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                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, D.C. 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, 1996

          [ ] 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                            (I.R.S. Employer
of incorporation or organization)                       Identification No.)

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

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

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

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

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

                                      None

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

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

     State aggregate market value of the voting stock held by  non-affiliates of
the registrant: $3,560,570 as of March 14, 1997.

     Indicate the number of shares outstanding of each of the registrant's class
of common stock, as of the latest  practicable date:  2,191,120 shares of Common
Stock, par value $.01 per share, as of March 14, 1997.

                       DOCUMENTS INCORPORATED BY REFERENCE

The  registrant's  definitive proxy statement in connection with its 1997 Annual
Meeting  of  Stockholders  to be  filed  within  120  days of the  close  of the
registrant's  fiscal  year is  incorporated  by  reference  into Part III of the
Report.

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<PAGE>

Item 1.  Business

     Porta Systems Corp. (the "Company")  develops,  designs,  manufactures  and
markets a broad range of proprietary and standard  telecommunications  equipment
and  systems  for sale in the  United  States and  abroad.  The  Company's  core
products fall into three categories:

     Computer-based  operational  support  systems  ("OSS")  which  automate the
operational, administrative,  maintenance and testing functions within telephone
companies. These systems are marketed principally to foreign telephone operating
companies in developing countries and Europe.

     Telecommunications  connection equipment and systems which are used both to
connect    copper-wired    telecommunications    networks    and   to    protect
telecommunications   equipment  from  voltage  surges.   The  copper  connection
equipment  and systems are  marketed to  telephone  operating  companies  in the
United States and foreign  countries,  with the largest  customer  being British
Telecommunications    plc   ("BT"),    and    manufacturers    and   owners   of
telecommunications equipment.

     To a significantly lesser extent, signal processing,  which are radio-based
communications systems sold principally for military uses.

     In March,  1996 the Company sold its fiber optics connector  business.  See
Item 7 Management  Discussion and Analysis of Financial Condition and Results of
Operations.

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

Products

     Operations Support Systems. The Company's OSS systems are used primarily by
telephone  operating  companies.  The  Company's  principal  OSS  system  is its
computer-based  testing  system--the Line Condition Report  ("LCR")--which  is a
major item of capital  equipment  and  typically  sells for prices  ranging from
several  hundred  thousand  to  several  million   dollars.   The  Company  also
manufactures  and sells a number of other  products  which are used in  testing,
maintenance and repair of telephone equipment.


                                       1
<PAGE>

     The LCR,  introduced in the mid-1970's,  was the first  computer-controlled
electronic  system  used to  automatically  test for and  diagnose  problems  in
customer  lines and to notify  service  personnel of required  maintenance.  The
associated  Mechanized Line Report ("MLR") data base system  provides  automated
record keeping  (including  repair and  disposition  records) and analyzes these
records for  identification of recurring  problems and equipment  deterioration.
The  Company's  LCRs are sold to  telephone  operating  companies in a number of
foreign countries as well as in the United States.

     The Company's software,  which can be packaged and integrated with the LCR,
provides additional OSS functions, such as the automated assignment of telephone
company  facilities  for the  provision  of service.  In  addition,  pursuant to
certain  contract with customers,  the Company  develops  software to meet those
specific customer requirements.

     The Company's OSS systems are complex systems which, in most  applications,
incorporate  features  designed  to  respond  to  the  purchaser's   operational
requirements  and the particular  characteristics  of the purchaser's  telephone
system.  As a result,  the  negotiation  of a  contract  for an OSS system is an
individualized  and highly  technical  process.  In addition,  contracts for OSS
systems frequently provide for manufacturing,  delivery,  installation,  testing
and  purchaser  acceptance  phases  which take place over  periods  ranging from
several months to a year or more. Such contracts  typically contain  performance
guarantees  by the  Company  and clauses  imposing  penalties  on the Company if
"in-service"  dates  are  not  met.  The  installation,  testing  and  purchaser
acceptance  phases of these  contracts may last longer than  contemplated by the
contracts and, accordingly, amounts due under the contracts may not be collected
for extended periods.  Delays in purchaser  acceptance of the systems and in the
Company's  receipt of final contract payments have occurred in connection with a
number of foreign sales.  In addition,  the Company has experienced no steady or
predictable flow of orders for OSS systems.

     Telecommunications  Connection Equipment. The Company's  telecommunications
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   the   Company's   line  of
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 grows  generally 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.


                                       2
<PAGE>

     The Company's traditional 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 from  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  and
multiple user facilities.

     The  Company  also  has  developed  an  assortment  of  frames  for  use in
conjunction  with  the  Company's  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 the
Company's frame products, the CAM frame, is designed to permit computer-assisted
analysis and  recording of the optimum  placement of  connections  for telephone
lines on the connector blocks mounted on the frame.

     The Company's  telecommunications copper  connection/protection  equipment,
including  its line  connecting/protecting  products,  is used by several of the
operating companies of the seven regional Bell holding 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,  the  Company's
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  the  Company  can  design
modifications to accommodate the specific needs of its customers.


                                       3
<PAGE>

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

                            Sales by Product Category

                                            Years Ended December 31,
                                           ------------------------
                               1996                 1995              1994
                               ----                 ----              ----
                                           (Dollars in thousands)



OSS Systems                26,804    46%       28,988   47%      $21,516   31%
                                                                
Line Connect-                                                   
ing/Protecting                                                  
Equipment (*)              23,249    40%       26,867   44%       40,800   59%
 .                                                               
Signal Processing           7,597    13%        4,857    8%        5,221    8%
                                                                
Other                         337     1%          469    1%        1,448    2%
                          -------   ---       -------  ---       -------  --- 
                                                                
Total                     $57,987   100%      $61,181  100%      $68,985  100%
                          =======   ===       =======  ===       =======  === 
                                                          

(*)  Includes sales of fiber optics products of $447,000 in 1996,  $6,513,000 in
     1995, and  $12,150,000 in 1994. The net assets of the fiber optics business
     unit were sold in March 1996.

Markets for the Company's Products

     The Company supplies  equipment and systems to telephone  companies for use
in providing  telecommunications  services to their  customers and to businesses
for use with their internal telecommunication systems. The markets served by the
Company are described below:

     Telecommunications  Systems.  Telephone  networks in certain regions of the
world,  notably  Latin  America,   Eastern  Europe  and  certain  areas  in  the
Asia/Pacific  region,  utilize  telephone  switching  systems  which use  analog
technology. These networks 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.


                                       4
<PAGE>

     A country with an emerging  telecommunications  network may want to rapidly
add access lines in order to increase  the  availability  of  telephone  service
among its  population  and to  significantly  upgrade  the  quality of the lines
already in service.  The  Company's OSS systems are designed to meet many of the
needs of a rapidly  growing  telephone  network.  OSS systems  facilitate  rapid
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 data
base which computerizes the inventory and maintenance  history of all subscriber
lines in service helps to keep the rapid growth under control.

     As a telephone  company expands the number of its subscriber lines, it also
requires  connection  equipment to  interconnect  and protect those lines in its
central offices.  The Company provides a line of copper connection equipment for
this purpose. In the more advanced  countries,  the movement towards fiber optic
circuits  has  resulted  in a  stagnation  or  decline  in the market for copper
connection  equipment,  while the less developed  countries,  such as those with
emerging  networks or those upgrading to digital  switching  systems,  provide a
growing market for copper connection and protection equipment.

     During  1996,  approximately  46% of  the  Company's  sales  were  made  to
customers in emerging markets. Such sales include both OSS and copper connection
products.

     Digital Systems. In regions such as Western Europe, telephone networks have
achieved a higher ratio of available telephone lines to population. However, the
switching  systems  may  utilize  analog  technology  which are  suited  more to
carrying voice transmissions than data transmissions.  These telephone companies
are upgrading  their  networks by replacing the older analog  switching  systems
with newer digital systems.

     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.  The
Company  supplies  central  office  connection/protection  systems to meet these
needs.

     During  1996,  approximately  40% of  the  Company's  sales  were  made  to
customers in this category.


                                       5
<PAGE>

     Signal  Processing.  The Company's  line of signal  processing  products is
supplied  to  customers  in the  military  and  aerospace  industry  as  well as
manufacturers of medical equipment and video systems. The primary  communication
standard in new  military  and  aerospace  systems is the  MIL-STD-1553  Command
Response  Data  Bus,  and  applications  require  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.

     The  Company's   wideband   transformers  are  required  for  ground  noise
elimination  in  video  imaging  systems  and  are  used in the  television  and
broadcast,  medical imaging and industrial  process control  industries.  If not
eliminated,  ground  noise  caused  by poor  electrical  system  wiring or power
supplies,  results in  significant  deterioration  in system  performance  (poor
picture  quality,  process  failures in  instrumentation,  etc.).  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 1996, signal processing equipment accounted for approximately 13% of
the Company's sales.

Marketing and Sales

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

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

     In the United States and throughout the world, the Company uses independent
distributors  in the  marketing  of Company  products to the  customer  premises
equipment market. All distributors  marketing  copper-based products also market
directly competing products.  In addition,  the Company continues to promote the
direct marketing  relationships  it forged in the past with telephone  operating
companies.


                                       6
<PAGE>

     In November  1996,  the Company  amended its supply  agreement with British
Telecommunications  plc  ("BT")  for the  Company's  line  connecting/protecting
products.  The amended  agreement  will expire on August 31, 2001, and provides,
among other things,  that the Company may no longer be the exclusive supplier to
BT for these products. During 1996, 1995, and 1994, BT purchased $9,296,000 (16%
of  sales),   $8,060,000  (13%  of  sales),  and  $11,743,000  (17%  of  sales),
respectively, of the Company's line connecting/protecting products. During these
years,  additional  sales  of the  Company's  products  were  also  made  at the
direction  of BT to certain  unaffiliated  suppliers to BT for resale to BT. The
amended contract also provides for a cross license which, in effect,  enables BT
to use certain of the  Company's  proprietary  information  to modify or enhance
products  provided to BT and permits those products to be  manufactured by BT or
others for its own purposes.

     The Company's  OSS systems have  primarily  been sold to foreign  telephone
operating companies (which are sometimes controlled by foreign governments), and
the  contracts  relating  to OSS  systems are  principally  negotiated  directly
between the Company and these purchasers.

     The Signal Processing line of products is sold primarily to US military and
aerospace prime contractors, and domestic OEMs and end users.


                                       7
<PAGE>

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


                   Sales to Customers By Geographic Region (1)

                                          Year Ended December 31,
                                          -----------------------
                               1996              1995                 1994
                               ----              ----                 ----
                                          (Dollars in thousands)

United States
and Puerto Rico           17,644    30%      $16,445   27%       $24,150   35%
                                                               
United Kingdom            16,000    28%       22,230   36%        17,761   26%
                                                               
Other Europe               5,416     9%        2,831    5%         4,344    6%
                                                               
Latin America              1,738     3%        4,743    8%         7,917   11%
                                                               
Asia/Pacific              15,812    27%       13,470   22%        12,909   19%
                                                               
Middle East                1,248     2%          899    1%         1,009    2%
                                                               
Other                        129     1%          563    1%           895    1%
                         -------   ---       -------  ---        -------  --- 
                                                               
Total Sales              $57,987   100%      $61,181  100%       $68,985  100%
                         =======   ===       =======  ===        =======  === 
                                                              

(1)  For information regarding the amount of sales, operating profit or loss and
     identifiable assets attributable to each of the Company's geographic areas,
     see Note 23 to the Consolidated Financial Statements.

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


                                       8
<PAGE>

Manufacturing

     The  Company's   computer-based  testing  products  include  the  Company's
proprietary   testing   circuitry   and   computer   programs,   which   provide
platform-independent solutions based on UNIX-type operating systems. The testing
products  also   incorporate  disk  data  storage,   data  terminals   ("CRTs"),
teleprinters  and  minicomputers  purchased by the Company.  These  products are
installed and tested by the Company on its customers' premises.

     At  present,  the  Company's  manufacturing  operations  are  conducted  at
facilities located in Glen Cove, New York; Kingsville,  Texas; Matamoros, Mexico
and Korea.  The Company  from time to time also uses  subcontractors  to augment
various  aspects of its  production  activities  and  periodically  explores the
feasibility  of  conducting  operations at lower cost  manufacturing  facilities
located  abroad.  In  pursuing  sales   opportunities   with  foreign  telephone
companies, the Company may locate its production activities in foreign countries
which require domestic  involvement in the production of equipment purchased for
their telephone  systems and in foreign  countries  which, in addition,  require
full or partial technology transfers to domestic enterprises.

Source and Availability of Components

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

Backlog

     At December 31, 1996, the Company's  backlog was $18,296,000  compared with
approximately  $22,569,000  at  December  31,  1995.  Of the  December  31, 1996
backlog,  approximately  $15,670,000  represented  orders from foreign telephone
operating companies,  including $5,383,000 attributable to the contract with BT.
See "Marketing and Sales".  The Company expects to ship substantially all of its
December 31, 1996 backlog  during 1997.  However,  certain of the  Company's OSS
contracts provide for deliveries subsequent to December 31, 1997.


                                       9
<PAGE>

Patents

     The  Company is the owner of a number of utility  and  design  patents  and
patent  applications.  In  addition,  the  Company  has  sought  foreign  patent
protection for a number of its products.

     From  time  to  time  the  Company  enters  into  licensing  and  technical
information  agreements  under  which it  receives  or grants  rights to produce
certain specified  subcomponents used in certain of the Company's products or in
connection  with products  developed by the Company.  These  agreements  are for
varying  terms and provide for the payment or receipt of  royalties or technical
license fees.

     While the Company considers patent protection  important to the development
of its  business,  and produces  certain  subcomponents  of its  products  under
licensing  agreements,  the Company believes that its success depends  primarily
upon its  engineering,  manufacturing  and marketing  skills.  Accordingly,  the
Company  does  not  believe  that  a  denial  of  any  of  its  pending   patent
applications,  expiration of any of its patents, a determination that any of the
patents which have been granted to it are invalid or the  cancellation of any of
its existing  license  agreements  would have a material  adverse  effect on the
Company's business.

Competition

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

     The Company  competes  directly with a number of large and small  telephone
equipment  manufacturers  in the United States,  with AT&T  continuing to be the
Company's   principal  United  States  competitor.   AT&T'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 the  Company  continue to be  significant  factors in the  Company's
competitive environment.


                                       10
<PAGE>

     Currently,  AT&T and a number of companies with greater financial resources
than the Company produce,  or have the design and manufacturing  capabilities to
produce,  products  competitive  with the  Company's  products.  In meeting this
competition,  the  Company  relies  primarily  on  the  performance  and  design
characteristics of its products of comparable  performance or design,  endeavors
to offer its products at prices and with  warranties that will make its products
competitive.

     In  connection  with  overseas  sales  of  its  line  connecting/protecting
equipment,  the Company has met with significant  competition from United States
and foreign  manufacturers of comparable  equipment and expects this competition
to continue. In addition to AT&T, a number of the Company's overseas competitors
have significantly greater resources than the Company.

