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                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-K

(Mark One)

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

                   For the fiscal year ended December 31, 2002

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

                 For the transition period from _______to_______

                          Commission file number 1-8191

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

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

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

                                      None

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

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

     Indicate by a check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes__ No X

     State aggregate market value of the voting stock held by  non-affiliates of
the registrant: $598,767 as of June 30, 2002.

     Indicate the number of shares outstanding of each of the registrant's class
of common stock, as of the latest  practicable date:  9,972,284 shares of Common
Stock, par value $.01 per share, as of March 19, 2003.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None

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<PAGE>

                                     Part I

Item 1.  Business

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

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

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

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

     Porta Systems Corp. is a Delaware  corporation  incorporated in 1972 as the
successor to a New York corporation  incorporated in 1969. Our principal offices
are located at 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 in
other  documents  which we file with the Securities and Exchange  Commission and
the matters described under  "Management's  Discussion and Analysis of Financial
Condition and Results of  Operations."  In addition,  such  statements  could be
affected by risks and uncertainties related to our financial conditions, factors
which affect the  telecommunications  industry,  market and customer acceptance,
competition,  government  regulations and requirements  and pricing,  as well as
general  industry and market  conditions and growth rates,  and general economic
conditions.  Any  forward-looking  statements speak only as of the date on which
they  are  made,   and  we  do  not  undertake  any  obligation  to  update  any
forward-looking  statement to reflect events or circumstances  after the date of
this Form 10-K.


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<PAGE>

Risk Factors

     We require substantial  financing to meet our working capital  requirements
and our principal  lender has no  obligation  to provide us with any  additional
financing. We had a working capital deficit at December 31, 2002 of $34,199,000.
As of December 31, 2002, our current liabilities included $25,070,000 due to our
senior  lender,  all of  which  becomes  due on May  15,  2003.  We do not  have
sufficient resources to pay the senior lender when our obligations to the senior
lender  mature on May 15, 2003,  or to pay  principal and interest of $8,444,000
due at December 31, 2002 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.  Because our senior lender is no
longer  advancing  funds to us,  at  present  our only  source  of funds is from
operations.  To the extent that our operations do not generate  sufficient funds
to cover our  expenses,  it may be necessary  for us to seek  reorganization  or
liquidation under the Bankruptcy Code. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

     We are incurring losses from our operations, and our losses are continuing.
We incurred a net loss of $4,114,000, or $0.41 per share (basic and diluted), on
sales of $21,417,000  for 2002,  following a loss of  $14,774,000,  or $1.50 per
share (basic and diluted) for 2001. In each of these years, our revenue declined
significantly from the level of the previous year. Our losses are continuing and
we expect that our losses will continue unless we are able both to significantly
increase our revenue and reduce our expenses.  We cannot give  assurance that we
will be able to  operate  profitably  in the  future,  and if we are  unable  to
operate profitably, we may be unable to continue in business.

     Because of our decreasing  revenues  together with problems facing both the
telecommunications  industry and the economy,  we may not be able to continue in
business. Our sales declined significantly from 2000 to 2001 and again from 2001
to 2002.  Unless we are able to stop the downward  trend in sales and generate a
significant  increase in sales, our reduction in overhead will not be sufficient
to enable us to sustain  our  operations.  We cannot  assure you that we will be
able to  increase  our  sales  significantly,  if at  all.  As a  result  of the
deterioration  of our  operating  revenue  we are  evaluating  various  options,
including the sale of one or more of our  divisions as well as a  reorganization
or liquidation under the Bankruptcy Code.

     Our independent auditors have included an explanatory paragraph relating to
our  ability to  continue as a going  concern in their  report on our  financial
statements.  Because  of our  substantial  losses in 2002,  2001 and  2000,  our
stockholders'  deficit of  $29,935,000  at December  31,  2002,  and our working
capital deficit of $34,199,000 as of December 31, 2002 our auditors  included in
their report an explanatory  paragraph  about our ability to continue as a going
concern.

     Because of our financial condition, we have not been able to pay certain of
our  creditors  on a timely  basis,  and  some of our  creditors  have  obtained
judgments against us. As a result of our continuing  financial  difficulties,  a
number of creditors have engaged  attorneys or collection  agencies or commenced
legal actions against us, and some of them have obtained  judgments  against us.
Claimants  who have already  either  commenced  litigation  or otherwise  sought
collection  are  due  approximately  $214,000.  If we  are  unable  to  reach  a
settlement with these creditors and others who have not yet brought claims,  and
these  claimants  obtain  judgments  against  us or seek to  enforce a  judgment
against us, it may be necessary  for us, or our senior lender may require us, to
seek protection under the Bankruptcy Code.


                                    2 of 35
<PAGE>

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

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

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

     We are heavily  dependent on foreign sales.  Approximately 54% of our sales
in 2002 and 2001 and 66% of our sales for 2000,  were made to foreign  telephone
operating  companies.  In selling to  customers  in  foreign  countries,  we are
exposed  to  inherent  risks not  normally  present  in the case of our sales to
United  States  customers,  including  extended  delays in both  completing  the
installation  and  receiving  the  final  payment  from  our  customers  for our
Operational  Support  Systems  contracts,  as well as further risks  relating to
political  and  economic  changes.  Furthermore,  our  financial  condition  has
impaired  our ability to generate new  business in the  international  market as
potential customers express concern about our ability to perform.

     We have  granted to British  Telecommunications  rights to our  technology.
Under  our   agreement   with  British   Telecommunications,   we  gave  British
Telecommunications the right to use our connection/protection technology or have
products  using  our  technology  manufactured  for it by  others.  As a result,
British  Telecommunication may have the right to use our technology and purchase
products  based on our  technology  from  others,  which  has  resulted  and may
continue  to  result  in  a   significant   decline  in  our  sales  to  British
Telecommunications.


                                    3 of 35
<PAGE>

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

     Because  of our  small  size  and  our  financial  problems,  we  may  have
difficulty  competing for business.  We compete  directly with a number of large
and small telephone  equipment  manufacturers in the United States,  with Lucent
Technologies,  Inc. continuing to be our principal United States competitor. Our
competitors  are using our  financial  difficulties  in  successfully  competing
against us. We anticipate that our loss for 2002, our working capital deficiency
and absence of financing may continue to place us in a competitive disadvantage,
particularly  in  seeking  Operations   Support  Systems  contracts,   where  we
frequently deal with national telecommunications companies.

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

     We require access to current technological developments.  We rely primarily
on the  performance  and design  characteristics  of our  products and we try to
offer our  products at prices and with  warranties  that will make our  products
competitive.  Our  business  could be  adversely  affected  if we cannot  obtain
licenses  for  such  updated   technology   or  self  develop   state-of-the-art
technology.  Because of our  financial  problems,  we are not able to devote any
significant  effort to  research  and  development,  which  could  increase  our
difficulties in making sales of our products.

     We rely on certain key  employees.  We may be dependent  upon the continued
employment of certain key employees,  including our senior  executive  officers.
Our failure to retain such employees may have a material adverse effect upon our
business.  Because of our financial  problems we have  experienced key personnel
losses.  To the extent that these losses continue or are accelerated,  we may be
unable to provide our customers  with necessary  service,  which could result in
the failure to generate new business.

     Our stock is subject to the penny stock rules,  which may make it difficult
for  stockholders  to sell 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  which sell our stock to persons
other than established customers and institutional  accredited investors.  These
rules may affect the ability of  broker-dealers to sell our common stock and may
affect the ability of our stockholders to sell any common stock they may own.

     We do not pay dividends on common stock.


                                    4 of 35
<PAGE>

Products

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

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

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

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

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

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


                                    5 of 35
<PAGE>

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

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

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

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


                                    6 of 35
<PAGE>

     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,
                     -----------------------------------------------------------
                     2002                 2001                2000
                     ----                 ----                ----
                             (Dollars in thousands)

OSS Systems         $ 6,414        30%   $ 8,874        32%   $22,296        44%

Line Connecting
/Protecting
Equipment             9,598        45%    12,756        46%    20,546        40%

Signal Processing     4,523        21%     5,737        20%     7,644        15%

Other                   882         4%       695         2%       654         1%
                    -------       ----   -------       ----   -------       ----
Total               $21,417       100%   $28,062       100%   $51,140       100%
                    =======       ====   =======       ====   =======       ====

Markets

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

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

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

     During 2002,  approximately  30% of our sales consisted of OSS products and
services.

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


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<PAGE>

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

     During 2002,  approximately 45% of our sales were made to customers in this
category.

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

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

     During 2002, signal processing equipment accounted for approximately 21% of
our sales.

Marketing and Sales

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

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

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

     British Telecommunications  purchased line  connecting/protecting  products
amounting to $689,000 (3% of sales) in 2002,  $3,339,000 (12% of sales) in 2001,
and  $4,261,000  (8% of sales) in 2000.  During  these  years,  we also sold our
products to unaffiliated suppliers for resale to British Telecommunications.  We
have a  cross-licensing  agreement  with British  Telecommunications  which,  in
effect,  enables  British  Telecommunications  to use certain of our proprietary
information to modify or enhance products provided to British Telecommunications
and  permits  British  Telecommunications  to  manufacture  or engage  others to
manufacture those products.

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


                                    8 of 35
<PAGE>

     During 2000, we entered into a multi-year sales, marketing,  and management
co-operative  agreement  with  Fujitsu  Telecommunications  to  market  Internet
infrastructure  products. This agreement expired during September 2002.Under the
agreement,  Fujitsu  sold and  marketed  our  advanced  Internet  infrastructure
technologies,   including  ADSL  Single  Ended  Line  Qualification  System  for
broadband services and the sixth generation Sherlock remote test unit to telecom
service operators in the United Kingdom, principally British Telecommunications,
and certain other European  countries.  During 2002, we had no sales pursuant to
this agreement. During 2001 and 2000, we had sales pursuant to this agreement of
$3,200,000 (11% of sales) and $12,051,000 (24% of sales), respectively.

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

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

                   Sales to Customers By Geographic Region (1)

                                            Year Ended December 31,
                       ---------------------------------------------------------
                              2002                  2001                2000
                              ----                  ----                ----
                                       (Dollars in thousands)

North America          $10,442     49%      $13,356      48%     $22,795     45%

United Kingdom           6,388     30%        8,060      29%      20,244     40%

Asia/Pacific             2,725     13%        4,552      16%       5,429     10%

Other Europe             1,600      7%        1,761       6%       2,482      5%

Latin America              258      1%          288       1%         146      0%

Other                        4      0%           45       0%          44      0%
                       -------    ----      -------     ----     -------    ----
Total Sales            $21,417    100%      $28,062     100%     $51,140    100%
                       =======    ====      =======     ====     =======    ====

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

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


                                    9 of 35
<PAGE>

Manufacturing

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

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

Source and Availability of Components

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

Significant Customers

     During the years ended  December 31, 2002,  2001 and 2000, our five largest
customers  accounted for sales of  $9,784,000,  or  approximately  46% of sales,
$13,444,000,  or approximately  48% of sales, and $28,323,000,  or approximately
55% of sales, respectively.  Our largest customer in 2002 and 2001 with sales of
$2,725,000 and $3,485,000, or approximately 13% and 12%, respectively,  of sales
was Philippine Long Distance Telephone.  Our largest customer in 2000 with sales
of $12,051,000,  or approximately  24% of sales was Fujitsu  Telecommunications.
Our sales to Fujitsu Telecommunications were $3,200,000, or approximately 11% of
sales in 2001. A significant  amount of sales of our products for use by British
Telecommunications were sold to Fujitsu Telecommunications,  as purchasing agent
for  British  Telecommunications.  As a  result,  most of the  sales to  Fujitsu
Telecommunications were for use by British  Telecommunications.  Direct sales to
British   Telecommunications  were  $2,306,000,  or  11%  of  sales,  for  2002,
$3,339,000, or 12% of sales, for 2001 and $5,098,000, or 10% of sales, for 2000.
During  2000,  sales  to  a  Mexican  telephone  company  were  $5,507,000,   or
approximately  11% of sales. No other  customers  account for 10% or more of our
sales in 2002, 2001 or 2000.

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


                                    10 of 35
<PAGE>

Backlog

     At December 31, 2002,  our backlog was  approximately  $4,400,000  compared
with  approximately  $6,100,000  at December 31, 2001.  Of the December 31, 2002
backlog,  approximately  $3,300,000  represented  orders from foreign  telephone
operating  companies.  We expect to ship  substantially  all of our December 31,
2002 backlog during 2003.

Intellectual Property Rights

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

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

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

Competition

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

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

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

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


                                    11 of 35
<PAGE>

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

     In addition to the quality and price of the  products  being  offered,  the
financial  stability of a supplier,  especially for OSS contracts,  is a crucial
element.  Because  these  contracts  require the supplier to spend  considerable
funds before the project is completed and require ongoing  maintenance  service,
potential  customers consider the financial stability of the supplier as a major
consideration in awarding a contract. Our financial position,  combined with our
recent losses,  our working capital  deficiency and the scheduled  expiration of
our  financing  agreement  with our senior  lender,  and the decision of British
Telecommunications  not to place  orders  for new OSS  products  from us and its
reduced level of purchases of copper connection/protection products may place us
at a  competitive  disadvantage  in  seeking  new  business  and new  orders for
existing customers.

Research and Development Activities

     We  spent  approximately  $2,500,000  in  2002,  $4,400,000  in  2001,  and
$5,800,000  in 2000 on research  and  development  activities.  All research and
development  was company  sponsored and is expensed as incurred.  As a result of
our  financial  difficulties,  we have scaled down our research and  development
effort, which could hurt our ability to offer competitive products.

