holder of the senior debt will continue
      to
      extend the loans. Any adverse event, including declines in business or attempts
      by creditors, including judgment creditors, to realize on their claims or
      judgments could have an effect on the decision of the holder of the senior
      debt
      to extend or demand payment on the notes. In such event, it would be necessary
      for the Company to seek protection under the Bankruptcy Code.





During
      the last several years, the Company has taken steps to reduce overhead,
      including a reduction in personnel and the hiring of lower wage personnel in
      its
      Mexico facility. The Company will continue to look to reduce costs while it
      seeks additional business from new and existing customers. Because of its
      present stock price, the Company may not be able to raise funds through the
      sales of its equity securities, and the Company’s financial condition prevents
      it from issuing debt securities. In the event that the Company is unable to
      extend or restructure its debt obligations and sell one or more of its
      divisions, it cannot be assured that the Company will be able to continue in
      operations. Furthermore, the Company believes that its historic financial
      position is having an adverse effect upon its ability to develop new business,
      as competitors and potential customers question its ability both to perform
      obligations under any agreements it may enter and to continue in
      business.





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








(Continued)


F-14




PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Notes
      to Consolidated Financial Statements, continued





(3)
            Accounts
                Receivable





Accounts
      receivable are customer obligations due under normal trade terms. The Company
      sells its products directly to customers, to distributors and original equipment
      manufacturers involved in a variety of industries, principally
      telecommunications and military/aerospace. The Company performs continuing
      credit evaluations of its customers’ financial condition and although it
      generally does not require collateral, letters of credit may be required from
      customers in certain circumstances. Senior management reviews accounts
      receivable on a monthly basis to determine if any receivables will potentially
      be uncollectible. Included in the overall allowance for doubtful accounts are
      any accounts receivable balances that are determined to be uncollectible, along
      with a general reserve. After all attempts to collect a receivable have failed,
      the receivable is written off against the allowance. Based on the information
      available to the Company, it believes the allowance for doubtful accounts as
      of
      December 31, 2005 is adequate. However, actual write-offs may differ from the
      recorded allowance.





The
      allowance for doubtful accounts receivable was $256,000 and $1,045,000 as of December 31, 2005 and 2004, respectively. In 2005, the
      Company wrote off approximately $778,000 of fully reserved old OSS accounts
      receivable.





(4)
            Inventories





Inventories
      consist of the following (net of $2,583,000 in reserve for 2005 and $2,626,000
      for 2004):





December
                31,2005
            
            2004Parts
                and components
            
            $
            3,196,000
            
            
            2,650,000Work-in-process
            
            
            460,000
            
            
            654,000Finished
                goods
            
            
            1,195,000
            
            
            1,272,000$
            4,851,000
            
            
            4,576,000





Inventories
      are stated at the lower of cost (on the average or first-in, first-out methods)
      or fair market value. Our stated inventory reflects an inventory obsolescence
      reserve that represents the difference between the cost of the inventory and
      its
      estimated market value. This reserve is calculated based on historical usage
      and
      forecasted sales. Actual results may differ from our estimates. As of December
      31, 2005, approximately $600,000 of inventory that is fully reserved and not
      required for current or future operations is included in the reserve of
      $2,583,000, and will be disposed of.





(Continued)


F-15





PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Notes
      to Consolidated Financial Statements, Continued





(5)
            Property,
                Plant and Equipment





Property,
      plant and equipment consist of the following:





December
                31
            
            Estimated2005
            
            2004
            
            useful
                livesLand
            
            $
            132,000
            
            
            132,000
            
            
            —Buildings
            
            
            871,000
            
            
            1,119,000
            
            
            20
                yearsMachinery
                and equipment
            
            
            3,160,000
            
            
            8,190,000
            
            
            3-8
                yearsFurniture
                and fixtures
            
            
            319,000
            
            
            2,294,000
            
            
            5-10
                yearsTransportation
                equipment
            
            
            33,000
            
            
            55,000
            
            
            4
                yearsTools
                and molds
            
            
            1,303,000
            
            
            3,984,000
            
            
            8
                yearsLeasehold
                improvements
            
            
            200,000
            
            
            893,000
            
            
            Lesser
                of term of lease6,018,000
            
            
            16,667,000
            
            
            or
                estimated life of assetLess
                accumulated depreciation and amortization
            
            
            4,609,000
            
            
            15,333,000$
            1,409,000
            
            
            1,334,000





Total
      depreciation expense for 2005, 2004 and 2003 amounted to approximately $407,000,
      $409,000 and $483,000, respectively.