     The Company competes directly with a limited number of substantial domestic
and international companies with respect to its sales of OSS systems. In meeting
this  competition,  the Company  relies  primarily  on the  features of its line
testing  equipment  and  endeavors  to offer such  equipment  at prices and with
warranties that will make it competitive.

Significant Customers

     During 1996 four  customers  each accounted for 5% or more of the Company's
sales.  Sales made to BT amounted to $11,308,000,  or  approximately  20% of the
Company's  1996 sales.  Sales made to the  Philippines  Long Distance  Telephone
amounted to $7,034,000,  or approximately 12% of the Company's 1996 sales. Sales
to Korea  Telecommunications  Authority  amounted  to  $4,749,000  or 8% in 1996
sales.  Sales to SPT Telecom  (Czech  Republic)  amounted to $3,116,000 or 5% in
1996 sales. No other customers account for 5% of the Company's sales in 1996. In
addition,  the former  Bell  operating  companies  continue  to be the  ultimate
purchasers of a significant portion of the Company's products sold in the United
States,  while sales to foreign  telephone  operating  companies  constitute the
major portion of the Company's foreign sales. The Company's contracts with these
customers require no minimum purchases by such customers.  Significant customers
for the Signal  Processing  products  include the major US Aerospace  companies,
Department of Defense service depots and OEMs in the medical imaging and process
control  equipment.  Both catalog and custom designed products are sold to these
customers. Some contracts are multi-year procurements.

Research and Development Activities

     During the fiscal years ended December 31, 1996, 1995 and 1994, the Company
spent approximately $3,848,000, $6,103,000, and $3,959,000, respectively, on its
research and  development  activities.  All research and development was company
sponsored.


                                       11
<PAGE>

Employees

     As of February  28, 1997,  the Company had 416  employees of which 167 were
employed in the United States,  163 were employed in Mexico, 43 were employed in
the United Kingdom, and 43 were employed in Korea. The Company believes that its
relations with its employees have been good, and it has never experienced a work
stoppage.  The  Company's  employees  are not  covered by  contracts  with labor
unions,  except for its hourly employees in Mexico who are covered by a contract
with the union  representing  such hourly employees that expires on December 31,
1998.

Item 2.  Properties

     The Company currently leases approximately 20,400 square feet of executive,
sales,  marketing and research and  development  space  located in Syosset,  New
York; 5,300 square feet of office space used for software development located in
Charlotte,   North  Carolina;  and  27,000  square  feet  of  manufacturing  and
warehousing  space at two  locations in  Kingsville,  Texas.  The Company owns a
31,000 square foot  manufacturing and research and development  facility located
in Glen Cove, New York.  These  facilities  represent  substantially  all of the
Company's office,  plant and warehouse space in the United States.  The Syosset,
New York lease expires June 1998; the Charlotte, North Carolina lease expires in
April 1999 and the  Kingsville,  Texas  leases  expire in July 1997 and December
1999. The aggregate annual rental is approximately $400,000.

     The Company's wholly-owned Mexican subsidiary,  Systems, S.A. de C.V., owns
its approximately 40,000 square foot Matamoros,  Mexico facility. A wholly-owned
subsidiary  of the Company  located in the United  Kingdom owns a 34,261  square
foot facility located in Coventry,  England, which facility comprises all of the
Company's office, plant and warehouse space in the United Kingdom.

     The Company believes its properties are adequate for its needs.


                                       12
<PAGE>

Item 3.  Legal Proceedings

     In July 1996,  an action was  commenced  against  the  Company  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 the  Company who
acquired their  securities in connection  with the acquisition by the Company of
Aster Corporation.  The complaint alleges breach of contract against the Company
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 the Company that additional  plaintiffs may be added and,
as a result, the amount of damages claimed may be substantially greater than the
amount  presently  claimed.  The Company believes that the defendants have valid
defenses to the claims. Discovery is proceeding.

     In July 1996, the Securities and Exchange  Commission (the "SEC") issued an
order  (the  "Order")  directing  a  private  investigation  of the  Company  to
determine whether there has been a violation of Federal securities laws. The SEC
indicated  to counsel  for the  Company  that the  investigation  relates to the
position of the SEC staff that the  independence  of the Company's  auditors for
1995, KPMG Peat Marwick LLP ("Peat Marwick"),  was adversely impacted by certain
relationships  involving  Peat  Marwick,  on the  one  hand,  and  KPMG  BayMark
Strategies LLC ("BayMark") and Edward R. Olson, the President of BayMark and the
Company's  former interim  president and chief operating  officer,  on the other
hand.  Although  the Company  does not agree with the  position of the SEC staff
with respect to the  independence  of Peat Marwick,  the Company is  cooperating
with the SEC's  investigation.  The Company retained BDO Seidman, LLP to reaudit
the Company's 1995 financial statements, which reaudit resulted in no changes to
the Company's 1995 financial  statements as audited by Peat Marwick. The Company
does not believe that the investigation will result in any material liability on
the part of the Company.

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

     During the fourth  quarter of 1996,  there were no matters  required  to be
submitted to a vote of security holders of the Company.


                                       13
<PAGE>

Item Pursuant to  Instruction 3 of Item 401 (b) of Regulation S-K:
Executive Officers of the Company as of March 31, 1997

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

William V. Carney                                    59
Chairman of the Board
Chief Executive Officer

Seymour Joffe                                        67
President and
Chief Operating Officer

Michael A. Tancredi                                  67
Senior Vice President
Secretary and Treasurer

Edward B. Kornfeld                                   53
Senior Vice President - Operations
Chief Financial Officer

John J. Gazzo                                        53
Senior Vice President

Prem G. Chandran                                     44
Vice President

Edmund Chiodo                                        42
Vice President

David Rawlings                                       53
Vice President

William Novelli                                      65
Vice President

     All of the  Company's  officers  serve  at the  pleasure  of the  Board  of
Directors.  Of the executive officers listed above,  Messrs.  Carney,  Joffe and
Tancredi  are also  members  of the  Board  of  Directors.  There  is no  family
relationship between any of the executive officers listed above.


                                       14
<PAGE>

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

     Mr. Joffe was elected  President and Chief  Operating  Officer in 1996. Mr.
Joffe,  who  served as  director  of the  Company  from  1987 to 1992,  has most
recently  served the  Company as senior  consultant  to its  Operations  Support
Systems (OSS) business.  Mr. Joffe has been Chairman of JSI International,  Inc.
which  represents  companies  in the  marketing  and  positioning  of  high-tech
products  and serves in the Asia Pacific  area.  Mr. Joffe has also served as an
officer and director of a number of public and private companies involved in the
computer and telecommunications industries.

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

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

     Mr. Gazzo was elected Senior Vice President in March 1996. He has been Vice
President-Marketing  of the Company since April 1993 and was general  manager of
its Porta  Electronics  Division  from  November  1989 to April 1993; he was the
Company's Vice  President-Research  and Development  from March 1984 to November
1989 and was Vice  President-Engineering  from February  1978 to February  1984.
Prior to that time, he was Chief Engineer of the Company.

     Mr.  Chandran was elected Vice President in December 1995. Mr. Chandran had
been with the Company as Assistant Vice President of Engineering since 1991.

     Mr.  Chiodo was elected Vice  President in March 1996.  Mr. Chiodo had been
with the Company since 1980. During that time he has held various positions with
in the Company, most recently as Assistant Vice President of OSS operations.


                                       15
<PAGE>

     Mr.  Rawlings was elected Vice  President in March 1996.  Mr.  Rawlings has
been the Assistant Vice President of Research and  Development - Copper products
since 1992.

     Mr.  Novelli was elected Vice  President in December  1996. Mr. Novelli has
been the Assistant Vice President of Sale and Marketing - Copper  products since
1989.


                                       16
<PAGE>

                                     Part II

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

     The Company's  Common Stock is traded on the American Stock Exchange,  Inc.
under the symbol PSI. The following table sets forth,  for the period January 1,
1995 through  December 31, 1996, the quarterly high and low sales prices for the
Company's Common Stock on the  consolidated  transaction  reporting  systems for
American  Stock  Exchange  listed  issues.  Share prices  listed below have been
restated to give  effect to the one for five  reverse  stock split which  became
effective on August 2, 1996.

                                            High        Low
                                            ----        ---

1995     First Quarter                    31  1/4     16  7/8
         Second Quarter                   23  1/8     13  1/8
         Third Quarter                    21  7/8      5
         Fourth Quarter                   12  1/2      3  1/8

1996
         First Quarter                     6  9/16     3  7/16
         Second Quarter                    4 11/16     3  1/8
         Third Quarter                     3  3/4      1  7/8
         Fourth Quarter                    2  1/2      1  1/4

     The Company did not declare or pay any cash  dividends in 1996 or 1995.  It
is the present  policy of the  Company to retain  earnings to finance the growth
and  development of the business and therefore,  the Company does not anticipate
paying  cash  dividends  on its  Common  Stock  in the  foreseeable  future.  In
addition,  the  Company's  Amended  and  Restated  Loan and  Security  Agreement
prohibits the Company from paying cash dividends on its Common Stock.

     As of March 14,  1997,  the number of  holders  of record of the  Company's
Common Stock was approximately 500.

Item 6.  Selected Financial Data

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


                                       17
<PAGE>

                                            Year Ended December 31,
                              -----------------------------------------------
                              1996      1995        1994      1993       1992
                              ----      ----        ----      ----       ----
                                   (In thousands, except per share data)

Income Statement
Data:
   Sales                   $ 57,987   $ 61,181   $ 68,985   $ 68,141   $ 68,993
   Operating
      income (loss)           3,982    (19,884)   (17,541)    (3,916)   (11,466)

      Income (loss) before
      discontinued
      operations and
      extraordinary item      1,252    (29,297)   (39,995)    (7,493)    (8,539)

   Net Income
      (loss)                  5,174    (31,041)   (39,995)    (9,545)   (14,977)

   Income (loss)
      per share from
      continuing
      operations           $   0.23   $ (20.05)  $ (28.05)   $ (5.40)  $  (6.20)

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

   Number of shares
   used in calcu-
   lating net in-
   come (loss) per
   share                      5,381      1,461      1,427      1,382      1,378

Balance Sheet
Data:
   Total Assets            $ 50,658   $ 60,591   $ 84,963   $109,948   $130,345

   Long-term debt
   excluding current
   maturities              $ 45,804   $ 55,389   $ 57,310   $ 49,931   $ 34,205

   Stockholders' equity
   (deficit)               $(20,704)  ($29,323)  $  1,525   $ 39,841   $ 49,486


                                       18
<PAGE>

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

     The Company's  consolidated  statements  of operations  for the three years
ended December 31, 1996 as a percentage
of sales follows:

                                              Years Ended December 31,
                                             -------------------------
                                             1996       1995      1994
                                             ----       ----      ----

Sales                                         100%      100%      100%
Cost of sales                                 63%        92%       90%
                                              ---       ---       --- 
  Gross Profit                                37%         8%       10%
Selling, general and
administrative expenses                       23%        27%       29%
Research and development expenses              7%        10%        6%
Litigation settlement                         --          2%       --
Write down of net assets sold                 --          1%       --
                                              ---       ---       --- 
   Operating income (loss)                     7%       (33%)     (25%)
Interest expense                              (9%)      (14%)      (8%)
Gain on sale of assets                         4%        --        --
Other                                          1%        (1%)      (3%)
                                              ---       ---       --- 
Income (loss) from continuing
   operations before income
   taxes and minority interest                 3%       (47%)     (36%)
Income tax expense and minority interest       1%        --        22%
                                              ---       ---       --- 
Income (loss) before discontinued
   operations and extraordinary gain           2%       (48%)     (58%)
Provision for loss on disposal
   of discontinued operations                 --          6%       --
Extraordinary gain on early
extinguishment of debt                         7%         3%       --
                                              ---       ---       --- 

Net income (loss)                              9%       (51%)     (58%)
                                              ===       ===       === 


                                       19
<PAGE>

Liquidity and Capital Resources

     As indicated in the Report of Independent Certified Public Accountants, the
accompanying  consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2 of Notes to
Consolidated  Financial  Statements,  the  Company's  continuing  losses  before
non-recurring  gains  and net  capital  deficiencies  combined  with the need to
refinance or restructure certain existing long-term notes payable beyond January
2, 1998  raise  substantial  doubt  about its  ability  to  continue  as a going
concern.  The consolidated  financial  statements do not include any adjustments
that might result from the outcome of this uncertainty.

     At  December  31,  1996  the  Company  had cash  and  cash  equivalents  of
$2,584,000  compared with $1,109,000 at December 31, 1995. The Company's working
capital at December  31,  1996 was  $4,100,000,  compared  to a working  capital
deficit of $8,200,000 at December 31, 1995. However, at of December 31, 1996 the
Company's  long-term  debt  includes  $25,855,000  of  Zero  coupon  convertible
subordinated  notes (the Notes),  all of which are due and payable on January 2,
1998. At December 31, 1996 the Company does not have sufficient resources to pay
the Notes when they  mature and it is likely that it cannot  generate  such cash
from its operations. Although the Company is seeking to refinance or restructure
the  Notes,  no  assurance  can be  given  that it will be  successful  in these
efforts.  If the Company is unable to refinance or restructure the Notes and the
holders of the Notes do not convert such notes,  the  Company's  business mat be
materially and adversely affected.

     The  improvement in working  capital from December 31, 1995 to December 31,
1996 reflected

     (i) The  continued  exchange of the Company's 6%  convertible  subordinated
debentures due 2006 in the principal  amount of  $5,045,000,  net of unamortized
original issue discount, plus accrued interest for Notes in the principal amount
of  $3,871,000,  which  resulted in a reduction  of  short-term  liabilities  of
$5,203,000 and an increase in long-term liabilities of $3,871,000.

     (ii) The sale of the Company's fiber optics business unit,  which generated
cash of $7,396,000  during 1996,  substantially  all of which was used to reduce
the Company's obligations to its senior lender.

     (iii) The sale of common stock received in connection  with the sale of the
Company's  discontinued  Israeli operation,  which generated cash of $3,456,000,
which was used to reduce the Company's obligations to its senior lender.

     (iv) The effect of the cost reductions and manufacturing efficiencies which
contributed to the Company's ability to sustain, during 1996, positive cash flow
from operations of $736,000. 

                                       20
<PAGE>

Liquidity and Capital Resources (continued)

     During 1996,  the  Company's  loan and security  agreement  with its senior
secured lender, Foothill was amended.  Pursuant to the amendment,  the Company's
obligations  were  extended  from November 1996 to November 1998 and defaults at
December  31,  1995  and  through  the date of the  amendment,  were  waived  by
Foothill.  As part of the  consideration  to  Foothill  for the  amendment,  the
Company  is  obligated  to pay a  monthly  facility  fee of  $50,000  commencing
November 30, 1996. As of December 31, 1996, the Company's availability under its
$2,000,000 revolving line of credit is approximately $700,000.

     As of December 31, 1996, the Company had remaining  outstanding  $2,096,000
of the 6%  Debentures,  net of original issue  discounts  amortized to principal
over the term of the debt using the effective interest rate method, of $209,000.
The face amount of the outstanding 6% Debentures was $2,305,000.