Employees

     As of March 7, 2003,  we had 258 employees of which 56 were employed in the
United States, 176 in Mexico, 18 in the United Kingdom, 3 in Poland, 4 in Chile,
and 1 in China.  We believe that our relations  with our employees are good, and
we have never  experienced  a work  stoppage.  Our  employees are not covered by
collective bargaining agreements,  except for our hourly employees in Mexico who
are covered by a collective  bargaining  agreement  that expires on December 31,
2003.

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 related to the New York property is approximately $277,000.

     Our wholly-owned  United Kingdom  subsidiary  leases  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
annual rental is approximately $114,000.

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

     We believe our properties are adequate for our needs.


                                    12 of 35
<PAGE>

Item 3.  Legal Proceedings

     In July 2001, the holder of a subordinated  note in the principal amount of
$500,000  commenced an action against 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  notes  which were  payable  in July 2001.  The
payment of the note is subordinated to payment of our senior debt and we believe
that the  subordination  provision  of the note  prohibits  payment  by us.  The
plaintiff's motion for a summary judgment was denied by the court 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.  Our  obligations  under
the  subordinated  notes are  reflected  as current  liabilities  on our balance
sheet.

     In March 2000, we suspended  (with pay) Messrs.  Ronald Wilkins and Michael
Bahlo, two of our executive officers, from their positions pending completion of
our  investigation  of certain matters that had come to our attention.  Prior to
the completion of this  investigation,  however,  these two executives  accepted
positions  with  another  company and thereby  voluntarily  resigned  from their
positions with us. In February 2001, these two executives, together with a third
former  executive  officer,  Mr. Michael Lamb,  who similarly  resigned from his
position  with us,  filed suit in the  Supreme  Court for the State of New York,
County of New York,  entitled Ronald Wilkins,  Michael Bahlo and Michael Lamb v.
Porta Systems Corp.  The complaint  asserted  various claims against us based on
the allegation  that each of these three  executives  was improperly  terminated
from his employment without cause, and seeks compensatory  damages,  liquidating
damages and  attorney's  fees. We filed an answer and  counterclaim  against the
plaintiffs.  During  2002,  we  settled  all claims  related to this  action for
$30,000.

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

     In June 2002, BMS Corp. served an arbitration demand on us claiming that we
breached our agreement to market and sell an update to our MLR product which BMS
was to develop.  We believe that we have  defenses to the claims by BMS and have
filed a  counterclaim  to recover  the  $350,000  we  advanced  to BMS under the
contract.  The arbitrators  have recently been selected and the proceedings will
move forward over the next several months.


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

     During the fourth  quarter of 2002, no matters were  submitted to a vote of
our security holders.


                                    13 of 35
<PAGE>

                                     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.
Prior to November 11, 2002,  our stock was traded on the American Stock Exchange
under the symbol PSI. The  following  table sets forth,  for 2001 and 2002,  the
quarterly  high and low sales  prices for our common  stock on the  consolidated
transaction  reporting  systems for the OTC Bulletin  Board and  American  Stock
Exchange listed issues.

                                                   High             Low
                                                   ----             ---

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

2002     First Quarter                           $0.20             $0.07
         Second Quarter                           0.10              0.06
         Third Quarter                            0.15              0.03
         Fourth Quarter                           0.08              0.005

     We did not  declare or pay any cash  dividends  in 2002 or 2001.  It is our
present policy to retain earnings, if any, to finance the growth and development
of the business,  and therefore,  we do not anticipate  paying cash dividends on
our common stock in the foreseeable future. In addition,  our agreement with our
senior lender prohibits it from paying cash dividends on its common stock.

     As of March 19, 2003, we had  approximately  979 stockholders of record and
the closing price of our common stock was $0.04.

     We did not issue any unregistered securities during 2002.


                                    14 of 35
<PAGE>

Equity Compensation Plan Information

The following  table  summarizes the equity  compensation  plans under which our
securities may be issued as of December 31, 2002.

          Equity Compensation Plan Information as of December 31, 2002

<TABLE>
<CAPTION>

                                                                                Number of
                                      Number of                                securities
                                   securities to                                remaining
                                  be issued upon       Weighted-average       available for
                                    exercise of         exercise price       future issuance
                                outstanding options     of outstanding         under equity
        Plan Category              and warrants      options and warrants  compensation plans
        -------------           -------------------  --------------------  ------------------
<S>                                   <C>                  <C>                   <C>
Equity compensation plans
approved by security holders
                                      844,030              $2.25                 698,470

Equity compensation plan
not approved by security holders

                                          -0-                -0-                  95,750
                                      -------              -----                 -------
                                      844,030              $2.25                 794,220
</TABLE>

The plan not  approved  by security  holders is a stock bonus plan that  permits
issuance of stock on a discretionary basis.


                                    15 of 35
<PAGE>

Item 6.  Selected Financial Data

         The following table sets forth certain selected consolidated  financial
information.  For further information, see the Consolidated Financial Statements
and  other  information  set  forth in Item 8 and  Management's  Discussion  and
Analysis of Financial Condition and Results of Operations set forth in Item 7:

<TABLE>
<CAPTION>

                                                     Year Ended December 31,
                                     -----------------------------------------------------
                                     2002         2001       2000        1999         1998
                                     ----         ----       ----        ----         ----
                                             (In thousands, except per share data)
<S>                                <C>         <C>         <C>         <C>         <C>
Income Statement Data:

Sales                              $ 21,417    $ 28,062    $ 51,140    $ 38,936    $ 59,343
Operating income (loss)              (2,881)    (11,453)     (5,153)     (9,709)      4,566

Debt conversion expense                  --          --          --          --        (945)

Income (loss) before
   extraordinary item                (4,114)    (14,774)    (10,176)    (13,686)        451

Net income (loss)                    (4,114)    (14,774)    (10,176)    (13,686)        527

Basic per share amounts:
  Continuing operations            $  (0.41)   $  (1.50)   $  (1.04)   $  (1.44)       0.05
  Net income (loss)                $  (0.41)   $  (1.50)   $  (1.04)   $  (1.44)   $   0.06

Diluted per share amounts:
  Continuing operations            $  (0.41)   $  (1.50)   $  (1.04)   $  (1.44)   $   0.04
  Net income (loss)                $  (0.41)   $  (1.50)   $  (1.04)   $  (1.44)   $   0.05

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

Number of shares used in
   calculating net income (loss)
   per share-basic                    9,994       9,878       9,763       9,489       9,281

Number of shares used in
   calculating net income (loss)
   per share-diluted                  9,994       9,878       9,763       9,489       9,785

Balance Sheet Data:
Total assets                       $ 14,228    $ 17,833    $ 34,174    $ 43,448    $ 52,136

Working capital (deficiency)       $(34,199)   $(31,236)   $(24,152)   $  6,135    $ 14,262

Current debt maturities            $ 31,599    $ 28,621    $ 26,890    $  2,000    $  2,000

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

Stockholders' equity (deficit)     $(29,935)   $(25,849)   $(10,792)   $ (1,387)   $ 11,984
</TABLE>


                                    16 of 35
<PAGE>

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 revenue recognition,  allowance for doubtful accounts receivable,
inventory  reserves,  goodwill  valuation  and the deferred tax asset  valuation
allowance.  Note 1 of  Notes  to  Consolidated  Financial  Statements,  included
elsewhere  on this  annual  report  on Form  10-K,  includes  a  summary  of the
significant  accounting  policies  and methods  used in the  preparation  of our
consolidated financial statements.

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,  principally  OSS 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.  The  percentage-of-completion  method is
based on judgments and estimates  that are complex and actual results may differ
from estimates.

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'
credit worthiness,  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.

In the ordinary  course of business,  we  established  an allowance for doubtful
accounts  receivable in the amount of $1,967,000  and  $2,168,000 as of December
31,  2002 and 2001,  respectively.  Our  allowance  for  doubtful  accounts is a
subjective critical estimate that has a direct impact on reported net loss. This
reserve is based upon the evaluation of accounts  receivable  aging and specific
exposures.

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.


                                    17 of 35
<PAGE>

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.

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 US  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 continued  losses in 2002 and 2001, a valuation
allowance for the entire  deferred tax asset was provided due to the uncertainty
as to future realization.

Results of Operations

     Our  consolidated  statements  of  operations  for the  three  years  ended
December 31, 2002, 2001 and 2000,  respectively,  as a percentage of sales is as
follows:

                                                       Years Ended December 31,
                                                       ------------------------
                                                       2002      2001      2000
                                                       ----      ----      ----
Sales                                                  100%      100%      100%
Cost of sales                                           68%       71%       70%
                                                       ----      ----      ----
  Gross profit                                          32%       29%       30%
Selling, general and
administrative expenses                                 30%       33%       28%
Research and development expenses                       12%       16%       12%
Goodwill impairment                                      3%       21%       --
                                                       ----      ----      ----
Operating loss                                         (13%)     (41%)     (10%)
Interest expense                                        (8%)     (16%)      (9%)
Gain on sale of assets                                  --         2%       --
Gain on sale of investment in joint venture              2%       --        --
Equity in net loss of joint venture                     --        --        --
Other                                                   --         1%       (1%)
                                                       ----      ----      ----
Loss before income
   taxes and minority interest                         (19%)     (54%)     (20%)
Income tax benefit (expense)
   and minority interest                                --         1%       --
                                                       ----      ----      ----
Net loss                                               (19%)     (53%)     (20%)
                                                       ====      ====      ====


                                    18 of 35
<PAGE>

Results of Operation
Years Ended December 31, 2002 and 2001

     Our sales for 2002 were  $21,417,000  compared to  $28,062,000  in 2001,  a
decrease of  $6,645,000  (24%).  The  decrease in revenue is  attributed  to the
decline in sales from all divisions.

     OSS sales for 2002 were $6,414,000, compared to 2001 sales of $8,874,000, a
decrease of $2,460,000 (28%). The decreased sales resulted from the inability to
secure new orders  primarily from the slowdown in the  telecommunication  market
and from lower  levels of contract  completion  compared  to the prior year.  We
expect to recognize the balance of the revenue from the in process OSS contracts
during  2003.  Sales  of OSS  systems  are not  made  on a  recurring  basis  to
customers,  but are the result of extended  negotiations  that frequently  cover
many months and do not always result in a contract.  In addition,  OSS contracts
may include conditions  precedent,  such as the customer obtaining  financing or
bank  approval,  and the contracts are not effective  until the  conditions  are
satisfied. Additionally, in April 2002 we disposed of our interest in our Korean
joint  venture  which  generated  no sales  during 2002 and sales of  $1,066,000
during 2001.

     Line connection/protection equipment sales for 2002 decreased approximately
$3,158,000  (25%) from  $12,756,000  in 2001 to $9,598,000 in 2002.  The reduced
sales level  reflected a decrease in volume of sales to United States and United
Kingdom  customers.  The results were adversely affected by the general slowdown
in the telecommunications industry.

     Signal processing revenue for 2002 compared to 2001 decreased by $1,214,000
(21%) from $5,737,000 to $4,523,000.  The decrease in sales  primarily  reflects
delays in the receipt of certain anticipated contracts during 2002.

     Gross  margin  increased  from  29% in  2001  to 32% in  2002.  The  margin
improvement  resulted from a reduction to the costs  associated with certain OSS
contracts  reflecting  our ability to replace a high cost  software  vendor with
comparable  lower cost software.  Offsetting this improvement were lower margins
associated  with our Line  business  that was  unable  to absorb  certain  fixed
expenses  in  relation  to lower sales  volume,  competitive  pricing  pressures
resulting  from  the  industry's  slowdown  and  additional  inventory  reserves
required based on reduced turnover.

     Selling,  general and administrative expenses decreased by $2,933,000 (31%)
from $9,316,000 in 2001 to $6,383,000 in 2002. This decrease  relates  primarily
to reduced salaries and benefits, consulting services and commissions reflecting
our current level of business and to a lesser  extent an occupancy  benefit from
the settlement of our North Carolina lease.

     Research  and  development  expenses  decreased  by  $1,911,000  (43%) from
$4,427,000  in 2001 to  $2,516,000  in 2002.  This  decrease  resulted  from our
efforts to reduce  expenses  in all  divisions  and most  significantly  the OSS
business.

     At December 31, 2001, our goodwill was $3,761,000,  all of which related to
our Signal  division.  We determined  that this goodwill had been impaired as of
June 30,  2002.  We  engaged  in  discussions  with  respect to the sale of that
division  during the second quarter of 2002,  and based on those  discussions we
estimated that the impairment loss was approximately  $800,000.  This amount was
charged to  operations  in the quarter  ended June 30,  2002.  Furthermore,  the
negotiations relating to the sale of the Signal division have been discontinued.
We cannot give any assurances that further  write-downs will not be necessary in
the future,  although management believes that no additional goodwill impairment
charges are necessary at this time.


                                    19 of 35
<PAGE>

Results of Operations (continued)

     As a result of the above,  we had an operating  loss of  $2,881,000 in 2002
versus an operating loss of $11,453,000 in 2001.

     Interest  expense for 2002 decreased by $2,682,000 from $4,480,000 for 2001
to $1,798,000 in 2002. The reduced level of interest  expense is attributable to
our amended  agreement with our senior lender whereby the old term loan bears no
interest  commencing March 1, 2002, until such time as the senior lender, in its
sole discretion, notifies us that interest shall be payable.