During
      2005, the Company wrote off previously fully depreciated assets of approximately
      $10,872,000, which have been disposed of.





(6)
            Goodwill





The
      Company measures the fair value of the goodwill at least annually, instead
      of
      amortizing goodwill over a fixed period of time, to determine if goodwill has
      been impaired.




As
      of December 31, 2005 and 2004, goodwill was $2,961,000. At
      such dates, all of the goodwill related to the Company’s Signal division. The
      Company cannot give assurances that future write-downs will not be necessary,
      although management believes that no goodwill impairment charges are necessary
      at this time.




(7)
            Senior
                Debt





On
      December 31, 2005 and 2004, the Company’s senior debt consisted of debt in the
      amount of $24,675,000 and $25,674,000, respectively. Substantially all of the
      Company’s assets are pledged as collateral for the senior debt. The current
      agreement with the holder of the senior debt will expire on May1, 2006 and,
      accordingly, the senior debt has been classified as a current liability (see
      note 2).




(Continued)


F-16





PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Notes
      to Consolidated Financial Statements, Continued





In
      March
      2002, the senior lender agreed to an amended and restated loan and security
      agreement whereby a new term loan was established with a maximum principal
      amount of $1,500,000 and subsequently increased in May 2002 to $2,250,000.
      The
      agreement provides that all indebtedness prior to March 1, 2002 is reflected
      as
      an old term loan in the amount of $22,610,000, which includes the principal
      balance due at December 31, 2001 plus accrued interest through March 1, 2002.
      The old term loan bears no interest until such time as the holder of the senior
      debt, in its sole discretion, notifies the Company that interest shall be
      payable at a rate of 12%, or a default rate of 14% on a going-forward basis.
      Additionally, the holder of the senior debt prohibited the Company from making
      any payments on indebtedness to any subordinated creditors or from paying any
      dividends on common stock, but the Company is not prohibited from paying
      accounts payable in the ordinary course of business. Finally, the agreement
      allowed for standby letters of credit not to exceed a maximum of $573,000.
      As of
      December 31, 2005, the Company did not have any standby letters of credit
      outstanding. Borrowings under this facility are included in senior debt as
      described in the preceding paragraph. The holder of the senior debt has no
      obligation to make any further loans to the Company.





(8)
            6%
                Convertible Subordinated
                Debentures





As
      of December 31, 2005 and 2004, the Company had outstanding $385,000 of its
      6%
      convertible subordinated debentures due July 1, 2002 (the “Debentures”). The
      Company has not paid interest on these Debentures since July 2000, and the
      holder of its senior debt prohibits it from making any payments of principal
      and
      interest (see note 7). At December 31, 2005 and 2004, accrued interest on the
      debentures was $127,000 and $104,000, respectively. The trustee of the
      Debentures gave notice to the Company that the
      non-payment caused an event of default. The convertibility feature associated
      with the Debentures expired upon their maturity.




(9)
            Subordinated
                Notes





As
      of December 31, 2005 and 2004, subordinated notes in the principal amount of
      $6,144,000 were outstanding. As of December 31, 2005, $5,053,000 of accrued
      interest was also due and payable. However, the Company does
      not have the resources to pay either the $6,144,000 principal or the $5,053,000
      interest due on the subordinated notes. In addition, the holder of its senior debt has precluded the Company from making payments
      on
      the subordinated debt (note 7).