     The interest accrued on the 6% Debentures is payable on July 1 of each year
and as of December 31, 1996 was $387,000.  At December 31, 1996, the Company has
failed to make the interest payments due in 1996 and 1995.  Accordingly,  the 6%
Debentures are classified as a current liability at December 31, 1996 and 1995.


                                       21
<PAGE>

Results of Operations

Years Ended December 31, 1996 and 1995

     The Company's  sales for 1996 were  $57,987,000  compared to $61,181,000 in
1995, a decrease of $3,194,000  (5%). The 1995 sales include sales of $6,513,000
from the  Company's  fiber  optics  business  unit which was sold in March 1996.
Sales of  fiber  optics  products  were  $447,000  in 1996  prior  to the  sale.
Therefore,  sales,  exclusive of fiber optics products,  increased by $2,872,000
(5.3%) from 1995. OSS net revenue decreased by $2,184,000 for 1996. This reduced
volume  reflects  lower levels of sales of our Korea joint venture  partner,  as
well as  reduced  sales to BT.  This  decline in sales was  partially  offset by
increased sales in Asia and Europe. Line connection/protection equipment revenue
for 1996 increased approximately  $2,448,000.  This increase relates to improved
domestic sales, as well as, increased sales to BT during 1996. Signal processing
revenue for 1996  increased by  $2,740,000.  Due to the Company's  improved cash
position in 1996,  signal processing was able to complete orders from backlog on
an accelerated basis which resulted in higher sales.

     As a result of the sale of the fiber optics  business unit, the Company was
able to extend its credit  agreement with its senior lender which provided funds
to enable the Company to procure materials to satisfy  outstanding orders in the
backlog during 1996. This positively affected revenue for all operating units in
1996.

     Cost of sales for the year ended  December  31, 1996,  as a  percentage  of
sales  compared to 1995,  decreased  from 92% to 63%. This  improvement in gross
margin is  attributed  to  improved  manufacturing  efficiencies  created by the
ability to obtain raw materials on a consistent basis,  improved  management and
more efficient  utilization of personnel,  and the elimination of under utilized
facilities associated with the fiber optics business. The Company's gross margin
improved from 8% in 1995 to 37% in 1996.

     Selling,  general and administration expenses decreased by $2,990,000 (18%)
from  $16,556,000 to $13,566,000  from December 31, 1996 compared to 1995.  This
decrease  is due to the  elimination  of the  expenses  as  related to the fiber
optics  business unit and the Company's  continuing  efforts to reduce costs and
expenses.

     Research  and  development  expenses  decreased  by  $2,255,000  (37%) from
$6,103,000 to $3,848,000  from 1996 compared to 1995. This reduced cost reflects
the Company's efforts to streamline its operations by focusing on those projects
with the highest  potential for success and to a lesser extent,  the elimination
of those expenses related to fiber optics business unit.


                                       22
<PAGE>

Results of Operations (continued)

     On a whole, the sale of the fiber optics business  benefited the Company by
allowing it to close two facilities,  with a resultant decrease in personnel and
overhead  costs.  The sale also  enabled  the  Company  to amend and  extend its
agreement  with  Foothill,  and make a  significant  payment to Foothill,  which
reduces its ongoing interest costs as described below.

     As a result of the above, the Company had operating income of $3,982,000 in
1996 versus an operating loss of  $19,884,000  in 1995. The Company's  operating
improvement  for the year ended  December  31, 1996,  when  compared to the year
ended December 31, 1995, were the results of its continuing efforts to bring its
costs and  expenses in line with its current  level of sales and the sale of the
fiber optics business unit.

     Interest  expense  decreased  for  the  year  ended  December  31,  1996 by
$3,156,000  from  $8,484,000  the year ended  December 31, 1995 to $5,328,000 in
1996.  This change is attributable  primarily to a decrease in interest  expense
related  to the  exchange  of the  Company's  6%  Debentures  and  repayment  of
principal to the  Company's  senior  lender from the proceeds of the sale of the
fiber business and the sale of the rights to common stock received in respect of
the sale of discontinued operations.

     During 1996, the Company received $3,456,000 from the sale of the rights to
common  stock  received in respect of the  obligations  of the  purchaser of the
discontinued  Israeli  operation  resulting  in a gain on the sale of  assets of
$2,264,000. During 1995, the Company recorded a $3,500,000 loss from the sale of
this discontinued Israeli operation.

     During 1996, the Company recorded a $3,922,000  extraordinary gain from the
early  extingushment  of approximately  94% of its Debentures.  During 1995, the
Company recorded an extraordinary  gain of $1,756,000 arising from the Company's
repurchase   from  its  senior  lender  and  retirement  of  $3,900,000  of  its
Debentures.

     As the  result  of the  foregoing,  the  Company  generated  net  income of
$5,174,000, $0.96 per share, for the year ended December 31, 1996, compared with
a net loss of  $31,041,000,  $21.25 per share,  for 1995. The calculation of the
weighted  average  shares for the year ended  December  31,  1996,  assumes  the
conversion of the Notes which are considered to be a common stock equivalent.

     The significant improvement in the operations of the Company in 1996 is the
result of several factors including: the sale of the non-profitable fiber optics
business unit, renewal and extension of the Company's borrowing arrangement with
its senior lender,  restructuring  of the  management  team, as well as, overall
efficiencies in the Company's manufacturing operations.


                                       23
<PAGE>

Results of Operations (continued)

Years Ended December 31, 1995 and 1994

     The  Company's  continued  shortage  of working  capital has had a material
adverse  effect  upon its  operations  during  1995.  The effects of the working
capital shortage were compounded by the Company's defaults during 1995 under its
agreement with Foothill,  which resulted in curtailment of certain  advances and
letter of credit facilities.  Although the defaults were waived as a result of a
March 1996 amendment to the agreement  with  Foothill,  during most of 1995, the
Company was in default  under its agreement  with  Foothill.  Although  Foothill
provided  the  Company  with cash to meet its  immediate  needs,  its failure to
provide additional  advances and letter of credit facilities  adversely affected
the  Company's  operations.  In March 1996,  the Company  sold its fiber  optics
business.  Substantially  all of the proceeds  from the sale were used to reduce
the Company's obligations to Foothill.

     The  Company's  sales for 1995  decreased  by 11% from 1994  sales,  as the
Company experienced  continuing  liquidity problems which adversely affected the
Company's  operations.  Sales of OSS products were  $29,000,000,  a 35% increase
from OSS sales of  $21,500,000  in 1994,  principally  as a result of  increased
sales to BT and sales in the Asian market.  Sales of copper connection  products
decreased by  $8,200,000,  or 29%, from  $28,600,000  in 1994 to  $20,400,000 in
1995.  The reduction in such sales reflects a reduction in sales to Telefonos de
Mexico,  which  accounted for sales of $4,600,000 in 1994 and virtually no sales
in 1995, a $1,600,000 reduction in sales of copper connection products to BT, as
well as the effects of reduced  production  resulting from the Company's working
capital problems.  The Company believes that the significantly  reduced sales to
Telefonos de Mexico is due in part to the continuing  Mexican  financial crisis.
However,  no assurance can be given that any  improvement in the Mexican economy
will result in increased sales of the Company's products.

     Sales of  fiber  optics  products  declined  by  $5,700,000,  or 47%,  from
$12,200,000  in 1994 to $6,500,000 in 1995.  The decline  reflects the Company's
inability  to  produce  fiber  optics  products  as a  result  of its  financial
problems,  as the Company  allocated  its resources  principally  to the OSS and
copper  connection  businesses.  This allocation of resources also reflected the
Company's  decision  late in 1995 to sell the fiber  optics  business.  Sales of
fiber optics products in the fourth quarter of 1995 were less than $1,000,000.

     Sales from signal  processing  products,  representing  approximately 8% of
1995 sales, were also hampered by the Company's ongoing financial difficulties.


                                       24
<PAGE>

Results of Operations (continued)

     Cost of sales in 1995,  as a percentage of sales,  increased  slightly from
1994, from 90% of sales in 1994 to 92% of sales in 1995. As a result of the high
cost of sales, the gross profit for 1995 was $4,700,000, which was significantly
less  than  selling,  general  and  administrative  expenses  and  research  and
development  expenses.  The high cost of sales  reflected  (i) a lower volume of
sales,  (ii) the inability of the Company to purchase  efficiently and to obtain
materials from certain suppliers,  (iii) the under-absorption of overhead costs,
(iv)  modification  of inventory in order to fulfill  customer  orders,  and (v)
significant  write down of fiber optics  inventory  reflecting the value of such
inventory  in  connection  with the sale of the fiber  optics  business in March
1996. In addition,  as part of the Company's ongoing evaluation of its inventory
and based on its 1995  level of  sales,  the  Company  increased  its  inventory
reserve by approximately $1,800,000 for slow-moving or obsolete inventory. Steps
taken to reduce  manufacturing  labor costs by reductions in direct and indirect
manufacturing personnel were not implemented until late in the second quarter of
1995 and are  reflected in cost of sales in the third and fourth  quarters.  The
reduction of facility,  personnel and overhead  costs from the sale of the fiber
optics business will first be reflected in the second quarter of 1996.

     Selling,  general and administrative  expenses decreased by $3,400,000,  or
17%, from  $20,000,000  in 1994 to  $16,600,000  in 1995.  The expense  decrease
reflects the Company's  efforts to reduce  personnel costs, as well as a reduced
level of sales and  marketing  activities.  To some  extent,  the effects of the
personnel reduction were offset by severance costs incurred during 1995.

     Research and development expenses increased by $2,100,000,  from $4,000,000
in 1994 to $6,100,000 in 1995, or 53%. The increase reflected a reduction in the
amount of software development costs which qualified for capitalization.

     In 1995, the Company incurred expenses of $1,100,000,  reflecting the value
of the  Company's  common  stock to be issued as a result of the  settlement  of
class  actions.  In addition,  in 1995, the Company wrote down the net assets of
its fiber optics business to net realizable  value to reflect the price at which
the assets were sold in March 1996.

     As a result of the  foregoing,  the Company  sustained an operating loss of
$19,900,000, an increase of 14% from the operating loss of $17,500,000 in 1994.


                                       25
<PAGE>

Results of Operations (continued)

     Interest expense increased  $2,900,000,  or 52%, from $5,600,000 in 1994 to
$8,500,000  in 1995.  The increase in interest  expense  reflects  substantially
higher  average  interest  rates and  increased  borrowings  under the Company's
agreement with Foothill as compared with the interest rate and borrowings  under
the Company's prior agreement with Chemical Bank. Although most of the increased
borrowings  reflect  additional  borrowings  for  operations,  $2,500,000 of the
additional  borrowings  result from the  purchase  by the Company of  Debentures
which were purchased  from Foothill in connection  with the March 1995 amendment
to the Foothill agreement.

     Other expenses of approximately  $900,000 include costs associated with the
modification  of the  Company's  agreement  with  Foothill in March 1995.  Other
expenses in 1994 related to the restructuring of the Company's secured debt when
Foothill  took over  Chemical  Bank's note from the Company and the terms of the
financing were modified.

     Income tax expense for 1995 was nominal,  reflecting primarily offshore and
Delaware  corporate  taxes.  The  $14,900,000  tax expense in 1994  results from
providing a valuation allowance for deferred income taxes.

     The $3,500,000  loss from the sale of  discontinued  operations  reflects a
reduction in the amount of the expected recovery from the sale by the Company in
1993 of its Israeli  subsidiaries  which were engaged in the manufacture of data
communications   connecting  equipment.  As  a  result  of  a  receivership  and
liquidation  proceedings  involving  the  purchaser  of  the  subsidiaries,  the
estimated recovery from the sale of such operations was reduced from $4,500,000,
which was the estimated  recovery at December 31, 1994, to $1,000,000,  which is
the estimated recovery at December 31, 1995.

     In connection  with the February 1995 amendment to the Company's  agreement
with  Foothill,  the Company  repurchased  from Foothill and retired  $3,900,000
principal amount of Debentures for approximately  $2,500,000 through an increase
of $3,000,000 in the term loan to Foothill and the repricing of certain warrants
granted to  Foothill.  The Company  recorded an  extraordinary  item,  a gain of
$1,800,000 on early  extinguishment  of this debt,  representing  the difference
between the book value of the debt and the approximate  market value of the debt
on the date of the transaction.

     As a result of the foregoing,  the Company sustained a loss from continuing
operations in 1995 of $29,300,000,  or $20.05 per share, as compared with a loss
from continuing  operations in 1994 of $40,000,000,  or $28.05 per share.  After
giving  effect to the loss on sale of  discontinued  operations  and the gain on
early  extinguishment  of debt, the Company sustained a net loss of $31,000,000,
or $21.25 per share,  for 1995, as compared with a net loss of  $40,000,000,  or
$28.05 per share, in 1994.


                                       26
<PAGE>

Results of Operations (continued)

     In  March  1996,  the  Company  sold the net  assets  of its  fiber  optics
business,  amended its agreement with Foothill and reduced its  indebtedness  to
Foothill.  In  addition,  through  March 22, 1996,  the Company  issued its zero
coupon notes in the principal  amount of $22,000,000 and issued 2,800,000 shares
of Common Stock in exchange for $28,800,000  principal  amount of Debentures and
accrued  interest of $1,600,000  at December 31, 1995,  pursuant to the Exchange
Offer.  These  transactions  enabled  the Company to reduce its  facilities  and
personnel  expenses,  reduce the  indebtedness  to Foothill  and reduce  ongoing
interest costs. The effects of these transactions will not be realized until the
second quarter of 1996. However,  the benefits to the Company from the reduction
in operating costs,  including  reductions  resulting from the sale of the fiber
optics business, and the reduced interest expense will not enable the Company to
operate  profitably unless it is able to significantly  reduce its cost of goods
sold or increase its sales margins and reduce its general overhead,  as to which
no assurance can be given.

Item 8. Financial Statements and Supplementary Data.

        See Exhibit I

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

        Not Applicable

                                    Part III

Item 10, 11, 12, and 13.

     The information  called for by Item 10 (Directors and Executive  Officers),
Item  11  (Executive  Compensation),  Item 12  (Security  Ownership  of  Certain
Beneficial  Owners  and  Management),  and Item 13  (Certain  Relationships  and
Related  Transactions)  is  incorporated  herein by reference from the Company's
definitive  proxy  statement for the Annual Meeting of  Shareholders to be filed
with the  Securities  and Exchange  Commission not later than 120 days after the
close of the year ended December 31, 1996.


                                       27
<PAGE>

                                     Part IV

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

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

     (i)  Financial Statements.

          See  Index to Consolidated Financial Statements under Item 8 hereof.

     (ii) Financial Statement Schedules.

          None 

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

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

(b)  Reports on Form 8-K

     None 

(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 10K 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 Form 10K 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  Form 10K for the year ended
          December 31, 1995.
       
  4.1     Amendment dated as of December 16, 1993 to the Warrant Agreement among
          the  Company,  Aster  Corporation  and  Chemical  Bank as successor to
          Manufacturers Hanover Trust Company as Warrant Agent,  incorporated by
          reference to Exhibit 4.2 of the  Company's  Annual Report on Form 10-K
          for the year ended December 31, 1993.
      