     In April 2002,  we sold our 50%  interest in our Korean  joint  venture for
$450,000 to our joint venture  partner.  Payment was made by the  forgiveness of
commissions,  totaling  $450,000,  which  we  owed to our  sales  representation
company  owned by our joint venture  partner,  with respect to sales made by the
Korean joint venture in Korea.

     As the result of the foregoing, the 2002 net loss was $4,114,000,  $.41 per
share (basic and diluted),  compared with a net loss of  $14,774,000,  $1.50 per
share (basic and diluted) for 2001.

     Our losses are continuing  into 2003, and we cannot give any assurance that
we  will be able  to  operate  profitably  in the  future.  As a  result  of the
deterioration of our operating revenue resulting from both market conditions and
our financial condition,  we are evaluating various options,  including the sale
of one or more of our divisions as well as a reorganization under the Bankruptcy
Code.

Years Ended December 31, 2001 and 2000

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

     OSS sales for 2001 were $8,874,000,  compared to 2000 sales of $22,296,000,
a  decrease  of  $13,422,000  (60%).  The  decline in sales from 2000 to 2001 is
attributed  to the  completion  during 2000 of certain sales  contracts  secured
during  1999 and  failure to secure new  contracts  as a result of the  negative
impact of reduced  opportunities  in Europe,  delays we encountered in obtaining
software from a vendor necessary to complete certain contracts and our financial
difficulties.  Sales  of OSS  systems  are not  made  on a  recurring  basis  to
customers,  but are the result of extended  negotiations  that frequently  cover
many months and do not always result in a contract.  In addition,  OSS contracts
may include conditions  precedent,  such as the customer obtaining  financing or
bank  approval,  and the contracts are not effective  until the  conditions  are
satisfied.

     Line connection/protection equipment sales for 2000 decreased approximately
$7,790,000  (38%) from  $20,546,000  in 2000 to $12,756,000 in 2001. The reduced
sales level  reflected a decrease  in volume of sales to United  States,  United
Kingdom  and  Mexican  customers.  The results  were  adversely  affected by the
general slowdown in the telecommunications industry.

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

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


                                    20 of 35
<PAGE>

Results of Operations (continued)

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

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

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

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

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

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

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

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

Liquidity and Capital Resources

     At December 31, 2002, we had cash and cash equivalents of $779,000 compared
with   $1,204,000  at  December  31,  2001.  Our  working  capital  deficit  was
$34,199,000  at December  31,  2002  compared  to a working  capital  deficit of
$31,236,000  at December  31, 2001.  The working  capital  deficit  reflects the
current  liabilities to the senior and  subordinated  lenders  together with the
effect of the  reduced  level of  business,  which  resulted  in  reduced  cash,
receivables  and inventory.  During 2002, we used  $3,238,000 of cash to support
our  operations.  Our principal  source of funds during 2002 was borrowings from
our senior lender.  Our senior lender is no longer  advancing us any funds. As a
result,  our only source of funds is from operations.  To the extent that we are
not able to  generate  sufficient  funds to cover  our  expenses  we may have to
consider reorganization or liquidation under the Bankruptcy Code.


                                    21 of 35
<PAGE>

Liquidity and Capital Resources (continued)

     As of December 31, 2002, our debt includes $25,070,000 of senior debt which
matures on May 15, 2003, 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  $2,300,000 which represents  interest
from July 2000 through  December  2002.  At December  31, 2002,  we did not have
sufficient resources to pay either the senior lender or the subordinated lenders
and it is unlikely that we can generate such cash from our operations.  Further,
our senior  lender has  precluded  us from making  payments on the  subordinated
debt.

     On March 19, 2003,  our senior  lender and we agreed to an extension to May
15, 2003 of the existing agreement that had expired on December 31, 2002.

     As of December 31, 2002, we had $385,000 outstanding of 6% Debentures which
matured July 2, 2002.  The interest  accrued on the 6%  Debentures is payable on
July 1 of  each  year.  Due to the  restriction  imposed  by our  senior  lender
precluding us from making any payments on indebtedness to any subordinated  debt
holder,  we were unable to pay the interest due on July 1, 2001. Thus,  interest
due at December 31, 2002 was $58,000. Additionally, we have been notified by the
trustee that the non-payment of the interest caused an event of default.

     As of December 31, 2002,  we had  outstanding  $6,144,000  of  subordinated
notes,  all of which  became due during 2001.  We did not have the  resources to
pay, and we did not pay,  either the  principal or interest on the  subordinated
notes totaling  $8,444,000,  and are restricted by our senior lender from making
such  payments.  The holder of a  subordinated  note in the principal  amount of
$500,000 has commenced an action  seeking  payment of the principal and interest
on his note.  However,  the  court  denied  the  holder's  motion  for a summary
judgment on the grounds  that the terms of the note did not give him  permission
to obtain a judgment while we remained in default to the senior debt holder.

     As a result of our continuing financial difficulties:

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

     o    a number of creditors have engaged attorneys or collection agencies or
          commenced  legal  actions  against us, and some of them have  obtained
          judgments against us; and

     o    we have  continued to suffer a significant  decline in revenue in 2002
          from 2001  following  a  significant  decline  in revenue in 2001 from
          2000.

     Claimants who have already either commenced  litigation or otherwise sought
collection  or who have  obtained  judgments  against  us are due  approximately
$214,000. If we are unable to reach a settlement with these creditors and others
who have not yet brought claims, and these claimants obtain judgments against us
or,  in the  case of  creditors  who have  already  obtained  judgments,  if the
creditors  seek to enforce  the  judgment,  it may be  necessary  for us, or our
senior lender may require us, to seek protection under the Bankruptcy Code.

       The  creditors  include five former senior  executives  who have deferred
compensation  agreements with us. The total payments due under these  agreements
are approximately  $1.9 million,  of which $133,000 was due at December 31, 2002
and  an  additional  $196,000  becomes  due in  2003.  The  claimants  commenced
litigation  that has been  adjourned  pending  settlement.  We are in the latter
stages of settlement negotiations with these creditors.


                                    22 of 35
<PAGE>

Liquidity and Capital Resources (continued)

     We are seeking to address our need for liquidity by exploring alternatives,
including  the possible  sale of one or more of our  divisions.  During 2001 and
2002 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 of the net proceeds will be paid to our senior lender
and we will not receive any  significant  amount of working  capital from such a
sale.  During  2001 and  2002,  we have  taken  steps  to  reduce  overhead  and
headcount.  We will  continue to look to reduce  costs while we seek  additional
business from new and existing customers.

     Because of our present stock price,  it is highly  unlikely that we will be
able to  raise  funds  through  the  sales  of our  equity  securities,  and our
financial condition prevents us from issuing debt securities.  In the event that
we are  unable  to  extend  our  debt  obligations  and  sell one or more of our
divisions,  we cannot assure you that we will be able to continue in operations.
Furthermore,  we believe that our losses and our  financial  position are having
and will  continue  to have an adverse  effect  upon our  ability to develop new
business as  competitors  and potential  customers  question our ability both to
perform our  obligations  under any  agreements  we may enter and to continue in
business. Because of our financial condition, British Telecommunications,  which
is one of our largest customers, is not placing orders with us for OSS products,
and has advised us that it will not place orders for OSS  products  until we can
demonstrate that we are financially viable. However,  British  Telecommunication
continues to place orders for OSS  maintenance  and modest  orders for line test
products.  The loss of this customer  would have a material  adverse effect upon
our  operations.   In  addition,  our  auditors  included  in  their  report  an
explanatory paragraph about our ability to continue as a going concern.

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

     Although we conduct  operations  outside of the United States,  most of our
contracts  and sales are dollar  denominated.  A portion of the revenue from our
United Kingdom  operations  and the majority of our United Kingdom  expenses are
denominated  in  Sterling.  Any   Sterling-denominated   receipts  are  promptly
converted into United States  dollars.  We do not engage in any hedging or other
currency  transactions.  For 2002, the currency  translation  adjustment was not
significant in relation to our total revenue.

Item 8. Financial Statements and Supplementary Data.

     See Exhibit I

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

     Not Applicable


                                    23 of 35
<PAGE>

                                    Part III

Item 10. Directors and Executive Officers

     Set forth below is information concerning our directors:

<TABLE>
<CAPTION>

    Name                   Principal Occupation or Employment                     Director Since       Age
    ----                   ----------------------------------                     --------------       ---
<S>                        <C>                                                    <C>                  <C>
William V. Carney(1)       Chairman of the board and chief executive officer      1970                 66

Michael A. Tancredi        Senior vice president, secretary and treasurer         1970                 73

Warren H. Esanu(1),(2)       Of counsel to Esanu Katsky Korins & Siger, LLP,
                           attorneys at law                                       1997                 60

Herbert H. Feldman(1),(2)    President, Alpha Risk Management, Inc., independent
                           risk management consultants                            1989                 69

Marco M. Elser             Managing director of Elser & Co., an investment
                           advisory firm                                          2000                 44
</TABLE>
----------
(1)  Member of the executive committee.
(2)  Member of the audit and compensation committees.

     Mr. Carney has been chairman of the board and chief executive officer since
October  1996.  He was vice  chairman  from 1988 to October  1996,  senior  vice
president  from 1989 to October  1996,  chief  technical  officer since 1990 and
secretary   from  1977  to  October   1996.   He  also  served  as  senior  vice
president-mechanical    engineering    from   1988   to   1989,    senior   vice
president-connector    products    from    1985    to    1988,    senior    vice
president-manufacturing  from 1984 to 1985 and senior vice  president-operations
from 1977 to 1984.  Since  December  2002,  Mr.  Carney  has  worked for us on a
part-time basis.

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

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

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

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


                                    24 of 35
<PAGE>

     Set forth is information concerning our executive officers:

Name of Executive Officer                      Position                      Age
-------------------------                      --------                      ---
  William V. Carney        Chairman of the board and chief executive
                           officer                                            66

  Michael A. Tancredi      Senior vice president, secretary and treasurer     73

  Edward B. Kornfeld       Senior vice president-operations and chief
                           financial officer                                  59

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

     Mr. Kornfeld, 59, has been senior vice president-operations  since 1996 and
chief  financial  officer since October 1995.  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 our business. He was vice  president-finance  from
October 1995 until 1996.  For more than five years prior thereto,  Mr.  Kornfeld
held positions with several companies for more than five years,  including Excel
Technology Inc. (Quantronix Corp.) and Anorad Corporation.

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,
2002.

                           Summary Compensation Table
<TABLE>
<CAPTION>
                                                                                       Long-Term
                                               Annual Compensation              Compensation (Awards)
                                         -------------------------------     --------------------------
                                                                              Restricted       Options,
                                                                             Stock Awards        SARs         All other
Name and Principal Position              Year       Salary         Bonus       (Dollars)       (Number)     Compensation
---------------------------              ----       ------         -----       ---------       --------     ------------
<S>                                      <C>        <C>             <C>          <C>              <C>       <C>
William V. Carney, Chairman of the       2002       $240,000         --          --               --        $   9,858
board and chief executive officer        2001        240,000         --          --               --            7,981
                                         2000        240,000         --          --               --           29,556

Edward B. Kornfeld, Senior vice          2002        192,000         --          --               --            5,022
president - operations and chief         2001        192,000         --          --               --            4,872
financial officer                        2000        192,000         --          --               --            4,872
</TABLE>
----------
     "All Other  Compensation"  includes a payment  to the  executive's  account
pursuant to our 401(k)  Plan,  premiums  paid with  respect to the equity  split
dollar  program (in 2000),  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 $21,000 paid in 2002 to
Tatum CFO Partners, of which Mr. Kornfeld is a partner.


                                    25 of 35
<PAGE>

     Set forth below is a chart that shows,  for 2002,  the  components  of "All
Other Compensation" listed in the Summary Compensation Table.

                                  Mr. Carney         Mr. Kornfeld
                                  ----------         ------------
401(k) Match                        $3,000              $2,700
Supplemental Insurance               6,858               2,322

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

     During 2002, 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, 2002,  Mr.  Carney held  options to purchase  180,000  shares of
common stock and Mr.  Kornfeld held options to purchase  88,000 shares of common
stock. All of these options are currently  exercisable and, because the exercise
price  is less  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, 2002.

     Employment Agreements.  We have amended our prior 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  to the  termination  of his
amended employment agreement of December 31, 2005. No further compensation shall
be paid to Mr.  Carney,  including  the  deferral,  provided  that Mr.  Carney's
employment with us does not terminate prior to December 31, 2005.

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

     Salary  Continuation  Agreement.  We are  party  to a  salary  continuation
agreement with Mr. Kornfeld. The salary continuation agreement provides that, in
the event that a change of control occurs and the executive's employment with us
is subsequently  terminated by us other than for cause, death or disability,  or
is terminated  by the  executive as a result of a substantial  alteration in the
executive's  duties,  compensation  or other  benefits,  the executive  shall be
entitled to the payment of an amount equal to his monthly  salary at the rate in
effect  as of  the  date  of  his  termination  (or,  if  higher,  as in  effect
immediately  prior to the change in control) plus the pro rata monthly amount of
his most  recent  annual  bonus  paid  immediately  before the change of control
multiplied by 24. 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


                                    26 of 35
<PAGE>

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, 2003 and is
renewed  automatically  unless we give timely  notice  prior to January 1 of any
year of our  election  not to renew the  agreement.  If such a change of control
occurs  during the  effectiveness  of the  salary  continuation  agreement,  any
termination of such covered  employee during the 18 months  following the change
of control will result in the payment of the compensation described above.