(Continued)


F-17





PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Notes
      to Consolidated Financial Statements, Continued





(10)
            Employee
                Benefit Plans





The
      Company has unfunded deferred compensation agreements with certain present
      and
      former officers and employees, with benefits commencing at retirement equal
      to
      50% of the employee’s base salary, as defined. The amount of payments is based
      on a 2004 modification of the plan whereby the former officers and employees
      agreed to spread their payments over a longer period of time than the original
      plan, ranging from approximately 15 to approximately 25 years although they
      may
      be accelerated under certain conditions. In 2004 and 2003, under the modified
      requirements, the accrued liability was reduced by approximately $109,000 and
      $137,000 respectively. Total deferred compensation obligations as of December
      31, 2005, before discounting at a rate of 6.5%, were $1,304,000 .





The
      Company maintains 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 all balances
      credited to his account, including the Company’s contribution. For the years
      ended December 31, 2005, 2004 and 2003, the Company’s contribution amounted to
      $41,000, $38,000 and $37,000, respectively.





11)
            Incentive
                Plans





During
      1999, the Company established an Employee Stock Bonus Plan whereby stock may
      be
      given to employees who are not officers or directors to recognize their
      contributions. A maximum of 95,750 shares of common stock is reserved for
      issuance pursuant to the Bonus Plan. No shares of common stock were issued
      pursuant to the Bonus Plan during 2005, 2004 and 2003.





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





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




(Continued)


F-18





PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Notes
      to Consolidated Financial Statements, continued




The
      weighted-average fair values of options granted were $0.02 per share for options
      granted in 2003, $0.05 per share for options granted in 2004 and $0.07 per
      share
      for options granted in 2005. 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 2005, 2004 and 2003:





2005
            
            2004
            
            2003Dividends:
            
            $
            0.00
                per share
            
            $
            0.00
                per share
            
            $
            0.00
                per shareVolatility:
            
            
            50
            %
            
            50
            %
            
            50
            %Risk-free
                interest:
            
            
            4.35
            %
            
            4.22
            %
            
            4.22%-5.48
            %Expected
                term:
            
            
            5
                years
            
            
            5
                years
            
            
            5
                years





A
      summary
      of the status of the Company’s stock option plans as of December 31, 2005, 2004,
      and 2003, and changes during the years ending on those dates is presented below:





2005
            
            2004
            
            2003Shares
            
            Weighted
            
            Shares
            
            Weighted
            
            Shares
            
            WeightedUnder
            
            Average
            
            Under
            
            Average
            
            Under
            
            AverageOption
            
            Exercise
                Price
            
            Option
            
            Exercise
                Price
            
            Option
            
            Exercise
                PriceOutstanding
                beginning of year
            
            
            322,780
            
            $
            1.52
            
            
            552,530
            
            $
            2.27
            
            
            601,530
            
            $
            2.43Granted
            
            
            15,000
            
            
            .11
            
            
            15,000
            
            
            .07
            
            
            15,000
            
            
            0.03Exercised
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Forfeited
            
            
            —
            
            
            —
            
            
            (244,750
            )
            
            3.23
            
            
            (64,000
            )
            
            3.21Outstanding
                end of year
            
            
            337,780
            
            $
            1.39
            
            
            322,780
            
            $
            1.45
            
            
            552,530
            
            $
            2.27Options
                exercisable at year-end
            
            
            337,780
            
            
            
            
            
            318,780
            
            
            
            
            
            542,530


The
      following table summarizes information about stock options outstanding under
      the
      stock option plans at December 31, 2005.




Options
                Outstanding
            
            Options
                ExercisableWeighted-averageRange
                of
            
            Outstanding
            
            Remaining
            
            Weighted-average
            
            Exercisable
            
            Weighted-AverageExercise
                Prices
            
            at
                12/31/05
            
            Contractual
                Life
            
            Exercise
                Price
            
            at
                12/31/05
            
            Exercise
                Price<$1.00
            
            
            80,000
            
            
            6.9
                years
            
            $
            0.14
            
            
            80,000
            
            $
            0.14$1.00
                - 1.99
            
            
            213,280
            
            
            1.4
                years
            
            $
            1.51
            
            
            213,280
            
            $
            1.51$2.00
                - 2.99
            
            
            10,000
            
            
            4.3
                years
            
            $
            2.03
            
            
            10,000
            
            $
            2.03$3.00
                - 3.85
            
            
            34,500
            
            
            .5
                years
            
            $
            3.39
            
            
            34,500
            
            $
            3.39337,780
            
            
            