                                       28
<PAGE>

Exhibits (continued)

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

  4.2     Form of Rights  Amendments,  dated as of March 22,  1989  between  the
          Company and  Manufacturers  Hanover  Trust  Company,  as Rights Agent,
          incorporated by reference to the Company's  Registration  Statement on
          Form 8-A dated April 3, 1989.
          
  4.2.1   Amendment No. 1 to Rights  Agreement,  dated July 28, 2993 between the
          Company and Chemical  Bank (as  successor  by merger to  Manufacturers
          Hanover Trust Company) as Rights Agent,  incorporated  by reference to
          the  Company's  Registration  Statement  on Form 8-A/A filed August 4,
          1993.
          
  4.3     Warrant issued to Aspen Grove Financial Corporation to Purchase 87,500
          Shares of Common  Stock  dated as of June 13,  1994,  incorporated  by
          reference to Exhibit 4 (d) to the Company's  Quarterly  Report on Form
          10-Q for the quarter ended June 30, 1994.
          
  4.4     Warrant  issued to Banque  Scandinave  en Suisse to  Purchase  100,000
          shares of Common  Stock  dated as of June 13,  1994,  incorporated  by
          reference to Exhibit 4 (f) to the Company's  Quarterly  Report on Form
          10-Q for the quarter ended June 30, 1994.
          
  4.5     Stock  Option  Agreement  dated as of May 15, 1994 between the Company
          and Stanley  Kreitman,  incorporated  by reference to Exhibit 4 (a) to
          the  Company's  Quarterly  Report on Form 10-Q for the  quarter  ended
          September 30, 1994.
          
  4.6     Amended and Restated Loan and Security  Agreement dated as of November
          28,  1994,  between  the  Company and  Foothill  Capital  Corporation,
          incorporated by reference to Exhibit 2 to the Company's Current Report
          on Form 8-K dated November 30, 1994.
          
  4.7     Amendment  Number  One dated  February  13,  1995 to the  Amended  and
          Restated  Loan and  Security  Agreement  dated as of November 28, 1994
          between the Company and Foothill Capital Corporation,  incorporated by
          reference to Exhibit 4.7 of the Company's Annual Form 10K for the year
          ended December 31, 1995.
          
  4.7.1   Letter  Agreement  dated as of  February  13,  1995,  incorporated  by
          reference to Exhibit  4.7.1 of the  Company's  Annual Form 10K for the
          year ended December 31, 1995.
          
  4.7.2   Amendment  Number Two dated March 30, 1995 to the Amended and Restated
          Loan and Security  Agreement dated as of November 28, 1994 between the
          Company and Foothill Capital Corporation, incorporated by reference to
          Exhibit  4.7.2 of the  Company's  Annual  Form 10K for the year  ended
          December 31, 1995.
         
                                       29
<PAGE>

Exhibits (continued)

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

  4.8     Secured Promissory Note dated November 28, 1994 made by the Company in
          favor of Foothill  Capital  Corporation,  incorporated by reference to
          Exhibit 4 to the Company's  Current  Report on Form 8-K dated November
          30, 1994.
          
  4.9     Amended and Restated Secured  Promissory Note dated February 13, 1995,
          incorporated by reference to Exhibit 4.9 of the Company's  Annual Form
          10K for the year ended December 31, 1995.
          
  4.10    Deferred  Funding Fee Note dated November 28, 1994 made by the Company
          in favor of Foothill Capital Corporation, incorporated by reference to
          Exhibit 5 to the Company's  Current  Report on Form 8-K dated November
          30, 1994.
          
  4.11    Amendment  Number  Three to Amended  and  Restated  Loan and  Security
          Agreement  dated March 12,  1996,  between  the  Company and  Foothill
          Capital  Corporation, incorporated by reference to Exhibit 4.11 of the
          Company's Annual Form 10K for the year ended December 31, 1995.
          
  4.12    Warrant to Purchase  Common  Stock of the Company  dated  November 28,
          1994 executed by the Company in favor of Foothill Capital Corporation,
          incorporated by reference to Exhibit 6 to the Company's Current Report
          on Form 8-K dated November 30, 1994.
          
  4.12.1  Amendment  Number  One to  Warrant  to  Purchase  Common  Stock of the
          Company dated as of February 13, 1995 executed by the Company in favor
          of Foothill Capital Corporation,  incorporated by reference to Exhibit
          4.12.1 of the  Company's  Annual Form 10K for the year ended  December
          31, 1995.
          
  4.13    Assignment of Loans,  Liens and Loan Documents dated November 28, 1994
          between  Chemical  Bank,  The  Bank  of  New  York,  Foothill  Capital
          Corporation,  the  Company  and  certain  of the  subsidiaries  of the
          Company,  incorporated  by  reference  to  Exhibit 3 to the  Company's
          Current Report on Form 8-K dated November 30, 1994.
          
  4.14    Warrant to Purchase  Common  Stock of the Company  dated  November 28,
          1994 executed by the Company in favor of Chemical  Bank,  incorporated
          by reference to Exhibit 12 to the Company's Current Report on Form 8-K
          dated November 30, 1994.
         

                                       30
<PAGE>

Exhibits (continued)

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

  4.15    Warrant to Purchase  Common  Stock of the Company  dated  November 28,
          1994  executed  by the  Company  in  favor  of The  Bank of New  York,
          incorporated  by  reference  to  Exhibit 13 to the  Company's  Current
          Report on Form 8-K dated November 30, 1994.
         
  4.16    Indenture dated as of July 1, 1992 between the Company and the Bank of
          New York as trustee, incorporated by reference to Exhibit 4 (a) of the
          Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
          1992.
         
  4.17    Form of Warrant to Purchase  Common  Stock of the Company  dated as of
          June 1, 1993 between the Company and Mallory  Factor,  incorporated by
          reference to Exhibit 4 (f) of the Company's  Quarterly  Report on Form
          10-Q for the quarter ended September 30, 1993.
         
  4.18    Form of Warrant  Agreement  dated as of August 12,  1993  between  the
          Company and Berenson  Minella & Company,  incorporated by reference to
          Exhibit 4 (e) of the Company's  Quarterly  Report on Form 10-Q for the
          quarter ended September 30, 1993.
         
  4.19    Lockbox Operating  Procedural  Agreement dated as of November 28, 1994
          among  Chemical Bank,  the Company and Foothill  Capital  Corporation,
          incorporated by reference to Exhibit 7 to the Company's Current Report
          on Form 8-K dated November 30, 1994.
         
  4.20    Security  Agreement,  dated  as of July  16,  1993,  made by Woo  Shin
          Electro-Systems Company to Chemical Bank, incorporated by reference to
          Exhibit 4 (b) (iv) of the Company's  Quarterly Report on Form 10-Q for
          the quarter ended June 30, 1993.
         
  4.21    Indenture  dated as of  November  30,  1995,  between  the Company and
          American Stock Transfer & Trust Company,  incorporated by reference to
          Exhibit  4.21 of the Company's  Annual  Form  10K for the  year  ended
          December 31, 1995.
         
  10.1    Form of Split Dollar  Agreement--more than ten years,  incorporated by
          reference to Exhibit 19 (d) of the Company's  Quarterly Report on Form
          10-Q for the quarter ended September 30, 1985.
         
  10.2    Form of Split Dollar  Agreement--less than ten years,  incorporated by
          reference to Exhibit 19 (e) of the Company's  Quarterly Report on Form
          10-Q for the quarter ended September 30, 1985. 
        

                                       31
<PAGE>

Exhibits (continued)

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

  10.3    Form of  Amendment  No. 1 to  Split  Dollar  Agreement--less  than ten
          years--Acceleration upon change of control,  incorporated by reference
          to Exhibit 10 (i) (i) of the Company's  Annual Report on Form 10-K for
          the year ended December 31, 1988.
         
  10.4    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.
         
  10.5    Agreement  dated as of January 1, 1990  between  the Company and Alpha
          Risk Management,  Inc., incorporated by reference to Exhibit 10 (k) of
          the Company's  Annual Report on Form 10-K for the year ended  December
          31, 1990.
         
  10.6    Agreement  dated May 25, 1988 between British  Telecommunications  plc
          and the  Company,  incorporated  by reference to Exhibit 19 (a) of the
          Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
          1988.  Confidential Treatment granted;  document filed separately with
          the SEC.
         
  10.6.1  Amendment  to  agreement  of May 25,  1988,  dated  September 1, 1996,
          between  British  Telecommunications  plc and  the  Company.
         
  10.7    Lease dated December 17, 1990 between the Company and LBA  properties,
          Inc.,  incorporated  by reference  to Exhibit 10 (d) of the  Company's
          annual report on Form 10-K for the year ended December 31, 1990.
         
  10.8    Asset Purchase  Agreement dated as of March 6, 1996 by and among Augat
          Inc.,   Porta   Systems  Corp.   and  certain  of  its   subsidiaries,
          incorporated by reference to Exhibit 10.8 of the Company's Annual Form
          10K for the year ended December 31, 1995.
         
  10.9    Form of Employment  Contract dated October 2, 1995 between the Company
          and  KPMG   BayMark   Strategies   LLC's  Crisis   Management   Group,
          incorporated by reference to Exhibit 10.9 of the Company's Annual Form
          10K for the year ended December 31, 1995.

  10.9.1  Amendment  dated  December  18, 1996  between the Company and KPMG Bay
          Mark Strategies LLC's Crisis Management Group.
        

                                       32
<PAGE>

Exhibits (continued)

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

  10.10   Form of Employment Contract dated October 16, 1995 between the Company
          and Edward B. Kornfeld,  incorporated by reference to Exhibit 10.10 of
          the Company's Annual Form 10K for the year ended December 31, 1995.

  10.11   (Deleted)
         
  10.12   Form of Executive Salary Continuation Agreement dated October 16, 1995
          between the Company and Edward B. Kornfeld,  incorporated by reference
          to Exhibit 10.12 of the  Company's  Annual Report on Form 10-K for the
          year ended December 31, 1995.
         
  10.13   Form of Employment  Contract dated October 9, 1996 between the Company
          and Seymour Joffe.
         
  10.14   1996 Stock Option Plan filed as Exhibit A to the Proxy  Statement  for
          the 1996 Annual Meeting to  Stockholders  and  incorporated  herein by
          reference.
         
  22.1    Subsidiaries of the Company, incorporated by reference to Exhibit 22.1
          of the Company's Annual Form 10K for the year ended December 31, 1995.
         
  23      Consent of Independent Auditors.


                                       33
<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 25, 1997                By/s/ William V. Carney
                                               -----------------------------
                                                   William V. Carney
                                                   Chairman of the Board

          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
            ---------                       -----                    ----

By /s/William V. Carney             Chairman of the Board        March 25, 1997
   ---------------------------      and Director(Principal
     William V. Carney              Executive Officer)


By /s/Edward B. Kornfeld            Chief Financial Officer      March 25, 1997
   ---------------------------      (Principal Financial and
     Edward B. Kornfeld             Accounting Officer)     
                                

By /s/Seymour Joffe                 Director                     March 25, 1997
   ---------------------------
     Seymour Joffe


By /s/Howard D. Brous               Director                     March 25, 1997
   ---------------------------
     Howard D. Brous


By /s/Herbert H. Feldman            Director                     March 25, 1997
   ---------------------------
     Herbert H. Feldman


By /s/Stanley Kreitman              Director                     March 25, 1997
   ---------------------------
     Stanley Kreitman


By /s/Michael A. Tancredi           Director                     March 25, 1997
   ---------------------------
     Michael A. Tancredi


                                       34
<PAGE>

Exhibit I

Item 8.  Financial Statements and Supplementary Data


Index                                                                      Page


Report of Independent Certified Public Accountants                         F-2

Independent Auditors' Report                                               F-3

Consent of Independent Certified Public Accountants                        F-4

Consent of Independent Auditors                                            F-5

Consolidated Financial Statements and Notes:

         Consolidated Balance Sheets,
         December 31, 1996 and 1995                                        F-6

         Consolidated Statements of Operations
         for the Years Ended
         December 31, 1996, 1995 and 1994                                  F-7

         Consolidated Statements of Stockholders' 
         Equity (Deficit) for the Years
         Ended December 31, 1996, 1995 and 1994                            F-8

         Consolidated Statements of Cash Flows
         for the Years Ended December 31, 1996,
         1995 and 1994                                                     F-9

         Notes to Consolidated Financial Statements                        F-10


                                      F-1
<PAGE>

               Report of Independent Certified Public Accountants


The Board of Directors and
Stockholders of Porta Systems Corp.:

We have audited the  accompanying  consolidated  balance sheets of Porta Systems
Corp.  and  subsidiaries  as of  December  31,  1996 and 1995,  and the  related
statements of operations,  stockholders'  equity  (deficit),  and cash flows for
each of the two years in the period ended December 31, 1996. These  consolidated
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Porta Systems Corp.
and  subsidiaries  as of December  31,  1996 and 1995,  and the results of their
operations  and their cash  flows for each of the two years in the period  ended
December 31, 1996, in conformity with generally accepted accounting principles.

The accompanying  consolidated  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's  continuing  losses  before
non-recurring  gains  and net  capital  deficiencies  combined  with the need to
refinance or restructure certain existing long-term notes payable beyond January
2, 1998  raise  substantial  doubt  about its  ability  to  continue  as a going
concern.  Management's  plans in regard to these  matters are also  described in
Note 2. The  consolidated  financial  statements do not include any  adjustments
that might result from the outcome of this uncertainty.



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

Mitchel Field, New York
March 18, 1997


                                      F-2
<PAGE>

                          Independent Auditors' Report


The Board of Directors and Stockholders
Porta Systems Corp.:

We  have  audited  the  accompanying   consolidated  statements  of  operations,
stockholders'  equity  (deficit),  and cash  flows of Porta  Systems  Corp.  and
subsidiaries for the year ended December 31, 1994. These consolidated  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards  require that we plan and perform the audit to obtain reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the results of operations and cash flows of
Porta Systems Corp.  and  subsidiaries  for the year ended December 31, 1994, in
conformity with generally accepted accounting principles.




                                                /s/KPMG PEAT MARWICK LLP
                                                ------------------------
                                                KPMG PEAT MARWICK LLP

Jericho, New York
March 31, 1995


                                      F-3
<PAGE>

               Consent of Independent Certified Public Accountants



Board of Directors
Porta Systems Corp.:


We consent to the  incorporation  by reference in the  registration  statements:
(Reg.  No.  2-95117) on Form S-8,  (Reg.  No.  2-65375) on Form S-8,  (Reg.  No.
33-12146) on Form S-8 and (Reg. No. 33-41992) on Form S-8 of Porta Systems Corp.
and  subsidiaries  of  our  report  dated  March  18,  1997,   relating  to  the
consolidated  balance  sheets of Porta  Systems  Corp.  and  subsidiaries  as of
December  31,  1996  and  1995  and  the  related  consolidated   statements  of
operations,  stockholders'  equity  (deficit) and cash flows for the years ended
December 31, 1996 and 1995,  which  report  appears in the Porta  Systems  Corp.
annual  report on Form  10-K.  Our  report  contains  an  explanatory  paragraph
regarding the Company's ability to continue as a going concern.