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 7, 2003 by:

     o    each director;

     o    each officer named in the summary compensation table;

     o    each  person  owning of record  or known by us,  based on  information
          provided to us by the persons  named  below,  to own  beneficially  at
          least 5% of our common stock; and

     o    all officers and directors as a group.

                                                Shares of          Percentage of
                                              Common Stock          Outstanding
       Name                                Beneficially Owned       Common Stock
       ----                                ------------------       ------------
William V. Carney                               303,021                 3.0%
Michael A. Tancredi                             114,238                 1.1%
Warren H. Esanu                                 116,500                 1.2%
Herbert H. Feldman                               76,000                    *
Marco M. Elser                                  325,592                 3.3%
Edward B. Kornfeld                              114,317                 1.1%
Ralph DePascale                                  19,572                    *
Christopher Miller                                6,796                    *
All directors and officers as a group (8
individuals)                                  1,076,036                10.8%
----------
* 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.


                                    27 of 35
<PAGE>

     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 7, 2003 or
will become  exercisable  within 60 days after that date. Set forth below is the
number of shares of common stock  issuable  upon  exercise of those  options and
warrants for each of these directors and officers.

               Name                                         Shares
               ----                                         ------
       William V. Carney                                   180,000
       Michael A. Tancredi                                  75,000
       Warren H. Esanu                                      61,500
       Herbert H. Feldman                                   56,000
       Marco M. Elser                                       10,000
       Edward B. Kornfeld                                   88,000
       Ralph De Pascale                                     14,500
       Christopher Miller                                    6,000
       All officers and directors as a group               491,000

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

Item 13. Certain Relationships and Related Transactions

     During 2002,  Warren H. Esanu, a director,  served as a member of our audit
and compensation committees.  During 2002, the law firm of Esanu Katsky Korins &
Siger, LLP, to which Mr. Esanu is of counsel, provided legal services to us, for
which it  received  fees of  $237,591.  Esanu  Katsky  Korins  &  Siger,  LLP is
continuing to render legal services to us during 2003.

Item 14.  Controls and Procedures

     Our chief executive officer and chief financial officer have supervised and
participated in an evaluation of the  effectiveness  of our disclosure  controls
and procedures as of a date within 90 days of the date of this report, and based
on their evaluations,  they believe that our disclosure  controls and procedures
(as  defined  in Rule  13a-14(c)  of the  Securities  Exchange  Act of 1934,  as
amended) are designed to ensure that information  required to be disclosed by us
in the reports that we file or submit under the Securities  Exchange Act of 1934
is  recorded,  processed,  summarized  and  reported,  within  the time  periods
specified in the  Commission's  rules and forms.  As a result of the evaluation,
there were no significant  changes in our internal  controls or in other factors
that could  significantly  affect these controls subsequent to the date of their
evaluation.


                                    28 of 35
<PAGE>

                                     Part IV

Item 15. Exhibits, Financial Statements Schedules and Reports on Form 8-K.

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

     (i)  Financial Statements.

          See  Index to Consolidated Financial Statements under Item 8 hereof.

     (ii) Financial Statement Schedules.

          None

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

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

(b) Reports on Form 8-K

     None.


                                    29 of 35
<PAGE>

(c) Exhibits

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

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

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

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

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

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

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

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

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

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

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


                                    30 of 35
<PAGE>

Exhibits (continued)

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

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

        4.9     Combined  Amendment No. Five dated as of May 10, 2002 to Amended
                and Restated Loan and Security  agreement  between  Foothill and
                the Company.

        4.10    Combined Amendment No. Six dated as of March 19, 2003 to Amended
                and Restated Loan and Security  agreement  between  Foothill and
                the Company.

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

        10.2    Lease dated November 6, 2002 between the Company and Long Island
                Industrial Group LLC.

        10.3    Lease  dated May 1, 2002  between  the  Company  and Long Island
                Industrial Group LLC.

        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 Certified Public Accountants.


                                    31 of 35
<PAGE>

SIGNATURES

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

                                                PORTA SYSTEMS CORP.

        Dated March 31, 2003                    By  /s/ William V. Carney
        `                                           ----------------------------
                                                    William V. Carney
                                                    Chairman of the Board and
                                                    Chief Executive Officer

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

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

     /s/William V. Carney         Chairman of the Board,        March 31, 2003
-------------------------------   Chief Executive Officer
         William V. Carney        and Director Principal
                                  (Executive Officer)

     /s/Edward B. Kornfeld        Senior Vice President and     March 31, 2003
-------------------------------   Chief Financial Officer
         Edward B. Kornfeld       (Principal Financial
                                  and Accounting Officer)

     /s/Warren H. Esanu           Director                      March 31, 2003
-------------------------------
         Warren H. Esanu

     /s/Michael A. Tancredi       Director                      March 31, 2003
-------------------------------
         Michael A. Tancredi

     /s/Herbert H. Feldman        Director                      March 31, 2003
-------------------------------
         Herbert H. Feldman

     /s/Marco Elser               Director                      March 31, 2003
-------------------------------
         Marco Elser


                                    32 of 35
<PAGE>

             CERTIFICATION OF CHIEF EXECUTIVE AND FINANCIAL OFFICERS

        The undersigned  chief executive  officer and chief financial officer of
the  Registrant  do hereby  certify  that this Annual  Report on Form 10-K fully
complies with the  requirements  of Section 13(a) or 15(d) of the Securities Act
of 1934, as amended,  and that the  information  contained in this report fairly
presents,  in all material  respects,  the  financial  condition  and results of
operations  of the  Registrant  at the dates and for the  periods  shown in such
report.

         Dated March 31, 2003               By /s/William V. Carney
                                               --------------------------------
                                               William V. Carney
                                               Chairman of the Board
                                               and Chief Executive Officer


         Dated March 31, 2003               By /s/Edward B. Kornfeld
                                               --------------------------------
                                               Edward B. Kornfeld
                                               Senior Vice President
                                               and Chief Financial Officer


                                    33 of 35
<PAGE>

William V. Carney does hereby  certify that he is the duly elected and incumbent
chief  executive  officerof Porta Systems Corp ("the issuer") and he does hereby
certify,  with respect to the issuer's Form 10-K for the year ended December 31,
2002 (the "report") as follows:

1.   He has reviewed the report;

2.   Based on his knowledge, the report does not contain any untrue statement of
     a material fact or omit to state a material fact necessary in order to make
     the  statements  made,  in  light of the  circumstances  under  which  such
     statements  were made, not misleading with respect to the period covered by
     the report;

3.   Based on his  knowledge,  the  financial  statements,  and other  financial
     information included in the report, fairly present in all material respects
     the financial condition, results of operations and cash flows of the issuer
     as of, and for, the periods presented in the report;

4.   He and the other  certifying  officer are responsible for  establishing and
     maintaining  disclosure  controls  and  procedures,   as  defined  in  Rule
     13a-14(c)  of the  Securities  Exchange  Act of 1934,  as amended,  for the
     issuer and have:

     i.   Designed  such  disclosure  controls  and  procedures  to ensure  that
          material   information   relating   to  the  issuer,   including   its
          consolidated  subsidiaries,  is made  known to them by  others  within
          those entities,  particularly  during the period in which the periodic
          reports are being prepared;

     ii.  Evaluated the  effectiveness of the issuer's  disclosure  controls and
          procedures as of a date within 90 days prior to the filing date of the
          report (the "Evaluation Date"); and

     iii. Presented in the report their  conclusions  about the effectiveness of
          the  disclosure   controls  and  procedures   based  on  the  required
          evaluation as of the Evaluation Date

5.   He and the other certifying officer have disclosed to the issuer's auditors
     and to the audit committee of the board of directors (or persons fulfilling
     the equivalent function):

     i.   All  significant  deficiencies  in the design or operation of internal
          controls which could adversely  affect the issuer's ability to record,
          process,  summarize and report  financial data and have identified for
          the issuer's  auditors any material  weaknesses in internal  controls;
          and

     ii.  Any fraud, whether or not material,  that involves management or other
          employees  who  have  a  significant  role  in the  issuer's  internal
          controls; and

6.   He and the other certifying officer have indicated in the report whether or
     not there were significant changes in internal controls or in other factors
     that could significantly affect internal controls subsequent to the date of
     their most recent evaluation,  including any corrective actions with regard
     to significant deficiencies and material weaknesses.

         By /s/ William V. Carney
            --------------------------------
            William V. Carney
            Chief Executive Officer

Edward B. Kornfeld does hereby certify that he is the duly elected and incumbent
chief financial officer of Porta Systems Corp. (the "issuer") and he does hereby
certify,  with respect to the issuer's Form 10-K for the year ended December 31,
2002 (the "report") as follows:

1.   He has reviewed the report;

2.   Based on his knowledge, the report does not contain any untrue statement of
     a material fact or omit to state a material fact necessary in order to make
     the  statements  made,  in  light of the  circumstances  under  which  such
     statements  were made, not misleading with respect to the period covered by
     the report;


                                    34 of 35
<PAGE>

3.   Based on his  knowledge,  the  financial  statements,  and other  financial
     information included in the report, fairly present in all material respects
     the financial condition, results of operations and cash flows of the issuer
     as of, and for, the periods presented in the report;

4.   He and the other  certifying  officer are responsible for  establishing and
     maintaining  disclosure  controls  and  procedures,   as  defined  in  Rule
     13a-14(c)  of the  Securities  Exchange  Act of 1934,  as amended,  for the
     issuer and have:

     i.   Designed  such  disclosure  controls  and  procedures  to ensure  that
          material   information   relating   to  the  issuer,   including   its
          consolidated  subsidiaries,  is made  known to them by  others  within
          those entities,  particularly  during the period in which the periodic
          reports are being prepared;

     ii.  Evaluated the  effectiveness of the issuer's  disclosure  controls and
          procedures as of a date within 90 days prior to the filing date of the
          report (the "Evaluation Date"); and

     iii. Presented in the report their  conclusions  about the effectiveness of
          the  disclosure   controls  and  procedures   based  on  the  required
          evaluation as of the Evaluation Date

5.   He and the other certifying officer have disclosed to the issuer's auditors
     and to the audit committee of the board of directors (or persons fulfilling
     the equivalent function):

     i.   All  significant  deficiencies  in the design or operation of internal
          controls which could adversely  affect the issuer's ability to record,
          process,  summarize and report  financial data and have identified for
          the issuer's  auditors any material  weaknesses in internal  controls;
          and

     ii.  Any fraud, whether or not material,  that involves management or other
          employees  who  have  a  significant  role  in the  issuer's  internal
          controls; and

6.   He and the other certifying officer have indicated in the report whether or
     not there were significant changes in internal controls or in other factors
     that could significantly affect internal controls subsequent to the date of
     their most recent evaluation,  including any corrective actions with regard
     to significant deficiencies and material weaknesses.


     By /s/Edward B. Kornfeld
        -----------------------------
        Edward B. Kornfeld
        Chief Financial Officer


                                    35 of 35
<PAGE>

Exhibit I

Item 8.  Financial Statements and Supplementary Data


Index                                                                      Page


Report of Independent Certified Public Accountants                          F-2

Consolidated Financial Statements and Notes:

     Consolidated Balance Sheets,
     December 31, 2002 and 2001                                             F-3

     Consolidated Statements of Operations and
     Comprehensive Loss,
     Years Ended December 31, 2002, 2001 and 2000                           F-4

     Consolidated Statements of Stockholders'
     Deficit, Years Ended
     December 31, 2002, 2001 and 2000                                       F-5

     Consolidated Statements of Cash Flows
     for the Years Ended December 31, 2002,
     2001 and 2000                                                          F-6

     Notes to Consolidated Financial Statements                             F-7


                                      F-1
<PAGE>

               Report of Independent Certified Public Accountants

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,  2002 and 2001,  and the  related
consolidated  statements of operations  and  comprehensive  loss,  stockholders'
deficit, and cash flows for each of the three years in the period ended December
31, 2002.  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 auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Porta Systems Corp.
and  subsidiaries  as of December  31,  2002 and 2001,  and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting  principles  generally accepted
in the United States of America.

As  discussed  in  Notes  1  and 6 to  the  consolidated  financial  statements,
effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets."

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 2002,  2001,  and 2000 and, as of December 31, 2002,  has a
stockholders'   deficit  of  $29,935,000   and  a  working  capital  deficit  of
$34,199,000.  These factors raise  substantial doubt about the Company's ability
to continue as a going  concern.  Management's  plans in regard to these matters
are also  described  in Note 2. The  financial  statements  do not  include  any
adjustments that might result from the outcome of this uncertainty.