            
            
            
            
            
            337,780






F-19




PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Notes
      to
      Consolidated Financial Statements, continued





(12)
            Income
                Taxes





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


2005
            
            2004
            
            2003Current
            
            Deferred
            
            Current
            
            Deferred
            
            Current
            
            DeferredFederal
            
            $
            32,000
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —State
                and foreign
            
            
            128,000
            
            
            —
            
            
            169,000
            
            
            —
            
            
            (272,000
            )
            
            —Total
            
            $
            160,000
            
            
            —
            
            
            169,000
            
            
            —
            
            
            (272,000
            )
            
            —





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


2005
            
            2004
            
            2003United
                States
            
            $
            1,064,000
            
            
            732,000
            
            
            (2,989,000
            )Foreign
            
            
            (94,000
            )
            
            2,112,000
            
            
            (640,000
            )Income
                (loss) before provision (benefit) for income taxes
            
            $
            970,000
            
            
            2,844,000
            
            
            (3,629,000
            )





A
      reconciliation of the Company’s income tax provision and the amount computed by
      applying the statutory U.S. federal income tax rate of 34% to loss before income
      taxes is as follows:


2005
            
            2004
            
            2003Tax
                provision (benefit) at statutory rate
            
            $
            330,000
            
            
            967,000
            
            
            (1,234,000
            )Increase
                (decrease) in income tax (benefit) resulting from:Increase
                (decrease) in valuation allowance
            
            
            (308,000
            )
            
            (1,038,000
            )
            
            1,379,000State
                taxes, less applicable federal benefits
            
            
            23,000
            
            
            —
            
            
            (114,000
            )Other
                expenses not deductible for tax purposes
            
            
            6,000
            
            
            6,000
            
            
            8,000Foreign
                income taxed at rates different from U.S. statutory rate
            
            
            125,000
            
            
            195,000
            
            
            (16,000
            )Reversal
                and adjustments of prior year’s accrual
            
            
            —
            
            
            —
            
            
            (275,000
            )Other
            
            
            (16,000
            )
            
            39,000
            
            
            (20,000
            )$
            160,000
            
            
            169,000
            
            
            (272,000
            )





Porta
      has
      unused United States tax net operating loss (NOL) carryforwards of approximately
      $47,850,000 expiring at various dates between 2008 and 2025. Due to the 1997
      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 with
      respect to approximately $23.9 million of the NOL, representing the portion
      that
      arose prior to the change in control. The carryforward amounts are subject
      to
      review by the Internal Revenue Service (IRS). In addition, Porta has foreign
      NOL
      carryforwards of approximately $6,463,000 with indefinite expiration
      dates.




(Continued)


F-20





PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Notes
      to
      Consolidated Financial Statements, continued





The
      components of the deferred tax assets, the net balance of which total zero
      after
      the valuation allowance, as of December 31, 2005 and 2004 are as
      follows:


2005
            
            2004Deferred
                tax assets:Inventory
            
            $
            1,254,000
            
            
            1,413,000Allowance
                for doubtful accounts receivable
            
            
            99,000
            
            
            402,000Benefits
                of tax loss carryforwards
            
            
            20,361,000
            
            
            20,425,000Benefit
                plans
            
            
            421,000
            
            
            436,000Accrued
                commissions
            
            
            77,000
            
            
            105,000Other
            
            
            2,762,000
            
            
            2,494,000Depreciation
            
            
            364,000
            
            
            371,00025,338,000
            
            
            25,646,000Valuation
                allowance
            
            $
            (25,338,000
            )
            
            (25,646,000
            )$
            —
            
            
            —





Deferred
      tax assets as of December 31, 2004 have been adjusted based on actual tax
      returns filed.