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


Mitchel Field, New York
March 26, 1997


                                      F-4
<PAGE>

                         Consent of Independent Auditors


Board of Directors
Porta Systems Corp.:


We consent to the  incorporation  by reference in the  registration  statements;
(Reg.  No.  2-95117) on Form S-8,  (Reg.  No.  2-65375) on Form S-8,  (Reg.  No.
33-12146) on Form S-8 and (Reg. No. 33-41992) on Form S-8 of Porta Systems Corp.
and  subsidiaries  of  our  report  dated  March  31,  1995,   relating  to  the
consolidated  statements of operations,  stockholders' equity (deficit) and cash
flows of Porta Systems Corp.  and  subsidiaries  for the year ended December 31,
1994, which report appears in the Porta Systems Corp. 1996 annual report on Form
10-K.


                                        /s/KPMG PEAT MARWICK LLP
                                        ------------------------
                                        KPMG PEAT MARWICK LLP

Jericho, New York
March 26, 1997


                                      F-5
<PAGE>

                                            PORTA SYSTEMS CORP. AND SUBSIDIARIES
                                                 Consolidated Balance Sheets
                                                 December 31, 1996 and 1995
                                                   (Dollars in thousands)

                                 Assets                       1996       1995
                                                              ----       ----
Current assets:                                                       
    Cash and cash equivalents                               $ 2,584      1,109
    Accounts receivable - trade, less                                 
       allowance for doubtful                                         
       accounts of $1,550 in 1996                                     
       and $1,251 in 1995                                    16,034     12,626
    Inventories                                               7,424      8,979
    Prepaid expenses                                            782        659
    Other receivables                                           531       --
    Receivable from sale of                                           
       discontinued operations                                 --        1,000
                                                            -------    -------
                  Total current assets                       27,355     24,373
                                                            -------    -------
                                                                      
Assets held for sale, net                                         -      7,893
Property, plant and equipment, net                            5,422      6,911
Deferred computer software, net                               1,676      3,188
Goodwill, net of amortization of $2,503                               
   in 1996 and $2,265 in 1995                                11,555     11,793
Other assets                                                  4,650      6,433
                                                            -------    -------
                  Total assets                              $50,658     60,591
                                                            =======    =======
                                                                    
                 Liabilities and Stockholders' Equity (Deficit)

Current liabilities:
    Convertible subordinated debentures                    $ 2,096       6,564
    Current portion of long-term debt                          750        --
    Accounts payable                                         6,056       8,302
    Accrued expenses                                         9,004       9,886
    Accrued interest payable                                   583       3,534
    Accrued commissions                                      2,708       2,016
    Accrued deferred compensation                            1,232       1,120
    Income taxes payable                                       780         780
    Short-term loans                                            31         368
                                                           -------     -------
                  Total current liabilities                 23,240      32,570
                                                           -------     -------

Long-term debt                                              16,835      26,645
Convertible subordinated debentures                           --        25,660
Zero coupon senior subordinated 
   convertible notes                                        25,885        --
Notes payable net of current maturities                      3,084       3,084
Income taxes payable                                           802         811
Other long-term liabilities                                    653         385
Minority interest                                              863         759
                                                           -------     -------
                  Total long-term liabilities               48,122      57,344
                                                           -------     -------
Commitments and contingencies

Stockholders' equity (deficit):
    Preferred stock, no par value;  
       authorized  1,000,000 shares,  
       none issued                                            --          -- 
    Common stock, par value $.01; 
       authorized 40,000,000 and 20,000,000 
       shares, issued 2,223,861 and 1,492,361 
       shares in 1996 and 1995, respectively                    22          15
    Additional paid-in capital                              36,561      33,308
    Foreign currency translation adjustment                 (4,014)     (4,199)
    Accumulated deficit                                    (50,900)    (56,074)
                                                           -------     -------
                                                           (18,331)    (26,950)
    Treasury stock, at cost, 33,340 shares                  (2,066)     (2,066)
    Receivable for employee stock purchases                   (307)       (307)
                                                           -------     -------
                  Total stockholders' 
                    equity (deficit)                       (20,704)    (29,323)
                                                           -------     --------
                  Total liabilities and 
                    stockholders' equity (deficit)         $50,658      60,591
                                                           =======     =======

          See accompanying notes to consolidated financial statements.


                                      F-6
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
                      Consolidated Statements of Operations
                  Years ended December 31, 1996, 1995 and 1994
                    (in thousands, except per share amounts)


                                               1996       1995       1994
                                               ----       ----       ----

Sales                                         $57,987     61,181     68,985
Cost of sales                                  36,591     56,444     62,530
                                              -------    -------    -------
     Gross profit                              21,396      4,737      6,455
                                              -------    -------    -------

Selling, general and administrative 
   expenses                                    13,566     16,556     20,037
Research and development expenses               3,848      6,103      3,959
Litigation settlement                            --        1,100       --
Write-down of net assets held for sale 
   to net realizable value                       --          862       --
                                              -------    -------    -------

     Total expenses                            17,414     24,621     23,996
                                              -------    -------    -------
                                             
     Operating income (loss)                    3,982    (19,884)   (17,541)
                                 
Interest expense                               (5,328)    (8,484)    (5,617)
Interest income                                   136         87        251
Gain on sale of assets                          2,264       --         --
Other income (loss), net                          402       (884)    (2,022)
                                              -------    -------    -------
     Income (loss) from continuing 
        operations before income taxes 
        and minority interest                   1,456    (29,165)   (24,929)
                                             
Income tax expense                                100         30     14,920
Minority interest                                 104        102        146
                                              -------    -------    -------

     Income (loss) before 
        discontinued operations                 1,252    (29,297)   (39,995)
                                             
Provision for loss on disposal of 
   discontinued operations                       --       (3,500)      --
                                              -------    -------    -------

     Income (loss) before 
        extraordinary item                      1,252    (32,797)   (39,995)
                                             
Extraordinary gain on early 
   extinguishment of debt                       3,922      1,756       --
                                              -------    -------    -------

     Net income (loss)                        $ 5,174    (31,041)   (39,995)
                                              =======    =======    =======

Per share amounts:
   Continuing operations                      $  0.23     (20.05)    (28.05)
   Discontinued operations                       --        (2.40)      --
   Extraordinary item                            0.73       1.20       --
                                              -------    -------    -------

     Net income (loss) per share             
     of common stock                          $  0.96     (21.25)    (28.05)
                                              =======    =======    =======

Weighted average shares of 
  common stock outstanding                      5,381      1,461      1,427
                                              =======    =======    =======


          See accompanying notes to consolidated financial statements.


                                      F-7
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
            Consolidated Statements of Stockholders' Equity (Deficit)
                  Years ended December 31, 1996, 1995 and 1994
                                 (In thousands)
<TABLE>
<CAPTION>



                                                                                                   Receivable   Total
                                  Common Stock                  Foreign      Retained                 for       Stock-
                                -----------------  Additional   Currency     Earnings               Employee   holders'    
                                No.of   Par Value   Paid-in    Translation (Accumulated  Treasury     Stock    Equity/
                                Shares    Amount    Capital    Adjustment     Deficit)     Stock    Purchases (Deficit)
                                ---------------------------------------------------------------------------------------

<S>                              <C>      <C>      <C>         <C>          <C>         <C>          <C>       <C>     
Balance at December 31, 1993     1,416    $ 14     $ 30,210    $ (2,909)    $ 14,962    $ (1,938)    $ (498)   $ 39,841
                                                                                                     
Net loss 1994                     --        --         --          --        (39,995)       --         --       (39,995)
Stock issued                        76       1        2,138        --           --          --         --         2,139
Warrants issued                   --        --          600        --           --          --         --           600
Write off of receivable for                                                                          
   employee stock purchases       --        --         --          --           --          --           62          62
Foreign currency translation                                                                         
                                ---------------------------------------------------------------------------------------
   adjustment                     --        --         --        (1,122)        --          --         --        (1,122)
Balance at December 31, 1994     1,492      15       32,948      (4,031)     (25,033)     (1,938)      (436)      1,525
                                                                                                     
                                                                                                     
Net loss 1995                     --        --         --          --        (31,041)       --         --       (31,041)
Warrants issued                   --        --          360        --           --          --         --           360
Write off of receivable for                                                                          
   employee stock purchases       --        --         --          --           --          (128)       129           1
Foreign currency translation                                                                         
   adjustment                     --        --         --          (168)        --          --         --          (168)
                                ---------------------------------------------------------------------------------------
Balance at December 31, 1995     1,492      15       33,308      (4,199)     (56,074)     (2,066)      (307)    (29,323)
                                                                                                     
Net income 1996                   --        --         --          --          5,174        --         --         5,174
Stock issued                       732       7        2,873        --           --          --         --         2,880
Warrants issued                   --        --          380        --           --          --         --           380
Foreign currency translation                                                                         
   adjustment                     --        --         --           185         --          --         --           185
                                ---------------------------------------------------------------------------------------
                                                                                                     
Balance at December 31, 1996     2,224    $ 22     $ 36,561    $ (4,014)    $(50,900)   $ (2,066)    $ (307)   $(20,704)
                                =======================================================================================
</TABLE>


           See accompanying notes to consolidated financial statements


                                      F-8
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
                 Consolidated Statements of Cash Flows (Note 22)
                  Years ended December 31, 1996, 1995 and 1994
                             (Dollars in thousands)

                                                      1996      1995      1994
                                                    --------  --------  --------
Cash flows from operating activities:
    Net income (loss)                               $ 5,174   (31,041)  (39,995)
    Adjustments to reconcile net income
       (loss) to net cash  provided by
       (used in) operating activities:
          Loss on disposal of discontinued
             operations                                --       3,500      --
          Gain on sale of assets                     (2,264)     --        --
          Gain on extinguishment or refinancing 
             of indebtedness                         (3,922)   (1,756)     (913)
          Non-cash financing costs                    2,280     2,698       600
          Deferred income taxes                        --        --      13,955
          Realized gain on litigation settlement       (174)     --        --
          Depreciation and amortization               3,941     7,015     5,580
          Write off of employee notes receivable       --           1        62
          Amortization of discount on convertible 
             subordinated debentures                    104       603       442
          Minority interest                             104       102       163
    Changes in operating assets and liabilities:
       Accounts receivable                           (3,408)    1,338     2,598
       Inventories                                    1,555     9,700     8,047
       Prepaid expenses                                (123)     (773)     (328)
       Other assets                                    (743)    1,916      (330)
       Accounts payable, accrued expenses 
          and other liabilities                      (1,788)    4,167    10,414
                                                    -------   -------   -------
                  Net cash provided by (used in) 
                     operating activities               736    (2,530)      295
                                                    -------   -------   -------

Cash flows from investing activities:
    Proceeds from disposal of assets held 
       for sale, net                                  7,393      --        --
    Proceeds from sale of assets                      3,456      --        --
    Capital expenditures, net                          (125)   (1,749)   (1,107)
                                                    -------   -------   -------
                  Net cash provided by (used in) 
                     investing activities            10,724    (1,749)   (1,107)
                                                    -------   -------   -------

Cash flows from financing activities:
    Proceeds from long-term debt                      1,343     5,781    24,212
    Repayments of long-term debt                     10,403)   (2,500)  (22,299)
    Proceeds from issuance of common stock             --        --       2,139
    Repayments of notes payable/short-term loans       (337)     --      (1,162)
                                                    -------   -------   -------
                  Net cash provided by (used in) 
                     financing activities            (9,397)    3,281     2,890
                                                    -------   -------   -------

Effect of exchange rate changes on cash                (588)     (225)   (1,473)
Increase (decrease) in cash and cash equivalents      1,475    (1,223)      605
Cash and equivalents - beginning of year              1,109     2,332     1,727
                                                    -------   -------   -------

Cash and equivalents - end of year                  $ 2,584     1,109     2,332
                                                    =======   =======   =======


          See accompanying notes to consolidated financial statements.

                                       F-9


<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                           December 31, 1996 and 1995

 (1)  Summary of Significant Accounting Policies

      Nature of Operations and Principles of Consolidation

      Porta Systems Corp.  (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.  The Company'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  Systems  Corp.  (the  "Company")  and  its   majority-owned  or
          controlled subsidiaries. All significant intercompany transactions and
          balances have been eliminated in consolidation.

      Revenue Recognition

      Revenue, from other than 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
          determined.

      Concentration of Credit Risk

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

      As  discussed in Note 19, a substantial portion of the Company's sales are
          to  customers in foreign  countries.  The  Company's  credit risk with
          respect to these customers is mitigated by obtaining letters of credit
          for a  substantial  portion of the contract  price,  and by monitoring
          credit  exposure  with  each  customer.   The  Company  has  no  other
          significant customers.

      Cash Equivalents

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

      Inventories

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


                                                                     (Continued)


                                      F-10
<PAGE>

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

      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

      Software costs  incurred for specific  customer  contracts  are charged to
          cost of sales at the time revenues on such  contracts are  recognized.
          Software development costs relating to products the Company offers for
          sale are deferred in accordance with Statement of Financial Accounting
          Standards (SFAS) No. 86 "Accounting for the Costs of Computer Software
          to Be Sold, Leased, or Otherwise Marketed".  These costs are amortized
          to cost of sales over the  periods  that the related  product  will be
          sold, up to a maximum of four years. Amortization of computer software
          costs,  which all  relate to  products  the  Company  offers for sale,
          amounted to  approximately  $1,551,000,  $3,171,000  and $1,847,000 in
          1996, 1995, and 1994, respectively.

      Goodwill

      Goodwill represents the difference between the purchase price and the fair
          market value of net assets acquired in business  combinations  treated
          as purchases.  Goodwill is amortized on a straight-line  basis over 20
          to 40 years. At December 31, 1996, $7,136,000 of the goodwill is being
          amortized  over   approximately  20  years  and  $4,419,000  is  being
          amortized over 40 years.  The Company assesses the  recoverability  of
          unamortized  goodwill  using the  undiscounted  projected  future cash
          flows from the related businesses.

      Income Taxes

      Deferred income taxes are recognized based on the differences  between the
          tax bases of assets and liabilities and their reported  amounts in the
          financial statements that will result in taxable or deductible amounts
          in future  years.  Further,  the  effects of  enacted  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 (see note 9).

      Foreign Currency Translation

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

                                                                     (Continued)


                                      F-11
<PAGE>

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

      Earnings (Loss) Per Share

      Earnings  (loss)  per share are based on the  weighted  average  number of
          shares  outstanding and common equivalent  shares.  The calculation of
          the  weighted  average  shares for the year ended  December  31, 1996,
          assumes  the  conversion  of  the  Zero  coupon  senior   subordinated
          convertible   notes  which  are   considered  to  be  a  common  stock
          equivalent.  Fully  diluted  earnings  per  share  information  is not
          presented as it is anti-dilutive.  All share and per share information
          have been  restated to give effect to the one for five  reverse  stock
          split effective August 2, 1996.

      Reclassifications

      Certain   reclassifications   have  been  made  to  conform  prior  years'
          consolidated financial statements to the 1996 presentation.