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

Melville, New York
March 13, 2003


                                      F-2
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
                           Consolidated Balance Sheets
                           December 31, 2002 and 2001
                   (in thousands, except shares and par value)

                                Assets                     2002           2001
                                ------                     ----           ----
Current assets:
    Cash and cash equivalents                            $     779        1,204
    Accounts receivable - trade, less allowance
      for doubtful accounts of $1,967 in 2002 and
      $2,168 in 2001                                         4,654        4,284
    Inventories                                              3,363        5,206
    Prepaid expenses and other current assets                  329          852
                                                         ---------       ------
         Total current assets                                9,125       11,546

Property, plant and equipment, net                           1,802        2,328
Goodwill, net                                                2,961        3,761
Other assets                                                   340          198
                                                         ---------       ------
         Total assets                                    $  14,228       17,833
                                                         =========       ======

                     Liabilities and Stockholders' Deficit
Current liabilities:
    Senior debt                                          $  25,070       22,095
    Subordinated notes                                       6,144        6,144
    6% Convertible subordinated debentures                     385          382
    Accounts payable                                         5,241        7,023
    Accrued expenses                                         2,640        3,417
    Accrued interest payable                                 2,639        1,593
    Accrued commissions                                        566        1,607
    Deferred compensation                                      329          196
    Income taxes payable                                       302          314
    Short-term loans                                             8           11
                                                         ---------       ------
         Total current liabilities                          43,324       42,782
                                                         ---------       ------
Deferred compensation                                          839          900
                                                         ---------       ------
         Total long-term liabilities                           839          900
                                                         ---------       ------
         Total liabilities                                  44,163       43,682
                                                         ---------       ------
Commitments and contingencies

Stockholders' deficit:
    Preferred stock, no par value;
      authorized 1,000,000 shares,
      none issued                                               --           --
    Common stock, par value $.01;
      authorized 20,000,000 shares,
      issued 10,003,224 and 9,947,421
      shares in 2002 and 2001, respectively                    100           99
    Additional paid-in capital                              76,059       76,056
    Accumulated deficit                                   (100,023)     (95,909)
    Accumulated other comprehensive loss:
       Foreign currency translation adjustment              (4,133)      (4,157)
                                                         ---------       ------
                                                           (27,997)     (23,911)
    Treasury stock, at cost, 30,940 shares                  (1,938)      (1,938)
                                                         ---------       ------
         Total stockholders' deficit                       (29,935)     (25,849)
                                                         ---------       ------
         Total liabilities and stockholders' deficit     $  14,228       17,833
                                                         =========       ======

          See accompanying notes to consolidated financial statements.


                                      F-3
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
                    Consolidated Statements of Operations and
                         Comprehensive Loss Years ended
                        December 31, 2002, 2001 and 2000
                    (in thousands, except per share amounts)

                                                 2002         2001        2000
                                                 ----         ----        ----

Sales                                          $ 21,417      28,062      51,140
Cost of sales                                    14,599      19,970      35,890
                                               --------      ------      ------
    Gross profit                                  6,818       8,092      15,250
                                               --------      ------      ------
Selling, general and administrative expenses      6,383       9,316      14,573
Research and development expenses                 2,516       4,427       5,830
Goodwill impairment                                 800       5,802          --
                                               --------      ------      ------
    Total expenses                                9,699      19,545      20,403
                                               --------      ------      ------
    Operating loss                               (2,881)    (11,453)     (5,153)

Interest expense                                 (1,798)     (4,480)     (4,500)
Interest income                                       7          31         129
Gain on sale of assets                               --         684          --
Gain on sale of investment in joint venture         450          --          --
Equity in net loss of joint venture                  --        (175)         --
Other income (expense), net                         119         191        (813)
                                               --------      ------      ------
    Loss before income taxes and minority
      interest                                   (4,103)    (15,202)    (10,337)

Income tax benefit (expense)                        (11)        203        (227)
Minority interest                                    --         225         388
                                               --------      ------      ------
    Net loss                                   $ (4,114)    (14,774)    (10,176)
                                               ========      ======      ======
Other comprehensive income (loss):

  Foreign currency translation adjustments           24        (360)         99

    Comprehensive loss                         $ (4,090)    (15,134)    (10,077)
                                               ========      ======      ======
Basic per share amounts:
   Net loss per share of common stock          $  (0.41)      (1.50)      (1.04)
                                               ========      ======      ======
   Weighted average shares of common stock
     outstanding                                  9,994       9,878       9,763
                                               ========      ======      ======
Diluted per share amounts:
   Net loss per share of common stock          $  (0.41)      (1.50)      (1.04)
                                               ========      ======      ======
   Weighted average shares of common stock
     outstanding                                  9,994       9,878       9,763
                                               ========      ======      ======

          See accompanying notes to consolidated financial statements.


                                      F-4
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
                Consolidated Statements of Stockholders' Deficit
                  Years ended December 31, 2002, 2001 and 2000
                                 (In thousands)
<TABLE>
<CAPTION>

                                      Common Stock                Accumulated                               Total
                                   ------------------ Additional     Other                                  Stock-
                                   No. of   Par Value   Paid-in  Comprehensive Accumulated   Treasury      holders'
                                   Shares    Amount     Capital     (Loss)       Deficit      Stock        Deficit
                                   ------    ------     -------     ------       -------      -----        -------
<S>                                 <C>       <C>     <C>         <C>          <C>          <C>          <C>
Balance at December 31, 1999        9,639     $ 96    $  75,310   $  (3,896)   $ (70,959)   $  (1,938)   $  (1,387)

Net loss 2000                          --       --           --          --      (10,176)          --      (10,176)
Common stock issued                   178        2          174          --           --           --          176
Warrants issued or re-priced           --       --          496          --           --           --          496
Foreign currency translation
   adjustment                          --       --           --          99           --           --           99
                                   ------     ----    ---------   ---------    ---------    ---------    ---------
Balance at December 31, 2000        9,817       98       75,980      (3,797)     (81,135)      (1,938)     (10,792)

Net loss 2001                          --       --           --          --      (14,774)          --      (14,774)
Common stock issued                   130        1           37          --           --           --           38
Warrants re-priced                     --       --           39          --           --           --           39
Foreign currency translation
   adjustment                          --       --           --        (360)          --           --         (360)
                                   ------     ----    ---------   ---------    ---------    ---------    ---------
Balance at December 31, 2001        9,947       99       76,056      (4,157)     (95,909)      (1,938)     (25,849)

Net loss 2002                          --       --           --          --       (4,114)          --       (4,114)
Common stock issued                    56        1            3          --           --           --            4
Foreign currency translation
   adjustment                          --       --           --          24           --           --           24
                                   ------     ----    ---------   ---------    ---------    ---------    ---------
Balance at December 31, 2002       10,003     $100    $  76,059   $  (4,133)   $(100,023)   $  (1,938)   $ (29,935)
                                   ======     ====    =========   =========    =========    =========    =========
</TABLE>
           See accompanying notes to consolidated financial statements


                                      F-5
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                       (Note 21) Years ended December 31,
                               2002, 2001 and 2000
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                           2002      2001       2000
                                                                           ----      ----       ----
<S>                                                                     <C>        <C>        <C>
Cash flows from operating activities:
    Net loss                                                            $(4,114)   (14,774)   (10,176)
    Adjustments to reconcile net loss to net cash
       used in operating activities:
          Depreciation and amortization                                     713      1,909      1,911
          Goodwill impairment                                               800      5,802         --
          Amortization of debt discounts                                      3          6         56
          Gain on sale of investment in joint venture                      (450)        --         --
          Non-cash financing expenses                                        --        123        373
          Gain on sale of assets                                             --       (684)        --
          Minority interest                                                  --       (225)      (388)
          Equity in loss of joint venture                                    --        175         --
    Changes in operating assets and liabilities:
       Accounts receivable                                                 (370)     3,141      4,712
       Inventories                                                        1,843      1,944      1,743
       Prepaid expenses                                                     523        278        243
       Other assets                                                        (142)       867      1,427
       Accounts payable, accrued expenses and other liabilities          (2,044)    (2,341)    (2,405)
                                                                        -------      -----      -----
             Net cash used in operating activities                       (3,238)    (3,779)    (2,504)
                                                                        -------      -----      -----
Cash flows from investing activities:
    Net proceeds from the sale of assets                                     --      1,670         --
    Capital expenditures, net                                              (124)      (196)    (1,533)
                                                                        -------      -----      -----
             Net cash provided by (used in) investing activities           (124)     1,474     (1,533)
                                                                        -------      -----      -----
Cash flows from financing activities:
    Proceeds from senior debt                                             2,975      2,222      5,010
    Repayments of senior debt                                                --       (873)    (1,782)
    Proceeds from subordinated debentures and warrants                       --         --         80
    Proceeds from the issuance of common stock                                4         38        176
    Proceeds (repayments) of notes payable/short-term loans                  (3)        10        (43)
                                                                        -------      -----      -----
             Net cash provided by financing activities                    2,976      1,397      3,441
                                                                        -------      -----      -----
Effect of exchange rate changes on cash and cash equivalents                (39)      (254)      (283)
                                                                        -------      -----      -----
Decrease in cash and cash equivalents                                      (425)    (1,162)      (879)
Cash and equivalents - beginning of year                                  1,204      2,366      3,245
                                                                        -------      -----      -----
Cash and equivalents - end of year                                      $   779      1,204      2,366
                                                                        =======      =====      =====
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-6
<PAGE>

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

(1)  Summary of Significant Accounting Policies

     Nature of Operations and Principles of Consolidation

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

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

     Revenue Recognition

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

     Concentration of Credit Risk

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

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

     Cash Equivalents

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

     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
       including,   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
<PAGE>

                      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 market.

     Property, Plant and Equipment

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

     Deferred Computer Software

     The Company engages solely in development of software products for specific
       customer  contracts and as such costs are charged to cost of sales at the
       time revenues on such contracts are recognized.

     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,  or  more
       frequently if certain  events  occur,  the Company tests the goodwill for
       impairment. The Company determines the market value of the reporting unit
       by considering the projected cash flows generated from the reporting unit
       to which the goodwill relates.

     Income Taxes

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

     Foreign Currency Translation

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

                                                                     (Continued)


                                      F-8
<PAGE>

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

     Net Loss Per Share

     Basic net loss per share is based on the weighted  average number of shares
       outstanding.  Diluted net loss per share is based on the weighted average
       number of shares outstanding plus the dilutive effect of potential shares
       of common stock,  as if such shares had been issued.  For 2002,  2001 and
       2000, no dilutive  potential shares of common stock were added to compute
       diluted loss per share because the effect would be anti-dilutive.

     Reclassifications

     Certain   reclassifications   have  been  made  to  conform   prior  years'
       consolidated financial statements to the 2002 presentation.

     Accounting for Stock-Based Compensation

     The Company  applies the intrinsic  value method as outlined in APB Opinion
       No.  25,  "Accounting  for  Stock  Issued  to  Employees",   and  related
       Interpretations  in  accounting  for stock  options.  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.  SFAS No.  123,  "Accounting  for  Stock-Based
       Compensation",  requires  the  Company to provide  pro forma  information
       regarding net loss and net loss per common share 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 loss and loss per  common  share as if the
       fair value method had been applied to all outstanding and unvested awards
       in each period presented.

                                                  Year Ended December 31
                                              ------------------------------
                                              2002        2001          2000
                                              ----        ----          ----
                                            (In millions, except per share data)
Net loss, as reported ..................    $(4,114)    $(14,774)    $(10,176)
Deduct: Total stock-based employee
  compensation expense determined
  under fair value method for all awards         (1)         (13)        (217)
                                            -------     --------     --------
Pro forma net loss .....................    $(4,115)    $(14,787)    $(10,393)
                                            =======     ========     ========

Loss per common share:
  Basic - as reported ..................    $ (0.41)    $  (1.50)    $  (1.04)
                                            =======     ========     ========
  Basic - pro forma ....................    $ (0.41)    $  (1.50)    $  (1.06)
                                            =======     ========     ========

  Diluted - as reported ................    $ (0.41)    $  (1.50)    $  (1.04)
                                            =======     ========     ========
  Diluted - pro forma ..................    $ (0.41)    $  (1.50)    $  (1.06)
                                            =======     ========     ========

                                                                     (Continued)


                                       F-9
<PAGE>

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

     Accounting for the Impairment of Long-Lived Assets

     The Company follows the Statement of Financial Accounting Standard 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.

     Use of Estimates

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

     New Accounting Pronouncements

     In June 2002, the Financial Accounting  Standards Board issued Statement of
       Financial  Accounting  Standards  No. 146 ("SFAS 146"),  "Accounting  for
       Costs Associated with Exit or Disposal Activities". This statement covers
       restructuring  type  activities  beginning  with  plans  initiated  after
       December 31, 2002.  Should the Company enter into  activities  covered by
       this  standard  after  that  date,  the  provisions  of SFAS 146 would be
       applied.  As a  result  of  this  standard,  there  is no  impact  on the
       Company's  consolidated  financial  position or results of operations for
       the periods presented.

     In December 2002, the Financial Accounting Standards Board issued Statement
       of Financial  Accounting  Standards No. 148,  "Accounting for Stock-Based
       Compensation - Transition and Disclosure" ("SFAS 148"). SFAS 148 provides
       alternative  methods of  transition  for a  voluntary  change to the fair
       value method of  accounting  for  stock-based  employee  compensation  as
       originally   provided  by  SFAS  No.  123   "Accounting  for  Stock-Based
       Compensation".  Additionally, SFAS 148 amends the disclosure requirements
       of SFAS  123 to  require  prominent  disclosure  in both the  annual  and
       interim   financial   statements  about  the  method  of  accounting  for
       stock-based  compensation  and the effect of the method  used on reported
       results. The transitional  requirements of SFAS 148 will be effective for
       all financial statements for fiscal years ending after December 15, 2002.
       The  disclosure  requirements  shall be effective for  financial  reports
       containing  condensed financial  statements for interim periods beginning
       after December 31, 2002.  The Company has adopted the disclosure  portion
       of this  statement  for the fiscal  year ended  December  31,  2002.  The
       application  of this  standard  will  have  no  impact  on the  Company's
       consolidated  financial  position or results of  operations.  The Company
       expects to continue to utilize the  intrinsic  value method of accounting
       for stock-based employee compensation.