Because
      of Porta’s losses in previous
      years  and
      uncertainties associated with projections of future taxable income and the
      possibility of a change in ownership, a valuation allowance for the entire deferred tax asset was provided and is
      still considered appropriate due to the uncertainty of future
      realization.




In
      January 2003, Porta accepted an offer to pay $30,000 in
      full settlement of a tax liability of its Puerto Rico subsidiary; accordingly
      the related tax and accrued interest liability of $274,000 was reversed in
      2003.





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, 2005, undistributed earnings of the foreign subsidiaries amounted
      to approximately $1,437,000. It is not practicable to determine the amount
      of
      income or withholding tax that would be payable upon the remittance of those
      earnings.





(13)
            Leases





At
      December 31, 2005, the Company and its subsidiaries leased manufacturing and
      administrative facilities, equipment and automobiles under a number of operating
      leases. The Company is required to pay increases in real estate taxes on the
      facilities in addition to minimum rents. Total rent expense for 2005, 2004,
      and
      2003 amounted to approximately $594,000, $581,000 and $537,000, respectively.
      The Company also subleased a portion of one of its facilities during 2003;
      the
      rent expense for 2003 was reduced accordingly, by $164,000. For 2005 and 2004,
      there was no reduction in rent expense. Minimum rental commitments, exclusive
      of
      future escalation charges, for each of the next five years are as
      follows:




F-21





PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Notes
      to Consolidated Financial Statements, Continued








2006
            
            $
            620,0002007
            
            
            591,0002008
            
            
            294,0002009
            
            
            264,0002010
            
            
            264,000Thereafter
            
            
            2,445,000$
            4,478,000





In
      January 2006, the Company negotiated an agreement with the landlord of its
      United Kingdom facility to cancel the remaining approximate 16 years of the
      lease for three years rent plus a cancellation fee, which comes to approximately
      $715,000. We anticipate the signing at the end of March 2006. The above table
      does not include the effects of the settlement.




(14)
            Major
                Customers





Porta’s five **** largest
      customers accounted for sales of $17,431,000, or approximately 61% of sales, for
      2005, $15,443,000,
      or approximately 53% of sales, for
      2004 and
      $8,507,000, or approximately 43% of sales, for
      2003. British
      Telecommunications PLC was Porta’s largest customer for 2005, accounting for sales of $5,933,000, or
      approximately 21%, and Fujitsu Telecommunications Europe LTD was the largest customer for 2004,
      accounting for sales of $4,772,000,
      or approximately 16%. A
      significant amount of sales of the Company’s products for use by British
      Telecommunications were sold to Fujitsu as purchasing agent for British
      Telecommunications. As a result, most of the sales
      to
      Fujitsu Telecommunications were for use by British Telecommunications. Direct
      sales to British Telecommunications were $2,652,000, or 9% of sales, for 2004,
      $1,480,000, or 8% of sales, for 2003 .
      Sales to Telmex in 2005 were $3,157,000, or approximately 11% of sales. Sales
      to
      Marconi in 2005 were $3,550,000, or approximately 12% of sales. No
      other
      customers account for 10% or more of the Company’s sales in 2005, 2004 or 2003.





(15)
            Fair
                Values of Financial Instruments





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





The
      fair value of the Company’s senior and subordinated debt and related interest
      cannot be reasonably estimated due to the lack of marketability of such
      instruments. However, management believes, because of the Company’s financial
      position and, with respect to the senior debt, the sale of the senior debt
      by
      the Company’s former senior lender, that the fair value of these instruments is
      significantly less than their aggregate carrying amount.




(Continued)


F-22




PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Notes
      to Consolidated Financial Statements, Continued





(16)
            Net
                Income (Loss) Per Share





In
      both
      2005 and 2004, the weighted average shares of common stock outstanding for
      purposes of computing diluted net income per share include 45,000 dilutive
      potential shares of common stock related to stock options for which the options’
exercise price was less than the weighted average market price of the Company’s
      common stock for the year. Options to purchase 292,780, 277,780, and 552,530
      shares of common stock for 2005, 2004 and 2003, respectively, with exercise
      prices ranging from $0.30 to $3.85, $0.30 to $3.85 and $0.02 to $3.85 for 2005,
      2004 and 2003, respectively, were outstanding but not included in the
      computation of diluted net income (loss) per share, because the effect of doing
      so would be anti-dilutive.