      Accounting for Stock-Based Compensation

      In  1996,  the  Company  adopted the  Statement  of  Financial  Accounting
          Standard  No. 123,  "Accounting  for  Stock-Based  Compensation".  The
          Company has elected not to implement  the fair value based  accounting
          method for  employee  stock  options,  but has elected to disclose the
          pro-forma net income and earnings per share as if such method had been
          used to account for stock-based  compensation cost as described in the
          Statement.

      Accounting for the Impairment of Long-Lived Assets

      In  1996,  the  Company  adopted the  Statement  of  Financial  Accounting
          Standard No. 121,  "Accounting for the Impairment of Long-Lived Assets
          and for  Long-Lived  Assets to be Disposed Of." The effect of adopting
          this standard was insignificant.

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

      New Accounting Standard

      On  March 3, 1997,  the FASB  issued  Statement  of  Financial  Accounting
          Standard No. 128,  "Earnings Per Share." This  pronouncement  provides
          for the  calculation of Basic and Diluted  earnings per share which is
          different  from the current  calculation  of Primary and Fully Diluted
          earnings per share in  accordance  with APB 15. The effect of adopting
          this new standard is not expected to be material.

                                                                     (Continued)


                                      F-12
<PAGE>

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

(2)   Liquidity

      The accompanying  consolidated  financial  statements  have been  prepared
          assuming  that the  Company  will  continue  as a going  concern.  The
          Company's continuing losses before non-recurring gains and net capital
          deficiencies  combined  with  the  need to  refinance  or  restructure
          certain  existing long-term  notes payable beyond January  1998  raise
          substantial doubt about the Company's ability  to continue as a  going
          concern.  The consolidated  financial  statements  do  not include any
          adjustments that might arise from the outcome of this uncertainty.

      During 1996, the Company  sold  the net assets related to its fiber optics
          business  in March 1996 (Note 4). This sale  raised  approximately  $8
          million  of  cash  and the  acquiring  company  assumed  approximately
          $1,400,000 of  liabilities.  The sale of this business,  which in 1995
          and  prior  years   sustained   significant   losses,   eliminated   a
          considerable operating cash drain. A majority of the proceeds from the
          sale  were  used to pay down a portion  of the  Company's  debt to its
          senior  lender,  which in turn  reduced  ongoing  interest  costs  and
          provided the Company with working  capital through the ability to then
          restructure its senior debt. In addition,  through  December 31, 1996,
          the  Company  exchanged  approximately  94%  of  its  6%  Subordinated
          Convertible  Debt for  non-interest  bearing  notes.  This has reduced
          interest  expense by approximately  $1,900,000 per year.  Furthermore,
          the Company  implemented various management and operational changes in
          1996 which have streamlined  operations and reduced operating expenses
          to enhance  the  Company's  ability to attain  profitable  operations.
          Management's  plans for 1997  include a  continuation  of the  expense
          reduction and  operations  consolidation  program which began in 1996.
          For the year ended December 31, 1996, the Company has operating income
          and positive working capital.  Although the Company,  during 1996, had
          adequate cash to fund its operations,  there is no assurance that this
          will continue.  The consolidated  financial statements for 1996 do not
          include  any   adjustments   that  might  arise  from  any   liquidity
          uncertainty.

      As  of December 31, 1996 the Company's long-term debt includes $25,855,000
          of Zero coupon convertible subordinated notes (the Notes) which mature
          on January 2, 1998.  At December  31, 1996 the  Company  does not have
          sufficient resources to pay the Notes when they come due. The  Company
          will  require  either  financing  to   enable  such  payment  of  this
          obligation or induce  the  conversion  of the  Notes.  If the  Company
          is unable to satisfy this  obligation,  the  Company's  operations and
          working capital could be materially and adversely affected.

(3)   Discontinued Operations

      In  1992 the Company sold its network communications business. As a result
          of an insolvency  procedure  involving the purchaser of this business,
          the  Company   reduced  its  receivable  due  from  the  purchaser  of
          $4,500,000 to $1,000,000 in 1995, and recorded an additional provision
          for  loss  on  disposal  of  discontinued  operations  of  $3,500,000.
          Pursuant  to  the  sale  of the  business  out  of  receivership,  the
          Company's  receivable  was  represented  by rights to shares of common
          stock of the  entity  which now owns the  discontinued  operation.  In
          1996,  the Company  sold its rights to the shares of this common stock
          for $3,456,000 and recorded a gain of $2,264,000. The gain represented
          an adjustment in the estimated value of the shares previously received
          and accordingly was reflected in continuing operations.  As part of an
          agreement with the Company's senior lender,  the net proceeds from the
          sale were applied to reduce the outstanding  principal  balance of the
          Company's term loan.

                                                                     (Continued)


                                      F-13
<PAGE>

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

(4)   Assets Held for Sale

      On  March 13, 1996,  the Company sold certain assets and the buyer assumed
          certain   liabilities  and  severance   obligations   related  to  the
          operations  of the  Company's  fiber optics  management  and component
          business  for  $7,893,000,  subject  to  certain  adjustments.  As  of
          December 31, 1995, in conjunction with this  transaction,  the Company
          accrued  approximately  $700,000 for certain obligations in connection
          with the  closing  of its fiber  optics  facility  in  Ireland.  These
          obligations  were settled  during 1996,  along with other  adjustments
          related  to  the  sale  of  the  fiber  business.   The  net  proceeds
          approximated  the  carrying  value of the  assets  held for sale.  The
          difference  was  recorded  as  other  expenses  in  the   accompanying
          statement of operations.

      The Company  received  $6,793,000  at  closing  of the  sale of the  fiber
          business  and the  remainder  was placed  into two escrow  funds to be
          released over the next year, subject to certain conditions,  including
          a final  valuation of the net assets  transferred.  As of December 31,
          1996, the remainder,  $531,000, has remained in escrow and is reported
          as an "Other  receivable"  in the  accompanying  consolidated  balance
          sheet.  The proceeds were primarily used to repay long-term debt. As a
          result of the transaction, the Company recorded a charge to operations
          in  1995  of  $862,000  to  write  down  the  net  assets  sold to net
          realizable value. Net sales of the fiber optics business  approximated
          $447,000,  $6,513,000,  and  $12,150,000  for  1996,  1995  and  1994,
          respectively.

      Net assets held for sale at net  realizable  value as of December 31, 1995
          consists of the following:

                  Inventory                                     $ 1,467,000
                  Fixed assets                                    1,510,000
                  Deferred computer software                        319,000
                  Goodwill                                        5,897,000
                  Other assets                                      115,000
                  Accounts payable and accrued liabilities       (1,415,000)
                                                                -----------

                                                                $ 7,893,000
                                                                ===========

(5)   Joint Venture

      The Company  entered into a joint  venture  agreement as of April 24, 1986
          with a Korean partner.  Unless otherwise terminated in accordance with
          the joint  venture  agreement,  the joint  venture  will  terminate on
          December  31,  2010.  In  addition,  the Company  has entered  into an
          agreement  with its joint  venture  partner  whereby  the  Company has
          obtained an option,  exercisable for approximately $2,300, to purchase
          an additional 1% interest in Woo Shin  Electro-Systems Co. (Woo Shin),
          which would  increase the Company's  ownership  percentage to 51%. The
          Company  consolidates the operations of Woo Shin since the Company can
          obtain a  controlling  interest at its  election for a nominal sum and
          Woo Shin is entirely  dependent  on the  Company  for the  products it
          sells as well as receiving management assistance from the Company. The
          interest  in the joint  venture not owned by the Company is shown as a
          minority interest.


                                                                     (Continued)


                                      F-14
<PAGE>

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

(6)   Inventories

      Inventories consist of the following:
                                                  December 31,
                                              --------------------
                                              1996            1995
                                              ----            ----

             Parts and components          $4,557,000       5,370,000
             Work-in-process                  515,000         849,000
             Finished goods                 2,352,000       2,760,000
                                           ----------       ---------

                                           $7,424,000       8,979,000
                                           ==========       =========

(7)   Property, Plant and Equipment

      Property, plant and equipment consists of the following:

                                            December 31                 
                                        ------------------         Estimated
                                        1996          1995        useful lives
                                        ----          ----        ------------

     Land                             $  246,000      246,000         --
     Buildings                         2,358,000    2,358,000     20-50 years
     Machinery and equipment           8,038,000    8,426,000      5-8 years
     Furniture and fixtures            3,830,000    3,379,000     5-10 years
     Transportation equipment            213,000      240,000       4 years
     Tools and molds                   3,064,000    4,233,000       8 years
     Leasehold improvements              855,000      827,000    Term of lease
                                      ----------   ----------
                                      18,604,000   19,709,000

     Less accumulated depreciation
        and amortization              13,182,000   12,798,000
                                      ----------   ----------

                                      $5,422,000    6,911,000
                                      ==========   ==========

      Total  depreciation  and  amortization  expense  for 1996,  1995 and  1994
          amounted  to  approximately  $1,746,000,   $3,610,000  and $3,242,000,
          respectively. 

(8)   Accounts Receivable

      Accounts  receivable  included  approximately  $900,000 and  $1,146,000 at
          December  31,  1996,  and  1995,  of  revenues   earned  but  not  yet
          contractually billable relating to long-term contracts for specialized
          products.  All such amounts at December  31, 1996,  are expected to be
          billed in the  subsequent  year.  The allowance for doubtful  accounts
          receivable  was  $1,550,000 and $1,251,000 as of December 31, 1996 and
          1995  respectively.  The allowance for doubtful accounts was increased
          by  provisions  of $553,000,  $864,000,  and $318,000 and decreased by
          write-offs  of  $254,000,  $198,000,  and $144,000 for the years ended
          December 31, 1996, 1995, and 1994, respectively.


                                                                    (Continued)


                                      F-15
<PAGE>

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

(9)   Income Taxes

      Included in income (loss) from continuing operations is income (loss) from
          foreign operations of $(584,000), $1,272,000 and $(920,000), for 1996,
          1995 and 1994, respectively.

      The provision for income taxes consists of the following:

                           1996               1995                 1994
                           ----               ----                 ----
                     Current  Deferred  Current   Deferred   Current   Deferred
                     -------  --------  -------   --------   -------   --------
                                                  
Federal             $   --       --     (98,000)     --      800,000  12,670,000
State and foreign    100,000     --     128,000      --      165,000   1,285,000
                    --------   ------  --------    ------   --------  ----------
                                                  
             Total  $100,000     --      30,000      --      965,000  13,955,000
                    ========    ======  ========   =======   ======== ==========
                                                  
      A   reconciliation  of the  Company's  income tax provision and the amount
          computed by applying the statutory U.S. federal income tax rate of 34%
          to income (loss) from continuing  operations before income taxes is as
          follows:

                                               1996       1995         1994
                                               ----       ----         ----

Tax expense (benefit) at 
   statutory rate                            $495,000  (9,916,000)  (8,526,000)
Increase (decrease) in income tax
   benefit resulting from:
      Increase (decrease) in 
         valuation allowance                 (495,000) 10,103,000   22,219,000
      Benefit of Puerto Rico industrial
          tax exemption                          --          --        813,000
      State and foreign taxes, less
          applicable federal benefits         100,000     132,000      147,000
      Other                                      --      (289,000)     267,000
                                             --------  ----------   ----------

                                             $100,000      30,000   14,920,000
                                             ========  ==========   ==========


      The Company has unused United States tax net operating loss  carryforwards
          of  approximately  $70,735,000  expiring at various dates between 2003
          and 2011. No tax benefit or expense was apportioned to either the loss
          from  discontinued  operations  or the  extraordinary  gains  as  such
          amounts are  immaterial.  In addition,  the Company has net  operating
          loss  carryforwards  arising from acquired  companies of approximately
          $9,878,000.  The  carryforward  amounts  are  subject to review by the
          Internal  Revenue  Service  (IRS).  The  effect  of  the  sale  of the
          Company's  fiber optics  business  (note 4) in March,  1996 on the net
          operating   loss   carryforwards   and  acquired  net  operating  loss
          carryforwards  was not material.  In addition,  there are capital loss
          carryforwards  of approximately  $11,396,000 and investment,  research
          and  development  and job tax credit  carryforwards  of  approximately
          $1,300,000 expiring at various dates between 1997 and 2001.


                                                                     (Continued)


                                      F-16
<PAGE>

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

      The  Company's net operating  loss  carryforwards  expire in the following
          years:

                          2003            $   187,000
                          2007             13,062,000
                          2008             17,291,000
                          2009             18,125,000
                          2010             20,634,000
                          2011              1,436,000
                                          -----------

                                          $70,735,000
                                          ===========

      The components of the deferred tax assets and liabilities  as  of December
          31, 1996 and 1995 are as follows:

                                                            1996      1995
   Deferred tax assets:
      Inventory allowances                             $ 2,064,000    4,157,000
      Allowance for doubtful accounts receivable           457,000      359,000
      Benefits of tax loss carryforwards                27,233,000   27,755,000
      Benefit plans                                        869,000    1,593,000
      Alternative minimum taxes                               --        293,000
      Accrued Commissions                                1,043,000         --
      Depreciation                                            --        122,000
      Other                                                128,000       30,000
      Benefits of tax loss carryforwards of 
         acquired business                               3,479,000    3,479,000
      Differences between tax basis and book basis
      of net assets of businesses acquired                    --      3,165,000
      Benefit of investment tax credit carryforwards     1,300,000         --
      Benefit of capital loss carryforwards              4,387,000         --
                                                       -----------  -----------

                                                        40,960,000   40,953,000
      Valuation allowance                              (39,444,000) (39,604,000)
                                                       ------------ ------------
                                                         1,516,000    1,349,000
                                                       -----------  -----------
   Deferred tax liabilities:
      Capitalized software costs                        (1,479,000)  (1,349,000)
      Depreciation                                         (37,000)        --
                                                       -----------  -----------
                                                        (1,516,000)  (1,349,000)
                                                       -----------  -----------
                                                       $      --           --
                                                       ===========  ===========


      In  the third quarter of 1994, the Company,  after  reviewing the deferred
          tax asset in the context of its results of  operations  for such third
          quarter,  recorded a valuation  allowance in the entire  amount of its
          then  existing  deferred  tax asset,  which is  included in income tax
          expense. This decision was based on the criteria contained in SFAS No.
          109, generally  requiring a valuation allowance when cumulative losses
          have  been  experienced  and there is a lack of  sufficient  objective
          offsetting  evidence to conclude  that it is more likely than not that
          the deferred tax asset will be utilized.

                                                                     (Continued)


                                      F-17
<PAGE>

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

      The income tax  returns of the  Company and its  subsidiary  operating  in
          Puerto Rico were examined by the IRS for the tax years ended  December
          31, 1989 and 1988. As a result of this examination,  the IRS increased
          the  Puerto  Rico   subsidiary's   taxable   income   resulting   from
          intercompany  transactions,  with  a  corresponding  increase  in  the
          Company's   net  operating   losses.   The   settlement   amounted  to
          approximately  $953,000.  During  1994,  the  Company  entered  into a
          structured settlement with the IRS, which was amended in 1996, whereby
          monthly payments will be made to liquidate the settlement. The amended
          agreement  calls for a financial  review by the IRS in November  1997.
          Aggregate annual amounts payable by the Company, including interest on
          the unpaid amounts at a current rate of 7%, is $240,000 in 1997. As of
          December  31,  1996,  the Company has made all the  required  payments
          through that date under the  settlement and  approximately  $1,000,000
          remains outstanding.