                                                                     (Continued)


                                      F-10
<PAGE>

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

 (2) Liquidity

     As of December 31, 2002, the Company's debt included  $25,070,000 of senior
       debt including principal and interest, which, as a result of a March 2003
       extension,  matures on May 15, 2003, and principle  amount  $6,144,000 of
       subordinated  debt, which matured on July 3, 2001. The Company was unable
       to  pay  the  principal  ($6,144,000)  or  interest  ($2,300,000)  on the
       subordinated  notes. The amount of interest represents interest from July
       2000 through  December  2002.  At December 31, 2002,  the Company did not
       have  sufficient  resources  to  pay  either  the  senior  lender  or the
       subordinated  lenders and it is likely that it cannot  generate such cash
       from its operations, and the senior lender had precluded the Company from
       making payments on the  subordinated  debt.  Accordingly,  all senior and
       subordinated  debt are classified as current  liabilities at December 31,
       2002 (note 7).

     In March 2003, the Company and its senior  lender  agreed to an amended and
       restated  loan  and  security  agreement  extending  the due  date of the
       indebtedness  to May 15,  2003.  As part of this  agreement,  the  senior
       lender  continues  to preclude  the Company  from making any  payments on
       indebtedness  to any  subordinated  creditors,  but  the  Company  is not
       prohibited from paying accounts payable in the normal course of business.

     As of December 31, 2002, the Company had remaining outstanding  $385,000 of
       6%  Debentures  which  matured  on July 2, 2002.  Due to the  restriction
       imposed by the  Company's  senior  lender  precluding  it from making any
       payments on indebtedness to any subordinated debt holder, the Company was
       unable to pay the interest  due of $23,000  which was due on each of July
       1, 2001 and 2002,  and it was  unable to pay the  principal  of  $385,000
       which  was  due on July 2,  2002.  Additionally,  the  Company  has  been
       notified by the trustee that the non-payment caused an event of default.

     As a result of its continuing financial difficulties:

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

     o    a number of creditors have engaged attorneys or collection agencies or
          commenced  legal  actions  against the Company,  and some of them have
          obtained judgments against the Company; and

     o    the Company  continued to suffer a  significant  decline in revenue in
          2002 from 2001 following a significant decline in revenue in 2001 from
          2000.


                                                                     (Continued)


                                      F-11
<PAGE>

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

     Claimants who have already either commenced  litigation or otherwise sought
       collection  or have  obtained  a judgment  against  the  Company  are due
       approximately  $214,000.  If Porta is unable to reach a  settlement  with
       these  creditors  and others who have not yet brought  claims,  and these
       claimants  obtain  judgments  against  the  Company  or seek  to  enforce
       judgments against the Company,  it may be necessary for it, or its senior
       lender may require it, to seek protection under the Bankruptcy Code.

     The  creditors  include five former  senior  executives  who have  deferred
       compensation  agreements  with the Company.  The total payments due under
       these agreements are  approximately  $1.9 million,  of which $133,000 was
       due at December 31, 2002 and an additional  $196,000 becomes due in 2003.
       The  claimants  commenced  litigation  that  has been  adjourned  pending
       settlement.   The  Company  is  in  the  latter   stages  of   settlement
       negotiations with these creditors.

     The Company  is  seeking to address  its need for  liquidity  by  exploring
       alternatives,  including  the  possible  sale  of  one  or  more  of  its
       divisions.  During 2001 and 2002,  the Company was engaged in discussions
       with  respect  to the  possible  sale of its  divisions;  however,  those
       negotiations  were terminated  without an agreement  having been reached.
       Furthermore,  if the Company  sells a division,  the  agreement  with the
       Company's senior lender requires it to pay the net proceeds to the senior
       lender.  As a result of this  provision and the Company's  obligations to
       the  holders of  subordinated  debt,  unless the  lenders  consent to the
       Company  retaining  a portion of the net  proceeds  from any sale for its
       operations,  the Company will not receive any significant amount, and may
       not  receive  any,  of the net  proceeds  from any such sale for  working
       capital.

     During 2001 and 2002,  the  Company  has  taken  steps to reduce  overhead,
       including a reduction in personnel.  The Company will continue to look to
       reduce  costs while it seeks  additional  business  from new and existing
       customers. Because of its present stock price, it is highly unlikely that
       the Company  will be able to raise funds  through the sales of its equity
       securities, and Porta's financial condition prevents it from issuing debt
       securities.  In the event  that the  Company is unable to extend its debt
       obligations  and sell one or more of its divisions,  it cannot be assured
       that the Company will be able to continue in operations. Furthermore, the
       Company  believes  that its losses and its financial  position,  together
       with the continuing  economic  climate  affecting the  telecommunications
       industry  generally,  are  having  and will  continue  to have an adverse
       effect  upon its  ability to develop  new  business  as  competitors  and
       potential  customers question its ability both to perform its obligations
       under any  agreements  it may  enter and to  continue  in  business.  The
       Company has been informally advised by British Telecommunications,  which
       is one of its  largest  customers  that,  because  of  Porta's  financial
       position,  this  customer  will not place orders with the Company for its
       OSS products  until it can  demonstrate  that it is  financially  viable.
       However,  this customer continues to place orders for OSS maintenance and
       modest orders for line test  products.  The loss of this  customer  would
       have a material adverse effect upon the Company's operations.

     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-12
<PAGE>

                      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
       including,   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 are any
       accounts  receivable  balances that are  determined to be  uncollectible,
       along with a general  reserve,  in the  overall  allowance  for  doubtful
       accounts.  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, 2002 is adequate.  However,  actual  write-offs  might
       exceed the recorded allowance.

     Accounts  receivable  included   approximately  $873,000  and  $500,000  at
       December 31, 2002 and 2001, respectively,  of revenues earned but not yet
       contractually  billable  relating to long-term  contracts for specialized
       products. All such amounts at December 31, 2002 are expected to be billed
       in 2003. In addition, accounts receivable included approximately $300,000
       and  $311,000 at December 31, 2002 and 2001,  respectively,  of retainage
       balances due on various  long-term  contracts.  All such amounts,  net of
       reserves,  at December  31, 2002 are expected to be collected in 2003 and
       all such amounts,  net of reserves,  at December 31, 2001, were collected
       in 2002.  The allowance for doubtful  accounts  receivable was $1,967,000
       and  $2,168,000  as of  December  31,  2002 and 2001,  respectively.  The
       allowance  for doubtful  accounts was increased by provisions of $23,000,
       $0, and $730,000 and decreased by write-offs of $224,000,  $309,000,  and
       $132,000  for  the  years  ended  December  31,  2002,  2001,  and  2000,
       respectively.

(4)   Inventories

      Inventories consist of the following:


                                                 December 31,
                                        ------------------------------
                                            2002                2001
                                            ----                ----
           Parts and components         $1,767,000           3,217,000
           Work-in-process                 208,000             192,000
           Finished goods                1,388,000           1,797,000
                                        ----------           ---------
                                        $3,363,000           5,206,000
                                        ==========           =========

                                                                     (Continued)


                                      F-13
<PAGE>

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

(5)  Property, Plant and Equipment

     Property, plant and equipment consists of the following:

                                            December 31
                                   --------------------------        Estimated
                                       2002           2001          useful lives
                                       ----           ----          ------------
Land                               $   132,000        132,000          --
Buildings                            1,110,000      1,060,000      20-50 years
Machinery and equipment              7,821,000      7,221,000       3-8 years
Furniture and fixtures               2,551,000      2,557,000      5-10 years
Transportation equipment                74,000         84,000        4 years
Tools and molds                      3,774,000      4,108,000        8 years
Leasehold improvements                 858,000        822,000     Term of lease
                                   -----------      ---------
                                    16,320,000     15,984,000
Less accumulated depreciation
   and amortization                 14,518,000     13,656,000
                                   -----------      ---------
                                   $ 1,802,000      2,328,000
                                   ===========      =========

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

(6)  Goodwill

     Effective  January 1, 2002,  the Company  adopted  Statement  of  Financial
       Accounting  Standards  ("SFAS") No. 142,  "Goodwill and Other  Intangible
       Assets".  This statement  established  financial accounting and reporting
       standards   for   acquired   goodwill   and  other   intangible   assets.
       Specifically,  the  standard  addresses  how acquired  intangible  assets
       should be accounted for after they have been  recognized in the financial
       statements. In accordance with SFAS No. 142, intangible assets, including
       purchased  goodwill,  must be evaluated for impairment.  Those intangible
       assets  that will  continue  to be  classified  as  goodwill  or as other
       intangibles with indefinite lives are no longer amortized.

     Effective  January 1, 2002,  the Company  ceased  amortization  of goodwill
       resulting  in a decrease of $795,000 in  amortization  for the year ended
       December  31,  2002  compared  to the same  period  in 2001.  Instead  of
       amortizing goodwill over a fixed period of time, the Company will measure
       the fair value of the acquired business at least annually to determine if
       goodwill has been impaired. In addition,  the Company completed the first
       step  of  the  goodwill  transitional  impairment  test,  which  requires
       determining the fair value of the reporting  units  as of January 1, 2002
       and comparing it to the carrying value of the reporting units net assets.
       The Company  determined  that there was no impairment loss resulting from
       the transitional impairment test as of January 1, 2002.

                                                                     (Continued)


                                      F-14
<PAGE>

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


     As of December 31, 2002 and 2001, unamortized  goodwill was  $2,961,000 and
       $3,761,000,  respectively. During the second quarter of 2002, the Company
       was  engaged  in  discussions  with  respect  to the  sale of the  Signal
       division. Based on those discussions the Company determined that goodwill
       was  impaired  and it  estimated  that the amount of the  impairment  was
       $800,000. This amount was charged to operations in the quarter ended June
       30, 2002.  Furthermore,  the Company cannot give  assurances that further
       write-downs will not be necessary.

     In December  2001, the  Company  determined  that  $5,802,000  of  goodwill
       associated  with its OSS business  unit was impaired and as such recorded
       an impairment loss. This assessment was based on the continued decline in
       sales and losses  generated  by the  business  unit over the past several
       years and the declining  prospects for  additional  sales of the products
       based on the older technology that originally gave rise to the goodwill.

     The following schedule presents adjusted net loss, basic net loss per share
       and  diluted  net loss per  share,  exclusive  of  goodwill  amortization
       expense, had the standard been adopted for those periods.

                                                    Year Ended June 30
                                             -------------------------------
                                             2002         2001          2000
                                             ----         ----          ----
                                          (In thousands, except per share data)

Reported net loss .....................    $(4,114)     $(14,774)    $(10,176)
    Add back:
    Goodwill amortization .............         --           795          719
                                           -------      --------     ----------
Adjusted net loss .....................    $(4,114)     $(13,979)    $  (9,457)
                                           =======      ========     ==========
Basic net loss per common share:
    Reported net loss .................    $ (0.41)     $  (1.50)    $   (1.04)
    Goodwill amortization .............         --           .08           .07
                                           -------      --------     ----------
    Adjusted net loss .................    $ (0.41)     $  (1.42)    $   (0.97)
                                           =======      ========     ==========
Diluted net earnings per common share:
    Reported net loss .................    $ (0.41)     $  (1.50)    $    (1.04)
    Goodwill amortization .............         --           .08            .07
                                           -------      --------     ----------
    Adjusted net loss .................    $ (0.41)     $  (1.42)    $    (0.97)
                                           =======      ========     ==========

                                                                     (Continued)


                                      F-15
<PAGE>

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

(7)  Senior Debt

     On December 31, 2002 and 2001, Porta's  senior debt consisted of debt under
       its  credit  facility  in the  amount  of  $25,070,000  and  $22,095,000,
       respectively. The current agreement with the senior lender, as amended in
       March 2002 and March 2003 and  described  below,  expires on May 15, 2003
       and,  accordingly,  the  senior  debt has been  classified  as a  current
       liability. (See Note 2)

     In March 2003,  the Company's  senior  lender agreed to an extension to May
       15, 2003 of the existing agreement that had expired on December 31, 2002.

     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  allowed the Company to draw monies subject to
       the senior lender's receipt and approval of a weekly disbursement budget.
       Any advances  under this  agreement  were at the discretion of the senior
       lender.  Obligations  under the new term loan bear interest at 12%, which
       interest  shall  accrue  monthly  and be  added  to the  principal  until
       September  1, 2002 when  interest  for the  month of August  2002  became
       payable and current interest became payable.  The agreement provides that
       all indebtedness  prior to March 1, 2002 is reflected as an old term loan
       in the amount of $22,610,000, which includes the principal balance due at
       December 31, 2001 plus  accrued  interest  though March 1, 2002.  The old
       term loan bears no interest  until such time as the senior  lender in its
       sole  discretion  notifies  the Company that  interest  shall be payable.
       Additionally,  the senior lender  prohibited  the Company from making any
       payments on indebtedness to any subordinated  creditors,  but the Company
       is not prohibited from paying accounts  payable in the ordinary course of
       business.  Finally,  the agreement  allowed for standby letters of credit
       not to exceed a maximum of $573,000. As of December 31, 2002, the Company
       did not have any standby  letters of credit  outstanding.  As of December
       31, 2002,  the Company has  borrowed  $2,250,000,  the maximum  principal
       amount under the new term loan,  and the total  principal and interest on
       the new term loan was $2,460,000.

     As consideration for an April 2001 loan  amendment,  the Company  agreed to
       reduce  the  exercise  price  of the  outstanding  warrants  to  purchase
       approximately 570,000 shares of common stock held by its senior lender to
       $0.25  per  share.  The  value of the  reduction  in  exercise  price was
       $39,000,  which was recorded as interest  expense and additional  paid in
       capital.  As of  December  31,  2002,  100,000 of these  warrants  remain
       outstanding.