Warrants
      to purchase 242,500 shares of common stock, with exercise prices ranging from
      $0.25 to $3.00, were outstanding as of December 31, 2005 and 2004 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, and the effect of doing so would be
      anti-dilutive.





(17)
            Legal
                Matters





In
      January 2006, the Company settled the previously reported arbitration proceeding
      by BMS Corp. against it. The settlement provides for the Company to pay a total
      of $1,000,000, in monthly installments through March 2010, secured by a
      confession of judgment. Based on the settlement, the
      Company recorded a liability of $824,000 at December 31, 2005, which represents
      the present value of its payments to BMS.





In
      July
      2001, the holder of a subordinated note in the principal amount of $500,000
      commenced an action against the Company in the United States District Court
      for
      the Southern District of New York seeking payment of the principal and accrued
      interest on their subordinated note which was payable in July 2001. The payment
      of the note is subordinated to payment of Porta’s senior debt. The plaintiff’s
      motion for a summary judgment was denied by the court in January 2002 on the
      grounds that the terms of the note did not give them permission to obtain a
      judgment while the Company remained in default to the senior debt holder. Since
      that time, the action has remained inactive.





(18)
            Cash
                Flow Information





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





2005
            
            2004
            
            2003Cash
                paid for interest
            
            $
            1,130
            
            
            116
            
            
            6Cash
                paid for income taxes
            
            $
            115
            
            
            69
            
            
            11





(Continued)


F-23




PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Notes
      to Consolidated Financial Statements, continued





(19)
            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; Signal Processing (“Signal”) whose products are used in data
      communication devices that employ high frequency transformer technology; and
      Operating Support Systems (“OSS”) whose products automate the testing,
      provisioning, maintenance and administration of communication networks and
      the  management
      of support personnel and equipment. During 2005, the activity of the OSS
      division was limited to the performance of warranty and maintenance services.
      In
      2004, OSS activities were limited to warranty and maintenance services and
      the
      completion of installations of OSS systems pursuant to contracts entered into
      in
      prior years.





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.


2005
            
            2004
            
            2003**Revenue:**Line
            
            $
            21,982,000
            
            
            21,545,000
            
            
            11,334,000Signal
            
            
            5,710,000
            
            
            5,551,000
            
            
            4,253,000OSS
            
            
            785,000
            
            
            2,003,000
            
            
            3,249,000$
            28,477,000
            
            
            29,099,000
            
            
            18,836,000**Segment
                profit (loss):**Line
            
            $
            4,344,000
            
            
            5,784,000
            
            
            1,634,000Signal
            
            
            2,134,000
            
            
            2,124,000
            
            
            1,393,000OSS
            
            
            (1,044,000
            )
            
            (1,662,000
            )
            
            (3,072,000
            )$
            5,434,000
            
            
            6,246,000
            
            
            (45,000
            )**Depreciation
                and amortization:**Line
            
            $
            241,000
            
            
            218,000
            
            
            253,000Signal
            
            
            31,000
            
            
            27,000
            
            
            22,000OSS
            
            
            62,000
            
            
            95,000
            
            
            136,000$
            334,000
            
            
            340,000
            
            
            411,000**Total
                identifiable assets:**Line
            
            $
            7,626,000
            
            
            6,368,000
            
            
            4,099,000Signal
            
            
            4,775,000
            
            
            4,561,000
            
            
            4,293,000OSS
            
            
            588,000
            
            
            945,000
            
            
            2,932,000$
            12,989,000
            
            
            11,874,000
            
            
            11,324,000**Capital
                expenditures:**Line
            
            $
            445,000
            
            
            167,000
            
            
            46,000Signal
            
            
            37,000
            
            
            71,000
            
            
            4,000OSS
            
            
            0
            
            
            0
            
            
            0$
            482,000
            
            
            238,000
            
            
            50,000





(Continued)