(10)  Notes Payable and Short-Term Loans

      The Company has outstanding  $3,084,000 of non-interest  bearing  deferred
          funding fee notes  payable with its senior  lender,  included in notes
          payable at December  31, 1996 and 1995,  which are due on November 30,
          1998  (see  Note  11).  The  Company's  Korean   subsidiary  also  has
          short-term  borrowings  with banks at  December  31,  1996 and 1995 of
          $31,000 and $368,000, respectively, bearing interest at 11%.

(11)  Long-Term Debt

      On  December 31, 1996 and 1995, the Company's  long-term debt consisted of
          senior debt under its credit facility in the amount of $16,835,000 and
          $26,645,000,   respectively.   The  credit   facility  is  secured  by
          substantially  all of the Company's  assets.  All  obligations  except
          undrawn  letters  of  credit,  letter  of  credit  guarantees  and the
          deferred fee notes will bear interest at 12%. The Company will incur a
          fee of 2% on the  average  balance  of  undrawn  letters of credit and
          letter of credit guarantees outstanding.


                                                                     (Continued)


                                      F-18
<PAGE>

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

      As  of December 31, 1995, the Company violated certain financial covenants
          and was in default of its agreement with its senior  lender.  On March
          13, 1996, the Company entered into an agreement to extend its Loan and
          Security  Agreement  with its senior  lender from November 30, 1996 to
          November 30, 1998,  which also  provided for a waiver of all specified
          events of default.  The revised agreement  provides for loan principal
          payments of $250,000 on each of June 30, 1997,  September 30, 1997 and
          December 31, 1997, and $325,000  commencing  March 31, 1998 and on the
          last day of each quarter  thereafter during the term of the agreement.
          Commencing  June 30, 1997,  the agreement also requires the Company to
          pay  additional  principal  payments if its cash flow exceeds  certain
          amounts. The March, 1996 amendment also required that certain proceeds
          from  the  Company's  sale of its  fiber  optics  business  (note  4),
          including $6,793,000 received at closing, the first $100,000 disbursed
          from escrow to the Company and 50% of any additional amounts disbursed
          to the Company,  be paid to the senior lender. The $6,793,000 received
          at closing was paid to the senior  lender to (i) pay accrued  interest
          through  March 31, 1996,  (ii) repay a  $3,000,000  line of credit and
          (iii) partially repay the principal balance of the term loan. Upon the
          payment on March 13, 1996,  the lender made available to the Company a
          $2,000,000 revolving line of credit. Simultaneously, and in accordance
          with the  amended  agreement,  the  revolving  line of credit  maximum
          amount was reduced  from  $10,000,000  to  $2,000,000  and the maximum
          available  for  letters  of  credit or  guarantees  was  reduced  from
          $8,000,000 to $7,000,000. The outstanding balance of the term loan and
          revolving   line  of  credit  was   approximately   $20   million  and
          approximately   $900,000,    respectively,   after   all   the   above
          transactions.  In addition, the Company repaid $3,456,000 of term loan
          from  the  proceeds  of  the  sale  of  assets   associated  with  its
          discontinued  Israeli operation (note 3). As of December 31, 1996, the
          Company's  availability under its $2,000,000  revolving line of credit
          was approximately $700,000.

      Through December 31, 1996,  the Company  incurred the  following  fees, in
          connection with this credit facility:  In 1994, a one-time  $2,474,000
          deferred funding fee for the revolving line and term loan evidenced by
          a non-interest bearing promissory note due and payable on November 30,
          1998.  The  Company  incurred a $300,000  fee on  February  13,  1995,
          evidenced by a  non-interest  bearing note due November 30, 1998 and a
          $310,000  facility  fee on November  30,  1995,  which amount has been
          added to the outstanding principal balance of the deferred funding fee
          note  and is also due  November  30,  1998.  In  consideration  of the
          extension of the facility  term to November  30, 1998,  the  agreement
          requires  a  monthly  facility  fee  payment  of  $50,000,  commencing
          November  30,  1996,  and  continuing  to the  end  of the  agreement.
          Additionally,  in 1994,  the  Company  incurred a $550,000  investment
          banking fee and  attorney and filing fees  amounting to  approximately
          $319,000.


                                                                     (Continued)


                                      F-19
<PAGE>

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

      In  connection  with the credit  facility,  in November,  1994 the Company
          issued  warrants  to its senior  lender to purchase  55,000  shares of
          common stock, immediately exercisable at $17.20 per share and expiring
          in November 1999,  together with warrants to purchase 27,500 shares of
          the  Company's  common  stock on the same  economic  terms that became
          exercisable  on March  13,  1996.  In  connection  with  the  extended
          agreement in March 1996, the Company  granted  additional  warrants to
          the lender to purchase  200,000 shares of common stock at $5 per share
          that expire in March 2001. All such warrants provide the senior lender
          demand and "piggyback" registration rights. The value of the warrants,
          $380,000,  was recorded as deferred  financing  expense and additional
          paid in capital.

      Financial debt  covenants  include an  interest  coverage  ratio  measured
          quarterly   commencing   with  the  quarter   ending  June  30,  1996,
          limitations on the incurrence of indebtedness,  limitations on capital
          expenditures,  and  prohibitions  on declarations of any cash or stock
          dividends or the repurchase of the Company's stock. As of December 31,
          1996, the Company was in compliance with the above covenants.

      In  connection  with an  amendment  to the credit  facility  agreement  on
          February 13, 1995,  the Company  purchased from the senior lender $3.9
          million  principal  amount  of  its  6%  Subordinated  Debentures  for
          approximately $2.5 million,  including accrued interest.  Such payment
          was financed with funds received from the senior lender as an increase
          in the term loan. In  connection  with this  transaction,  the Company
          recorded an extraordinary gain on the early extinguishment of the debt
          of  $1,756,000,  which gain  represented  the excess of the book value
          over the market value of the debt. Moreover, the $782,000 premium paid
          in excess of the market value of the debt was  reflected as additional
          borrowing costs over the remaining term of the facility.

      Maturities  of  the  Company's  long-term  debt,   including   convertible
          subordinated  debentures (exclusive of $2,096,000 which are in default
          and have not been exchanged as described in note 12 and are classified
          as a current  liability) and notes payable net of current  maturities,
          are as follows:

                             1997         $   750,000
                             1998          45,804,000
                                          -----------

                                          $46,554,000
                                          ===========

(12)  6% Convertible Subordinated Debentures and
      Zero Coupon Senior Subordinated Convertible Notes

      As  of December 31, 1996 and 1995 the Company had  outstanding  $2,096,000
          and $32,224,000 of its 6% convertible Subordinated Debentures due July
          1, 2002 (the Debentures), net of original issue discounts amortized to
          principal over the term of the debt using the effective  interest rate
          method, of $209,000 and $3,851,000,  respectively.  The face amount of
          the outstanding  Debentures was $2,305,000 and $36,075,000 at December
          31, 1996 and 1995, respectively. The Debentures are convertible at any
          time prior to maturity,  unless previously redeemed, into Common Stock
          of the Company at a  conversion  rate of 8.333  shares for each $1,000
          principal  amount at maturity  of  Debentures,  subject to  adjustment
          under certain circumstances.
                                                                    
                                                                     (Continued)


                                      F-20
<PAGE>

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

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

      Interest on the Debentures is payable on July 1 of each year. The interest
          accrued as of  December  31, 1996 and 1995  amounted  to $387,000  and
          $3,244,000,  respectively.  As of December  31, 1996 the Company is in
          default under the interest payment provisions of the Debentures.

      On  November 30, 1995,  the Company  offered the holders of its Debentures
          an  exchange  of such debt for  common  stock and zero  coupon  senior
          subordinated  convertible  notes (the Notes) due January 2, 1998.  The
          exchange ratio is 19.4 shares of common stock and $767.22 of principal
          of Notes in exchange for $1,000 principal amount of Debentures.
          Accrued interest on the Debentures would also be eliminated.

      The unsecured  Notes do not bear  interest  and there are no sinking  fund
          requirements.  Each  Note  is  convertible  into  common  stock  at  a
          conversion  price of $6.55.  Accordingly,  in  addition to the 699,855
          maximum  common shares  issuable from the exchange of the  Debentures,
          the  maximum  number  of  common  shares  that  could be  issued  upon
          conversion,  if all Debentures are exchanged, is 4,225,600.  The Notes
          are redeemable at the option of the Company at 90.32% of the principal
          balance  increasing  periodically to 100% of the principal  balance on
          November 1, 1997.

      Subsequent to December 31, 1995 and through  March 22,  1996,  the Company
          exchanged   approximately   $28,725,000   principal   amount   of  the
          Debentures,  net of unamortized  discount of  $3,065,000,  for 557,265
          shares of the Company's common stock and $22,038,000  principal amount
          of Notes pursuant to the Exchange Offer.  Accordingly,  the Debentures
          exchanged,   which  were   outstanding  at  December  31,  1995,  were
          classified as a long-term liability, consistent with the payment terms
          of the Notes. Since the remaining  principal amount of $7,350,000 with
          a carrying  value of $6,564,000 of  Debentures  not exchanged  were in
          default,  such debt was classified as a current  liability at December
          31, 1995.

      As  of  December  31,  1996,  the  Company  had  exchanged   approximately
          $33,770,000  principal  amount  of  the  Debentures,  net  of  related
          unamortized  discount and accrued interest expense, for 655,000 shares
          of  stock  and  $25,909,000  of  Notes.  This  represents  94%  of the
          outstanding  balance of the 6% Debentures  prior to any  conversion to
          the Notes. In addition, as of December 31, 1996, $24,000 of Notes have
          been converted, at the option of the holder and in accordance with the
          conversion  rights  of the  Notes,  for 3,639  shares of stock.  As of
          December  31,  1996  $25,885,000  Notes  are  outstanding  net of such
          conversions.


                                                                     (Continued)


                                      F-21
<PAGE>

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

      The exchange  of the  Debentures  for  the  Notes  and  common  stock  was
          accounted for as a troubled  debt  restructuring  in  accordance  with
          Statement of Financial  Accounting  Standards No. 15. Since the future
          principal  and  interest  payments  under  the  Notes is less than the
          carrying  value of the  Debentures,  the Notes were  recorded  for the
          amount of the future cash  payments,  and not  discounted,  the common
          stock issued was recorded at the market value at the time of issuance,
          and an extraordinary gain on restructuring of approximately $3,922,000
          was recorded.
          Accordingly, no future interest expense will be recorded on the Notes.

(13)  Leases

      At  December  31,   1996,   the  Company  and  its   subsidiaries   leased
          manufacturing and administrative facilities, equipment and automobiles
          under a number of  operating  leases.  The  Company is required to pay
          increases  in real  estate  taxes on the  facilities  in  addition  to
          minimum rents. Total rent expense for 1996, 1995, and 1994 amounted to
          approximately  $871,000,  $1,277,000  and  $1,397,000,   respectively.
          Minimum rental  commitments,  exclusive of future escalation  charges,
          for each of the next five years are as follows:

                                1997         $ 526,000
                                1998           343,000
                                1999           102,000
                                2000             8,000
                                2001                 0
                              
                  
(14)  Incentive Plans

      Under the Company's 1984 Employee  Incentive Plan, the Company provided an
          opportunity to acquire subordinated  convertible debentures to certain
          employees of the Company and its subsidiaries. This plan was suspended
          when the  Company's  stockholders  approved the  Company's  1986 Stock
          Option Plan.  As of December  31, 1996,  there is $307,000 of employee
          promissory  notes receivable  outstanding,  of which the maturity date
          has been  extended to April 1997.  During 1995,  the Company wrote off
          $128,000 of notes receivable and took possession of the related shares
          held as  collateral.  Accordingly,  treasury  stock  account  has been
          increased by the amount of such write-off.

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


                                                                     (Continued)


                                      F-22
<PAGE>

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

      In  1996,  the  stockholders  of the Company  approved the Company's  1996
          Stock  Incentive  Plan (1996 Plan),  which is  authorized  for 100,000
          shares of  Common  Stock.  Incentive  stock  options  cannot be issued
          subsequent to ten years from the date the 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 alternative members of the stock option committee are
          not eligible for options  under the 1996 Plan.  In addition,  the Plan
          provides  for the  automatic  grant  to  non-management  directors  of
          non-qualified options to purchase 2,000 shares on May 1st of each year
          commencing  May 1, 1996,  based upon the average  closing price of the
          last ten trading days of April of each year.

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

      Statement of  Financial  Accounting  Standard  No.  123,  "Accounting  for
          Stock-Based  Compensation"  ("SFAS  No.123")  requires  the Company to
          provide,  beginning with 1995 grants, pro forma information  regarding
          net income and net income per common  share as if  compensation  costs
          for the Company's stock option plans had been determined in accordance
          with the fair value method  prescribed in SFAS No.123.  Such pro forma
          information has not been presented  because  management has determined
          that the  compensation  costs  associated with options granted in 1996
          and 1995 are not material to net income or net income per share.