(8)  6% Convertible Subordinated Debentures

     As of December 31, 2002 and 2001, the Company had outstanding  $385,000 and
       $382,000 of its 6% convertible  subordinated  debentures due July 1, 2002
       (the  "Debentures"),  net of  original  issue  discount of $0 and $3,000,
       respectively.  The face amount of the outstanding Debentures was $385,000
       at both December 31, 2002 and 2001.  The Company has not paid interest on
       these Debentures since July 2000, and its senior lender prohibits it from
       making any payments of principal  and interest  (note 7). At December 31,
       2002 and  2001,  accrued  interest  on the  debentures  was  $58,000  and
       $35,000,  respectively.  The trustee of the Debentures gave notice to the
       Company that the non-payment caused an event of default.

                                                                     (Continued)


                                      F-16
<PAGE>

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

(9)  Subordinated Notes

     As of December 31, 2002 and 2001,  $6,144,000  of  Subordinated  Notes were
       outstanding.  As of  December  31,  2002,  $6,144,000  of  principal  and
       $2,300,000 of accrued interest were due and payable.  However,  Porta did
       not have the resources to pay the $6,144,000  principal and $2,300,000 of
       interest due on the subordinated debt. In addition, the senior lender had
       precluded the Company from making payments on the subordinated debt (note
       7).  During  2001,  one of the  noteholders  unsuccessfully  attempted to
       obtain a judgment  compelling  the  Company to pay the past due Notes and
       related interest (note 20).

(10) Joint Venture

     In April 2002,  the  Company  sold its 50%  interest  in its  Korean  joint
       venture company,  for $450,000 to its joint venture partner.  Payment was
       made by the forgiveness of  commissions,  totaling  $450,000,  which were
       owed to its sales  representation  company owned by the  Company's  joint
       venture  partner,  with  respect  to sales  made by the joint  venture in
       Korea.  The investment in the joint venture had  previously  been written
       down to zero as the  Company's  share of the losses of the joint  venture
       exceeded its  investment.  Therefore,  the transaction was reflected as a
       $450,000 reduction in accrued  commissions and a non-cash gain on sale of
       investment in joint venture.

     Prior to October 1, 2001,  the Company  consolidated  the operations of the
       joint venture  since the Company  could obtain a controlling  interest at
       its election and the joint venture was entirely  dependent on the Company
       for the products it sold and the receipt of  management  assistance  from
       the Company.  The joint venture partner's interest is shown as a minority
       interest  through  September  30, 2001.  Based on the  expiration  of the
       option  agreement,  the  reduced  volume  of  products  sold to the joint
       venture and reduced level of management  assistance provided to the joint
       venture,  the  Company's  share  of the  losses  on its  investment  were
       recorded on the equity method  effective  October 1, 2001. As such losses
       are in excess of Porta's  investment,  and the Company  does not guaranty
       such excess losses, the investment in the joint venture was carried at $0
       as of December 31, 2001.

(11) Stockholders' Equity

     At December 31, 2002 ,the Company had  outstanding  (a) warrants  issued to
       its senior lender to purchase  100,000 shares of common stock,  which are
       currently  exercisable at $0.25 per share and expire on June 6, 2005, and
       (b)  warrants  issued to a vendor  to  purchase  15,000  shares of common
       stock,  which are currently  exerciseable at $1.8125 per share and expire
       in May, 2005.

     In connection with an  amendment of the  Subordinated  Notes in April 2000,
       the Company agreed to issue to the  noteholders  New Warrants to purchase
       an aggregate 127,500 shares of Common Stock at $3.00 per share, the value
       of which was determined to be $140,000 and recorded as deferred financing
       expenses  and  additional  paid in capital in 2000.  Additional  non-cash
       interest  expense of $84,000  and $56,000  was  recorded  during 2000 and
       2001, respectively, in connection with this transaction.

                                                                     (Continued)


                                      F-17
<PAGE>

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

(12) Employee Benefit Plans

     Porta has deferred compensation  agreements with certain present and former
       officers and employees,  with benefits  commencing at retirement equal to
       50% of the  employee's  base  salary,  as  defined.  Payments  under  the
       agreements  will be made for a period  of  fifteen  years  following  the
       earlier of  attainment  of age 65 or death.  During 2002,  2001 and 2000,
       Porta   accrued   approximately   $122,000,    $166,000   and   $180,000,
       respectively, under these agreements.

     In 1986, Porta  established the Porta Systems Corp. 401(k) Savings Plan for
       the  benefit of  eligible  employees,  as defined  in the  Savings  Plan.
       Participants contribute a specified percentage of their base salary up to
       a maximum of 15%.  Porta will match a  participant's  contribution  by an
       amount equal to 25% of the first 6%  contributed  by the  participant.  A
       participant  is 100% vested in the  balance to his credit.  For the years
       ended December 31, 2002, 2001 and 2000, Porta's contribution  amounted to
       $47,000, $54,000 and $72,000, respectively.

     In 1999, Porta established the Employee Stock Purchase Plan for the benefit
       of eligible  employees,  as defined in the Purchase  Plan,  which permits
       employees to purchase  Porta's common stock at discounts up to 10%. Porta
       has reserved 1,000,000 shares of Porta stock for issuance under the plan.
       During  2002 and 2001,  55,803 and  130,256  shares,  respectively,  were
       issued pursuant to the Purchase Plan.

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

(13) Incentive Plans

     During 1999,  Porta  established an Employee Stock Bonus Plan whereby stock
       may be given to non-officers or directors to recognize the  contributions
       of employees.  A maximum of 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 2002, 2001 and 2000.

                                                                     (Continued)


                                      F-18
<PAGE>

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

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

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

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

     During 1999,  pursuant to an  employment  contract  with an officer,  Porta
       issued  options to purchase  15,000  shares of common  stock at $1.75 per
       share.  The  exercise  prices  approximated  market  value on the date of
       issuance. The options expire in May 2005. As of December 31, 2002, all of
       these options have been forfeited.

                                                                     (Continued)


                                      F-19
<PAGE>

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

     The  weighted-average  fair values of options granted were $0.05, $0.23 and
       $1.62 per share for options granted in 2002, 2001 and 2000, respectively.

     The fair value of each option grant is estimated on the date of grant using
       the Black-Scholes option-pricing model with the following assumptions for
       2002, 2001 and 2000:

                                   2002             2001              2000
                             ---------------   --------------   ---------------
       Dividends:            $0.00 per share   $0.00 per share   $0.00 per share
       Volatility:           100%              100%              57.64%-68.70%
       Risk-free interest:   4.22%-5.48%       4.22%-5.48%       5.54%-6.53%
       Expected term:        5 - 9.6 years     5 -9.6years       5 years

     A summary of the status of Porta's  stock  option  plans as of December 31,
     2002, 2001, and 2000, and changes during the years ending on those dates is
     presented below:

<TABLE>
<CAPTION>
                                      2002                   2001                     2000
                             --------------------    --------------------     ----------------------
                                         Weighted                Weighted                   Weighted
                             Shares      Average     Shares      Average      Shares        Average
                             Under       Exercise    Under       Exercise     Under         Exercise
                             Option      Price       Option      Price        Option        Price
                             ------      --------    ------      --------     ------        --------
<S>                          <C>          <C>        <C>           <C>        <C>            <C>
Outstanding beginning
  of year                    801,705      $3.96      949,713       $2.55      870,538        $2.51

Granted                       15,000       0.07       55,000        0.29      108,500         3.12
Exercised                         --                      --                   (6,000)        1.50
Forfeited                   (215,175)      2.11     (203,008)       2.58      (23,325)        2.80
                             -------                 -------                 -------
Outstanding end of year      601,530      $3.96      801,705       $3.96      949,713        $2.55
                             =======                 =======                 =======
Options exercisable
  at year-end                567,647                 698,105                 807,780
                             =======                 =======                 =======
</TABLE>

     The following table summarizes  information about stock options outstanding
       under the stock option plans at December 31, 2002:

<TABLE>
<CAPTION>
                                     Options Outstanding                         Options Exercisable
                      ------------------------------------------------    --------------------------------
    Range of          Outstanding       Remaining     Weighted-average    Exercisable     Weighted-Average
    Exercise Prices   at 12/31/02    Contractual Life  Exercise Price      at 12/31/02     Exercise Price
    ---------------   -----------    ----------------  --------------      -----------     --------------
    <S>                  <C>            <C>                <C>                <C>             <C>
    <$1.00               35,000         8.1 years          $0.21              32,000          $0.20
    $1.00 - 1.99        217,780         4.4 years          $1.51             217,780          $1.51
    $2.00 - 2.99         11,500         6.5 years          $2.26              11,200          $2.26
    $3.00 - 3.85        337,250         1.4 years          $3.26             306,667          $3.26
                        -------                                              -------
                        601,530                                              567,647
                        =======                                              =======
</TABLE>

                                                                     (Continued)


                                      F-20
<PAGE>

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

(14) Income Taxes

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

                          2002                  2001                2000
                    ------------------   -------------------   -----------------
                    Current   Deferred   Current    Deferred   Current  Deferred
                    -------   --------   -------    --------   -------  --------
Federal             $    --      --           --       --           --      --
State and foreign    11,000      --     (203,000)      --      227,000      --
                    -------   -----      -------    -----      -------   -----
    Total           $11,000      --     (203,000)      --      227,000      --
                    =======   =====      =======    =====      =======   =====

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

                                          2002           2001            2000
                                          ----           ----            ----
United States                         $(3,726,000)   (11,578,000)    (7,519,000)
Foreign                                  (376,000)    (3,399,000)    (2,430,000)
                                      -----------    -----------     ----------
Loss before provision (benefit)
  for income taxes                    $(4,102,000)   (14,977,000)    (9,949,000)
                                      ===========    ===========     ==========

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

<TABLE>
<CAPTION>

                                                  2002            2001          2000
                                                  ----            ----          ----
<S>                                           <C>             <C>            <C>
Tax benefit at statutory rate                 $(1,395,000)    (5,092,000)    (3,383,000)
Increase (decrease) in income tax benefit
  resulting from:
   Increase in valuation allowance              1,094,000      3,057,000      2,776,000
   State and foreign taxes, less applicable
     federal benefits                             (98,000)      (211,000)      (127,000)
   Non-deductible goodwill impairment             272,000      1,973,000             --
   Other expenses not deductible for tax           13,000        333,000        345,000
   Foreign income taxed at rates
       Different from U.S. statutory rate         (78,000)       (19,000)        25,000
   Estimated NOL adjustments, including
     Section 382 limitation                            --             --        594,000
   Reversal of prior year's accrual               203,000       (262,000)            --
   Other                                               --         18,000         (3,000)
                                              -----------       --------        -------
                                              $    11,000       (203,000)       227,000
                                              ===========       ========        =======
</TABLE>

     Porta has unused United States tax net operating  loss (NOL)  carryforwards
       of approximately  $48,409,000  expiring at various dates between 2009 and
       2022.  Due to the change in ownership  which resulted from the conversion
       of Porta's Zero coupon  subordinated  convertible  notes to common stock,
       Porta's  usage of its NOL will be limited  in  accordance  with  Internal
       Revenue Code section 382. Porta's carryforward  utilization of the NOL is
       limited to $1,767,000 per year. The  carryforward  amounts are subject to
       review by the Internal  Revenue  Service  (IRS).  In addition,  Porta has
       foreign NOL  carryforwards  of  approximately  $6,037,000 with indefinite
       expiration dates.

                                                                     (Continued)


                                      F-21
<PAGE>

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

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

                       2009                       $ 4,106,000
                       2010                        18,880,000
                       2011                           884,000
                       2018                            37,000
                       2019                         7,546,000
                       2020                         8,441,000
                       2021                         4,259,000
                       2022                         4,256,000
                                                  -----------
                                                  $48,409,000
                                                  ===========

     The components  of the deferred tax assets,  the net balance of which total
       zero after the valuation allowance,  as of December 31, 2002 and 2001 are
       as follows:

                                                      2002             2001
                                                      ----             ----
Deferred tax assets:
   Inventory                                      $  1,313,000       1,370,000
   Allowance for doubtful accounts receivable          757,000         835,000
   Benefits of tax loss carryforwards               20,690,000      18,734,000
   Benefit plans                                       591,000         633,000
   Accrued commissions                                 218,000         619,000
   Other                                             1,093,000         917,000
   Depreciation                                        358,000         818,000
                                                  ------------      ----------
                                                    25,020,000      23,926,000
   Valuation allowance                             (25,020,000)    (23,926,000)
                                                  ------------      ----------
                                                  $         --              --
                                                  ============      ==========

     Because of Porta's  losses in 2002 and 2001, a valuation  allowance for the
       entire  deferred  tax asset was  provided  due to the  uncertainty  as to
       future realization.

     The income tax returns of Porta and its subsidiary operating in Puerto Rico
       were  examined by the IRS for the tax year ended  December 31, 1989. As a
       result  of  this   examination,   the  IRS   increased  the  Puerto  Rico
       subsidiary's  taxable income  resulting from  intercompany  transactions,
       with a  corresponding  increase  in Porta's  net  operating  losses.  The
       settlement  amounted to approximately  $953,000.  Porta is currently in a
       structured  settlement with the IRS, which is reviewed annually,  whereby
       monthly payments will be made to liquidate the settlement. As of December
       31, 2002, Porta has not made all the required  payments through that date
       under  the  settlement  and has  been in  correspondence  with the IRS to
       obtain an offer in compromise.  As of December 31, 2002, $274,000 remains
       outstanding.