F-24




PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Notes
      to Consolidated Financial Statements, Continued





The
      following table reconciles segment totals to consolidated totals:


2005
            
            2004
            
            2003**Revenue:**Total
                revenue for reportable segments
            
            $
            28,477,000
            
            
            29,099,000
            
            
            18,836,000Other
                revenue
            
            
            127,000
            
            
            69,000
            
            
            754,000Consolidated
                total revenue
            
            $
            28,604,000
            
            
            29,168,000
            
            
            19,590,000**Operating
                income (loss):**Total
                segment income (loss) for reportable segments
            
            $
            5,434,000
            
            
            6,246,000
            
            
            (45,000
            )Corporate
                and unallocated
            
            
            (3,413,000
            )
            
            (2,093,000
            )
            
            (2,307,000
            )Consolidated
                total operating income (loss)
            
            $
            2,021,000
            
            
            4,153,000
            
            
            (2,352,000
            )**Depreciation
                and amortization:**Total
                for reportable segments
            
            $
            334,000
            
            
            340,000
            
            
            411,000Corporate
                and unallocated
            
            
            73,000
            
            
            69,000
            
            
            72,000Consolidated
                total deprecation and amortization
            
            $
            407,000
            
            
            409,000
            
            
            483,000**Total
                assets:**Total
                for reportable segments
            
            $
            12,989,000
            
            
            11,874,000
            
            
            11,324,000Corporate
                and unallocated
            
            
            1,672,000
            
            
            2,564,000
            
            
            1,031,000Consolidated
                total assets
            
            $
            14,661,000
            
            
            14,438,000
            
            
            12,355,000**Capital
                expenditures:**Total
                for reportable segments
            
            $
            482,000
            
            
            238,000
            
            
            50,000Corporate
                and unallocated
            
            
            0
            
            
            21,000
            
            
            22,000Consolidated
                total capital expenditures
            
            $
            482,000
            
            
            259,000
            
            
            72,000





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


2005
            
            2004
            
            2003**Revenue:**United
                States
            
            $
            10,120,000
            
            
            9,809,000
            
            
            8,610,000United
                Kingdom
            
            
            14,998,000
            
            
            14,911,000
            
            
            7,523,000Asia/Pacific
            
            
            10,000
            
            
            128,000
            
            
            428,000Other
                Europe
            
            
            319,000
            
            
            457,000
            
            
            1,228,000Latin
                America
            
            
            0
            
            
            158,000
            
            
            238,000Other
                North America
            
            
            3,157,000
            
            
            3,139,000
            
            
            1,037,000Other
            
            
            0
            
            
            566,000
            
            
            526,000Consolidated
                total revenue
            
            $
            28,604,000
            
            
            29,168,000
            
            
            19,590,000**Consolidated
                long-lived assets**:United
                States
            
            $
            4,055,000
            
            
            3,843,000
            
            
            3,859,000United
                Kingdom
            
            
            77,000
            
            
            169,000
            
            
            255,000Other
                North America
            
            
            288,000
            
            
            352,000
            
            
            393,000Asia/Pacific
            
            
            0
            
            
            0
            
            
            0Latin
                America
            
            
            0
            
            
            0
            
            
            5,000Other
            
            
            0
            
            
            0
            
            
            04,420,000
            
            
            4,364,000
            
            
            4,512,000Current
                and other assets
            
            
            10,241,000
            
            
            10,074,000
            
            
            7,843,000Consolidated
                total assets
            
            $
            14,661,000
            
            
            14,438,000
            
            
            12,355,000




(Continued)


F-25





PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Notes
      to Consolidated Financial Statements, Continued





(20)
            Quarterly
                Information (Unaudited)





The
      following presents certain unaudited quarterly financial data:





Quarter
                EndedMarch
                31, 2005
            
            June
                30, 2005
            
            September
                30, 2005
            
            December
                31, 2005Net
                sales
            
            $
            7,615,000
            
            $
            8,425,000
            
            $
            7,021,000
            
            $
            5,543,000Gross
                profit
            
            
            3,143,000
            
            
            3,242,000
            
            
            2,534,000
            
            
            1,487,000Net
                income (loss)
            
            
            1,203,000
            
            
            887,000
            
            
            107,000
            
            
            (1,387,000
            )Basic
                and diluted net income(loss)
                per share:
            
            $
            0.12
            
            $
            0.09
            
            $
            0.01
            
            $
            (0.14
            )




Quarter
                EndedMarch
                31, 2004
            
            June
                30, 2004
            
            September
                30, 2004
            
            December
                31, 2004Net
                sales
            
            $
            8,100,000
            
            $
            6,272,000
            
            $
            7,883,000
            
            $
            6,913,000Gross
                profit
            
            
            3,130,000
            
            
            2,368,000
            
            
            3,047,000
            
            
            2,783,000Net
                income
            
            
            829,000
            
            
            319,000
            
            
            1,058,000
            
            
            469,000Basic
                and diluted net income per share:$
            0.08
            
            $
            0.03
            
            $
            0.11
            
            $
            0.05





During
      the first three quarters of 2005, the Company had incurred approximately
      $450,000 in restructuring costs attributed to investment banking, legal and
      accounting expenses as well as legal and other expenses incurred by the holder
      of our senior debt. The expenses were included in “ *Prepaid
      expenses and other current assets.”* In
      the
      fourth quarter of 2005 the Company incurred additional expenses of $427,000.
      At
      December 31, 2005, the Company expensed the $877,000.






F-26





Report
      of Independent Registered Public Accounting
      Firm:








The
      Board
      of Directors and Stockholders


Porta
      Systems Corp.


Syosset,
      New York





The
      audits referred to in our report, dated March 10, 2006, relating to the
      consolidated financial statements of Porta Systems Corp., which are included
      in
      item 8 of this Form 10-K, included the audit of the financial statement Schedule
      II - Valuation and Qualifying Accounts for the three-year period ended December
      31, 2005. The financial statement schedule is the responsibility of the
      Company’s management. Our responsibility is to express an opinion on this
      financial statement schedule based on our audits.





In
      our
      opinion, such financial statement schedule presents fairly, in all material
      respects, the information set forth therein.





/s/
                BDO Seidman, LLP
              BDO
                Seidman, LLP




Melville,
      New York


March
      10,
      2006




F-27




SCHEDULE
      II


**d)**
              **Financial
                  Statement Schedule**





**PORTA
                SYSTEMS CORP****VALUATION
                AND QUALIFYING ACCOUNTS**




**Column
                A**
            
            **Column
                B**
            
            **Column
                C**
            
            **Column
                D**
            
            **Column
                E****Balance
                at**
            
            **Charged
                to**
            
            
            
            **Balance
                at****Beginning**
            
            **Costs
                and**
            
            
            
            **End
                of****Description**
            
            **of
                Period**
            
            **Expenses**
            
            **Deductions**
            
            **Period**Reserve
                and allowance deducted from Asset accounts:YEAR
                ENDED DECEMBER 31, 2005Allowance
                for doubtful accounts
            
            $
            1,045
            
            $
            19
            
            $
            808
            
            $
            256Inventory
                reserve
            
            
            2,626
            
            
            626
            
            
            669
            
            
            2,583YEAR
                ENDED DECEMBER 31, 2004Allowance
                for doubtful accounts
            
            $
            1,091
            
            $
            34
            
            $
            80
            
            $
            1,045Inventory
                reserve
            
            
            2,936
            
            
            515
            
            
            825
            
            
            2,626YEAR
                ENDED DECEMBER 31, 2003Allowance
                for doubtful accounts
            
            $
            1,967
            
            $
            210
            
            $
            1,086
            
            $
            1,091Inventory
                reserve
            
            
            3,072
            
            
            863
            
            
            999
            
            
            2,936






F-28