      A   summary of the status of the  Company's  1986 stock  option plan as of
          December 31, 1996, 1995, and 1994, and changes during the years ending
          on those dates is presented below:
<TABLE>
<CAPTION>

                                     1996                     1995                      1994
                            ------------------------   -----------------------  ----------------------
                            Shares    Weighted         Shares   Weighted        Shares  Weighted
                            Under     Average          Under    Average         Under   Average
                            Option    Exercise Price   Option   Exercise Price  Option  Exercise Price
                            ------    --------------   ------   --------------  ------  --------------
         
<S>                         <C>          <C>           <C>          <C>         <C>         <C>
Outstanding beginning 
   of the year              56,360       $58           80,775       $63         80,330      $63
                                                                              
Granted                       --                        6,000         5          2,000       49
Exercised                     --                         --                       (200)      37
Forfeited                  (39,963)       58          (30,415)       63         (1,355)      76
                           -------                    -------                   ------         
                                                                              
Outstanding end of year     16,397        57           50,360        58         80,775       63
                           =======                    =======                   ======         
                                                                              
Options exercisable                                                           
   at year-end              16,397                     50,360                   55,575
                           =======                    =======                   ======         
</TABLE>


                                                                     (Continued)


                                      F-23
<PAGE>

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

      The following table summarizes information about stock options outstanding
          under the 1986 Plan at December 31, 1996:
<TABLE>
<CAPTION>

                              Options Outstanding                      Options Exercisable
                 -----------------------------------------------   -----------------------------
Range of         Outstanding  Remaining         Weighted-average   Exercisable  Weighted-Average
Exercise Prices  at 12/31/96  Contractual Life  Exercise Price     at 12/31/96  Exercise Price
---------------  -----------  ----------------  ----------------   -----------  ----------------

<C>                <C>            <C>                <C>             <C>            <C>
$ 5 to   25         3,000          5.8 years          $ 5             3,000          $ 5
 25 to   50             5           .1                 38                 5           38
 50 to   75        10,595          2.7                 65            10,595           65
 75 to  100         2,797          2.3                 86             2,797           86
                   ------                                            ------

$ 5 to  100        16,397          3.2                 58            16,397           58
                   ======                                            ======
</TABLE>

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

                                                          1996
                                                  --------------------------
                                                  Shares      Weighted
                                                  Under       Average
                                                  Option      Exercise Price
                                                  ------      --------------

          Outstanding beginning of the year          -0-        $  0.00

          Granted                                 79,448           2.45
          Exercised                                 --
          Forfeited                                 --
                                                  ------         

          Outstanding end of year                 79,448           2.45
                                                  ======         

          Options exercisable at year-end         63,050
                                                  ======         

      The following table summarizes information about stock options outstanding
          under the 1996 Plan at December 31, 1996:
<TABLE>
<CAPTION>

                              Options Outstanding                      Options Exercisable
                 ------------------------------------------------  -----------------------------
Range of         Outstanding   Remaining         Weighted-average  Exercisable  Weighted-Average
Exercise Prices  at 12/31/96   Contractual Life  Exercise Price    at 12/31/96  Exercise Price
---------------  -----------   ----------------  ----------------  -----------  ----------------

<C>                <C>            <C>                <C>              <C>           <C>   
$ 1 to 5           79,448         5.7 years          $ 2.45           63,050        $ 2.57
                   ======                                             ======
</TABLE>

(15)  Employee Benefit Plans

      The Company has deferred compensation agreements with certain officers and
          employees,  with benefits commencing at retirement equal to 50% of the
          employee's base salary, as defined. Payments under the agreements will
          be made for a  period  of  fifteen  years  following  the  earlier  of
          attainment of age 65 or death. During 1996, 1995 and 1994, the Company
          accrued approximately $180,000,  $203,000 and $191,000,  respectively,
          under these agreements.

                                                                     (Continued)


                                      F-24
<PAGE>

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

      In  1986, the Company  established the Porta Systems Corp.  401(k) Savings
          Plan (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%.  The  Company  will match a
          participant's  contribution  by an amount equal to 25% and 75% in 1996
          and 1995,  respectively,  of the first six percent  contributed by the
          participant.  A  participant  is 100%  vested  in the  balance  to his
          credit.  For the years ended  December  31, 1996,  1995 and 1994,  the
          Company's  contribution  amounted to $90,000,  $379,000 and  $417,000,
          respectively.

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

(16)  Stockholders' Equity

      On  June 6,  1996,  the  stockholders  of  the  Company  approved   (a) an
          amendment  to the Company's  certificate of incorporation  to increase
          the number of authorized  shares of  Common Stock from  20,000,000  to
          40,000,000  shares and (b) a  one-for-five reverse split (the "Reverse
          Split") of the  Company's  common stock.  As a  result of  the Reverse
          Split,  each share of common stock  outstanding  at the effective time
          of the Reverse  Split,  without any action on the part of  the  holder
          thereof,  became  one-fifth  share of common  stock.  The par value of
          the common stock was not affected by the Reverse Split. In conjunction
          with the  Reverse Split,  the  Company has  reclassified approximately
          $84,000  from common stock to  additional  paid-in  capital. All share
          and per  share data have  been  restated to give effect to the Reverse
          Split.

      As  of December 31, 1996, the Company has outstanding warrants to purchase
          27,000  shares of  Common  Stock to  certain  consultants  as  partial
          remuneration  for  services  provided  during 1993.  Such  warrants to
          purchase  shares were issued at an exercise  price  approximating  the
          fair market  value at the date of grant of $33.10 per share and expire
          in August 1998.

      During 1996, the Company  settled its previously  disclosed  class action.
          The settlement  includes a cash payment by the Company's  insurers and
          issuance by the Company of 220,000  shares of its common stock.  As of
          December  31,  1996,  approximately  73,000  shares  have been  issued
          pursuant to such  settlement.  The remaining  liability of $773,000 is
          included in accrued expenses.

      During 1994,  the Company  issued  warrants to purchase  82,500  shares of
          common  stock at an  exercise  price of $17.20 per share to its senior
          lender that expire in November,  1999, and warrants to purchase 53,000
          shares of common stock at an exercise price of $17.50 per share to its
          former  lenders in return for a discount with respect to the repayment
          of its debt. In connection  with the issuance of these  warrants,  the
          Company recorded  deferred  financing costs of $360,000 and an expense
          of $600,000,  respectively.  In March 1996, the Company, in connection
          with an agreement to amend and extend certain  long-term debt,  issued
          warrants to  purchase  200,000  shares of common  stock at an exercise
          price of $5.00 per share that  expire  March,  2001  (note 11).  As of
          December 31, 1996, all warrants issued to lenders are exercisable.


                                                                     (Continued)


                                      F-25
<PAGE>

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

(17)  Stockholder Rights Plan

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

      The rights  will  be  exercisable  only  if a  person  or  group  acquires
          beneficial  ownership  of 20 percent or more of the  Company's  Common
          Stock or  commences a tender or exchange  offer upon  consummation  of
          which such person or group would  beneficially  own 20 percent or more
          of the Common Stock.

      If  any person becomes the  beneficial  owner of 20 percent or more of the
          Company's  Common Stock other than pursuant to an offer for all shares
          which is fair to and  otherwise  in the best  interests of the Company
          and its  stockholders,  each right not owned by such person or related
          parties  will enable its  holders to  purchase,  at the  right's  then
          current exercise price,  shares of Common Stock of the Company (or, in
          certain  circumstances  as  determined  by the Board of  Directors,  a
          combination  of cash,  property,  common  stock  or other  securities)
          having a value of twice the right's  exercise price.  In addition,  if
          the  Company is  involved  in a merger or other  business  combination
          transaction  with  another  person in which its shares are  changed or
          converted,  or sells  more than 50  percent  of its  assets to another
          person or persons,  each right that has not previously  been exercised
          will  entitle  its holder to  purchase,  at the right's  then  current
          exercise  price,  common shares of such other person having a value of
          twice the right's exercise price.

      The Company will generally be entitled to redeem the rights,  by action of
          a majority of the  continuing  directors of the  Company,  at $.01 per
          right at any time  until  the  tenth  business  day  following  public
          announcement that a 20 percent position has been acquired.

(18)  Fair Values of Financial Instruments

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

      The carrying  amount of the Company's  long-term  debt  approximates  fair
          value  as the  extension  of  the  Loan  and  Security  Agreement  was
          re-negotiated  on March 13,  1996  with  similar  terms to those  that
          existed at December 31, 1996.

      Due to the  inherent  uncertainty  regarding  the  conversion  of the Zero
          coupon  convertible  subordinated notes or their status at maturity as
          discussed in Note 2, it is  impractical  to estimate the fair value of
          this financial instrument.


                                                                     (Continued)


                                      F-26
<PAGE>

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

      The carrying  amount and estimated fair value of the Company's  additional
          financial instruments are summarized as follows:

                                    December 31, 1996       December 31, 1995
                                  ---------------------    ---------------------
                                  Carrying   Estimated     Carrying   Estimated
                                  amount     fair value    amount     fair value
                                  --------   ----------    --------   ----------
                                                                   
   Receivable from sale of 
      discontinued operations    $     --          --      1,000,000   1,370,000
                                 ==========     =======   ==========  ==========
   6% Convertible subordinated 
      debentures                 $2,096,000     511,000   32,224,000  12,626,000
                                 ==========     =======   ==========  ==========


      The estimated fair value of the receivable  from the sale of  discontinued
          operations  is based  upon the  quoted  market  price of the shares of
          common stock  collateralizing the receivable.  Management's  estimated
          fair value of the 6% convertible  subordinated  debentures is based on
          estimated  market prices of the Company's  common stock as of December
          31, 1996 assuming  conversion as 94% of the 6% debentures holders have
          elected to convert.

(19)  Major Customers

      Consolidated  sales  made  to  a  Korean  telephone  company  amounted  to
          $4,749,000,   $7,651,000  and  $9,599,000  in  1996,  1995  and  1994,
          respectively.  Sales  made to a United  Kingdom  telephone  company in
          1996,  1995  and  1994  amounted  to   $11,308,000,   $17,252,000  and
          $11,566,000,  respectively.  Sales  made  to  a  Philippine  telephone
          company amounted to $7,034,000,  $581,000 and $9,000 in 1996, 1995 and
          1994,  respectively.  Sales made to a Czech Republic telephone company
          in 1996, 1995 and 1994 amounted to $3,116,000, $1,997,000 and $22,000,
          respectively  Sales made to a Mexican  telephone company in 1996, 1995
          and  1994  amounted  to  $0,  $41,000  and  $4,987,000,  respectively.
          Approximately 33% and 28% of the Company's accounts receivable are due
          from  the  above   customers   as  of  December  31,  1996  and  1995,
          respectively.

(20)  Contingencies

      At  December 31, 1996, the Company was contingently liable for outstanding
          letters of credit aggregating approximately $5,880,000 as security for
          the performance of certain long-term  contracts and the borrowing from
          a bank of its Korean subsidiary.

      The Company is a party to various  lawsuits  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.



                                                                     (Continued)


                                      F-27
<PAGE>

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

(21)  Legal Matters

      In  July 1996,  an action was  commenced  against  the Company 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
          the Company who  acquired  their  securities  in  connection  with the
          acquisition by the Company of Aster Corporation. The complaint alleges
          breach of contract  against the Company 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 the Company that  additional  plaintiffs may be
          added  and,  as a  result,  the  amount  of  damages  claimed  may  be
          substantially  greater than the amount presently claimed.  The Company
          believes  that the  defendants  have  valid  defenses  to the  claims.
          Discovery is proceeding.

      In  July 1996, the Securities and Exchange  Commission  (the "SEC") issued
          an order  (the  "Order")  directing  a  private  investigation  of the
          Company to  determine  whether  there has been a violation  of Federal
          securities laws. The SEC indicated to counsel for the Company that the
          investigation  relates  to the  position  of the SEC  staff  that  the
          independence of the Company's auditors for 1995, KPMG Peat Marwick LLP
          ("Peat  Marwick"),  was  adversely  impacted by certain  relationships
          involving Peat Marwick,  on one hand, and KPMG BayMark  Strategies LLC
          ("BayMark")  and Edward R.  Olson,  the  President  of BayMark and the
          Company's former interim president and chief operating officer, on the
          other hand.  Although  the Company does not agree with the position of
          the SEC staff with respect to the  independence  of Peat Marwick,  the
          Company  is  cooperating  with the SEC's  investigation.  The  Company
          retained  BDO Seidman,  LLP to reaudit the  Company's  1995  financial
          statements, which reaudit resulted in no changes to the Company's 1995
          financial  statements as audited by Peat Marwick. The Company does not
          believe that the investigation  will result in any material  liability
          on the part of the Company.

(22)  Cash Flow Information

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

                                                 1996     1995     1994
                                                 ----     ----     ----

          Cash paid for interest               $ 2,751    2,915    4,196
                                               =======    =====    =====

          Cash paid for income taxes           $   105       73      128
                                               =======    =====    =====


                                                                     (Continued)
 

                                      F-28
<PAGE>

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

      (2) Non cash transactions:

          (i) During  1996,  the  Company  exchanged  approximately  $33,770,000
          principal amount of its 6% convertible subordinated debentures, net of
          unamortized  discount  and accrued  interest,  for  655,000  shares of
          Common stock and $25,909,000 of Zero coupon  convertible  subordinated
          notes (see Note 12).

          (ii) During 1996, the Company issued 3,600 shares of common stock as a
          result of the  conversion of Zero coupon  convertible  notes (see Note
          12).

          (iii) During 1996, the Company issued 73,000 shares of common stock to
          satisfy a portion of the final  settlement  of a previously  disclosed
          class action lawsuit (see Notes 16).

          (iv) In  connection  with the  Company's  March 1996  amendment to its
          credit  facility,  the Company  granted its senior lender  warrants to
          purchase  200,000  shares of common  stock (see Note 11). The value of
          the  warrants  were  recorded  as  deferred   financing   expense  and
          additional paid in capital.

(23)  Segment Disclosure

      The Company  operates  exclusively  in  the  telecommunications  industry.
          Customers include telephone  operating companies and others within and
          outside the United States and its possessions.

      In  the following table, intercompany sales are accounted for at cost plus
          a reasonable profit.  Identifiable assets for the geographic areas are
          those assets  identified  with the operations in each area.  Corporate
          assets consist principally of cash and cash equivalents, debt issuance
          costs, employee loans for debentures and patents. The Company does not
          allocate  costs for product  development,  marketing or  management to
          each  segment.  Thus,  the  information  may not be  indicative of the
          extent  to  which  geographic  areas   contributed  to  the  Company's
          consolidated results of operations.



                                                                     (Continued)


                                      F-29
<PAGE>

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

          Geographic  area data for the years ended December 31, 1996,  1995 and
              1994 are as follows:

                                            1996          1995          1994
                                            ----          ----          ----
Sales made from:
   United States to:
      U.S. customers                    $17,644,000    16,445,000    23,831,000
      Foreign customers                  18,418,000    12,875,000    11,069,000
      Intercompany                       16,726,000    14,849,000    25,102,000
                                        -----------   -----------   -----------

                                         52,788,000    44,169,000    60,002,000
                                        -----------   -----------   -----------

Korea-to customers                        4,749,000     7,651,000     9,599,000
                                        -----------   -----------   -----------

Europe-to customers                      17,176,000    24,174,000    19,847,000
Intercompany                              3,228,000     3,735,000       690,000
                                        -----------   -----------   -----------
                                         20,404,000    27,909,000    20,537,000

Other-to customers                                -        36,000     4,639,000
Intercompany                              1,878,000     2,410,000     3,796,000
                                        -----------   -----------   -----------

                                          1,878,000     2,446,000     8,435,000
                                        -----------   -----------   -----------

Intercompany eliminations               (21,832,000)  (20,994,000)  (29,588,000)
                                        ------------  ------------  -----------

Consolidated sales                      $57,987,000    61,181,000    68,985,000
                                        ===========   ===========   ===========

Operating income (loss)
   United States                          4,310,000   (22,549,000)  (16,621,000)
   Europe                                  (666,000)    2,279,000    (1,465,000)
   Korea                                    236,000       288,000       387,000
   Other                                    102,000        98,000       158,000
                                        -----------   -----------   -----------

Consolidated operating income (loss)    $ 3,982,000   (19,884,000)  (17,541,000)
                                        ===========   ===========   ===========

Identifiable assets:
   United States                         33,993,000    39,600,000    63,200,000
   Europe                                 9,182,000    11,414,000    10,505,000
   Korea                                  2,324,000     2,540,000     2,491,000
   Other                                    544,000       623,000     1,248,000
                                        -----------   -----------   -----------

Consolidated identifiable assets         46,043,000    54,177,000    77,444,000

Corporate assets                          4,615,000     6,414,000     7,519,000
                                        -----------   -----------   -----------

Consolidated total assets               $50,658,000    60,591,000    84,963,000
                                        ===========   ===========   ===========


  
                                      F-30