                                                                     (Continued)


                                      F-22
<PAGE>

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

     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,  2002,  undistributed  earnings of the foreign  subsidiaries
       amounted to approximately  $1,417,000. It is not practicable to determine
       the amount of income or  withholding  tax that would be payable  upon the
       remittance of those earnings.


(15) Leases

     At December 31, 2002, Porta and its subsidiaries leased  manufacturing  and
       administrative  facilities,  equipment and automobiles  under a number of
       operating leases. Porta is required to pay increases in real estate taxes
       on the  facilities in addition to minimum  rents.  Total rent expense for
       2002,  2001, and 2000 amounted to  approximately  $499,000,  $793,000 and
       $1,375,000,  respectively.  With respect to the Company's  lease in North
       Carolina, rent expense in 2002 was reduced by approximately $280,000, the
       difference  between the total lease  obligation  at the time the facility
       was vacated in 2000 of  approximately  $400,000 and the final  settlement
       approximating $120,000. Rent expense in 2000 reflected the accrual of the
       remaining  lease  obligation.  Minimum rental  commitments,  exclusive of
       future  escalation  charges,  for  each of the  next  five  years  are as
       follows:

                    2003                        $  614,000
                    2004                           527,000
                    2005                           517,000
                    2006                           526,000
                    2007                           496,000
                    Thereafter                   2,723,000
                                                ----------
                                                $5,403,000
                                                ==========

(16) Contingencies

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

     As a result of the Company's continuing financial difficulties, a number of
       creditors  have  engaged  attorneys or  collection  agencies or commenced
       legal  actions  against  the  Company,  and  some of them  have  obtained
       judgments  against  the  Company.   Claimants  who  have  already  either
       commenced  litigation or otherwise  sought  collection or have obtained a
       judgment against the Company are due approximately $214,000.

                                                                     (Continued)


                                      F-23
<PAGE>

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

(17) Major Customers

     During the years ended  December  31,  2002,  2001 and 2000,  Porta's  five
       largest customers accounted for sales of $9,784,000, or approximately 46%
       of sales, $13,444,000, or approximately 48% of sales, and $28,323,000, or
       approximately  55% of sales,  respectively.  Porta's largest  customer in
       2002 and 2001 with sales of $2,725,000 and $3,485,000,  or  approximately
       13% and 12%,  respectively,  of  sales,  was  Philippines  Long  Distance
       Telephone   (PLDT).   However,   in  2001   Porta's   sales  to   British
       Telecommunications  plc ("BT") directly of $3,339,000,  approximately 12%
       of sales, and through Fujitsu  Telecommunications  Europe LTD ("FTEL") as
       purchasing agent to BT of $3,200,000, approximately 11% of sales in 2001,
       combined for sales of $6,539,000,  approximately  23% of sales,  in 2001.
       Porta's  largest   customer  in  2000  with  sales  of  $12,051,000,   or
       approximately  24% of sales,  was Fujitsu  Telecommunications  Europe LTD
       ("FTEL"). A significant amount of sales of the Company's products for use
       by British  Telecommunications plc ("BT") were sold to FTEL as purchasing
       agent to BT.  Direct  sales to BT for the year ended  December  31, 2002,
       2001  and  2000  amounted  to  $2,306,000,   $3,339,000  and  $5,098,000,
       respectively, or approximately 11%, 12% and 10%, respectively, of Porta's
       sales for such years.  Direct  sales to FTEL for the year ended  December
       31, 2001 and 2000 amounted to $3,200,000, and $12,051,000,  respectively,
       or  approximately  11% and 24%,  respectively,  of Porta's sales for such
       years.  Therefore,  any  significant  interruption or decline in sales to
       FTEL or BT may have a materially adverse effect upon Porta's  operations.
       During 2000, sales to a Mexican  telephone  company were  $5,507,000,  or
       approximately 11% of sales. No other customers account for 10% or more of
       Porta's sales for any year.  Approximately 53% and 19%, respectively,  of
       Porta's accounts receivable are due from the five largest customers as of
       December 31, 2002 and 2001, respectively.

(18) 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 Porta's senior and subordinated debt and related interest
       cannot be reasonably  estimated due to the lack of  marketability of such
       instruments.  However,  management  believes that the fair value of these
       instruments is significantly less than their aggregate carrying amount.

                                                                     (Continued)


                                      F-24
<PAGE>

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

(19) Net Loss Per Share

     Options to purchase 601,530, 806,705 and 649,733 shares of common stock for
       2002,  2001 and 2000,  respectively,  with exercise  prices  ranging from
       $0.07 to $3.85,  $0.22 to $5.00  and  $1.69 to $5.00  for 2002,  2001 and
       2000, respectively,  were outstanding but not included in the computation
       of diluted net loss per share  because the  exercise  prices were greater
       than the average market price of common stock during such years,  and the
       effect of doing so would be anti-dilutive.

     Warrants to purchase 242,500,  1,776,152 and 195,000 shares of common stock
       for 2002, 2001 and 2000, respectively,  with exercise prices ranging from
       $0.25 to $1.81,  $0.25 to $3.00 and  $1.81 to $17.50  for 2002,  2001 and
       2000, respectively,  were outstanding but not included in the computation
       of diluted net loss per share  because the  exercise  prices were greater
       than the average market price of common stock during such years,  and the
       effect of doing so would be anti-dilutive.

                                                                     (Continued)


                                      F-25
<PAGE>

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

(20) Legal Matters

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

     In March 2000, the Company  suspended (with pay) Messrs. Ronald Wilkins and
       Michael  Bahlo,  two of its  executive  officers,  from  their  positions
       pending completion of the Company's investigation of certain matters that
       had come to its attention. Prior to the completion of this investigation,
       however, these two executives accepted positions with another company and
       thereby  voluntarily  resigned from their positions with the Company.  In
       February  2001,  these  two  executives,  together  with a  third  former
       executive  officer,  Mr.  Michael Lamb,  who similarly  resigned from his
       position with the Company,  filed suit in the Supreme Court for the State
       of New York,  County of New York. The complaint  asserted  various claims
       against  the  Company  based on the  allegation  that each of these three
       executives was improperly  terminated from his employment  without cause,
       and seeks compensatory damages,  liquidating damages and attorney's fees.
       The Company  filed an answer and  counterclaim  against  the  plaintiffs.
       During 2002,  the Company  settled all claims  related to this action for
       $30,000.

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

     In June  2002,  BMS  Corp. served  an  arbitration  demand  on the  Company
       claiming  that it breached an  agreement  to market and sell an update to
       the Company's MLR product which BMS was to develop.  The Company believes
       that it has defenses to the claims by BMS and has filed a counterclaim to
       recovery the $350,000 the Company advanced to BMS under the contract. The
       arbitrators  have recently been  selected and the  proceedings  will move
       forward over the next several months.

     See Note 16, in connection with claims against the Company by creditors.

                                                                     (Continued)


                                      F-26
<PAGE>

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

(21) Cash Flow Information

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

                                                 2002        2001       2000
                                                 ----        ----       ----
          Cash paid for interest                 $10         933        3,763
          Cash paid for income taxes             $ 2         131          183

     (2)  Non-cash transactions:

          (i) In  2000  and  2001,  Porta  incurred  non-cash  charges  totaling
          $140,000 as a result of the issuance New Warrants (note 11).

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

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

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

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

                                                                     (Continued)


                                      F-27
<PAGE>

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

(22) Segment and Geographic Data

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

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

                                       2002            2001           2000
                                       ----            ----           ----
Revenue:
      Line                         $ 9,598,000      12,756,000      20,546,000
      OSS                            6,414,000       8,874,000      22,296,000
      Signal                         4,523,000       5,737,000       7,644,000
                                   -----------      ----------      ----------
                                   $20,535,000      27,367,000      50,486,000
                                   ===========      ==========      ==========
Segment profit (loss):
      Line                         $  (565,000)      1,275,000       3,665,000
      OSS                              226,000     (10,518,000)     (6,201,000)
      Signal                           286,000       1,449,000       2,088,000
                                   -----------      ----------      ----------
                                   $   (53,000)     (7,794,000)       (448,000)
                                   ===========      ==========      ==========
Depreciation and amortization:
      Line                         $   245,000         374,000         424,000
      OSS                              350,000       1,262,000       1,262,000
      Signal                            25,000         166,000         162,000
                                   -----------      ----------      ----------
                                   $   620,000       1,802,000       1,848,000
                                   ===========      ==========      ==========
Total identifiable assets:
      Line                         $ 3,975,000       5,990,000       8,508,000
      OSS                            4,538,000       4,268,000      14,942,000
      Signal                         4,319,000       5,557,000       6,591,000
                                   -----------      ----------      ----------
                                   $12,832,000      15,815,000      30,041,000
                                   ===========      ==========      ==========
Capital expenditures:
      Line                         $    37,000         132,000         340,000
      OSS                               58,000          55,000       1,132,000
      Signal                             9,000               0          45,000
                                   -----------      ----------      ----------
                                   $   104,000         187,000       1,517,000
                                   ===========      ==========      ==========

                                                                     (Continued)


                                      F-28
<PAGE>

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

     The following table reconciles segment totals to consolidated totals:

<TABLE>
<CAPTION>
                                                      2002             2001            2000
                                                      ----             ----            ----
<S>                                               <C>               <C>             <C>
Revenue:
   Total revenue for reportable segments          $ 20,535,000      27,367,000      50,486,000
   Other revenue                                       882,000         695,000         654,000
                                                  ------------      ----------      ----------
Consolidated total revenue                        $ 21,417,000      28,062,000      51,140,000
                                                  ============      ==========      ==========

Operating loss:
   Total segment loss for reportable segments     $    (53,000)     (7,794,000)       (448,000)
   Corporate and unallocated                        (2,828,000)     (3,659,000)     (4,705,000)
                                                  ------------      ----------      ----------
Consolidated total operating loss                 $ (2,881,000)    (11,453,000)     (5,153,000)
                                                  ============      ==========      ==========
Depreciation and amortization:
   Total for reportable segments                  $    620,000       1,802,000       1,848,000
   Corporate and unallocated                            93,000         107,000          63,000
                                                  ------------      ----------      ----------
Consolidated total deprecation and amortization   $    713,000       1,909,000       1,911,000
                                                  ============      ==========      ==========
Total assets:
   Total for reportable segments                  $ 12,832,000      15,815,000      30,041,000
   Corporate and unallocated                         1,396,000       2,018,000       4,133,000
                                                  ------------      ----------      ----------
Consolidated total assets                         $ 14,228,000      17,833,000      34,174,000
                                                  ============      ==========      ==========
Capital expenditures:
   Total for reportable segments                  $    104,000         187,000       1,517,000
   Corporate and unallocated                            20,000           9,000          16,000
                                                  ------------      ----------      ----------
Consolidated total capital expenditures           $    124,000         196,000       1,533,000
                                                  ============      ==========      ==========
</TABLE>


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

                                             2002          2001         2000
                                             ----          ----         ----
Revenue:
      United States                      $ 9,877,000    12,999,000    17,225,000
      United Kingdom                       6,388,000     8,060,000    20,244,000
      Asia/Pacific                         2,725,000     4,552,000     5,429,000
      Other Europe                         1,600,000     1,761,000     2,482,000
      Latin America                          258,000       288,000       146,000
      Other North America                    565,000       357,000     5,570,000
      Other                                    4,000        45,000        44,000
                                         -----------    ----------    ----------
Consolidated total revenue               $21,417,000    28,062,000    51,140,000
                                         ===========    ==========    ==========

Consolidated long-lived assets:
      United States                      $ 4,274,000     5,301,000    12,115,000
      United Kingdom                         364,000       583,000     1,107,000
      Other North America                    455,000       523,000       568,000
      Asia/Pacific                                 0             0       612,000
      Latin America                            7,000         8,000        14,000
      Other                                    3,000         2,000         3,000
                                         -----------    ----------    ----------
                                           5,103,000     6,417,000    14,419,000
   Current and other assets                9,125,000    11,416,000    19,755,000
                                         -----------    ----------    ----------
Consolidated total assets                $14,228,000    17,833,000    34,174,000
                                         ===========    ==========    ==========

                                                                     (Continued)


                                      F-29
<PAGE>

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

(23) Quarterly Information (Unaudited)

     The following presents certain unaudited quarterly financial data:

                                           Quarter Ended
                         -------------------------------------------------------
                         March 31,      June 30,     September 30,  December 31,
                           2002           2002           2002          2002
                         ---------      --------     -------------  ------------
Net sales              $ 4,744,000    $ 6,492,000    $ 5,093,000    $ 5,088,000
Gross profit               878,000      2,117,000      2,025,000      1,798,000
Net income (loss)       (2,637,000)      (887,000)      (696,000)       106,000
Net income (loss)
  per share:
    Basic                   $(0.26)        $(0.09)        $(0.07)         $0.01
    Diluted                 $(0.26)        $(0.09)        $(0.07)         $0.01

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

     Net income for the quarter  ended  December  31, 2002  reflects the benefit
       associated  with the reversal of certain  reserves for  potential  claims
       established  in  prior  years  and a  settlement  of a lease  obligation,
       approximating  $400,000. In addition, the Company reduced certain expense
       estimates recorded in earlier quarters in 2002, approximating $400,000.

     Net loss for the quarter  ended  December 31, 2001  reflects an  impairment
       loss on goodwill of $5,802,000 associated with OSS operations (note 6).


                                      F-30