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                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-K
(Mark One)
            [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                 SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

                   For the fiscal year ended December 31, 1998

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

                 For the transition period from _______to_______

                          Commission file number 1-8191

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

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

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

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

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

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

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

                                      None

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

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

      State aggregate market value of the voting stock held by non-affiliates of
the registrant: $18,597,424 as of March 12, 1999.

      Indicate  the  number of shares  outstanding  of each of the  registrant's
class of common stock, as of the latest  practicable  date:  9,298,712 shares of
Common Stock, par value $.01 per share, as of March 12, 1999.

                       DOCUMENTS INCORPORATED BY REFERENCE

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

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<PAGE>

Item 1.  Business

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

      Computer-based  operation  support  systems  ("OSS").  The  Company's  OSS
systems  focus on the access loop and are  components  of  telephone  companies'
Service  Assurance,  Service  Activation and FlowThru  initiatives.  The Systems
primarily  focus on Trouble  Management,  Line  Testing,  Network  Provisioning,
Inventory and Assignment,  and Automatic Activation.  These systems are marketed
principally  to  foreign  telephone   operating  companies  in  established  and
developing countries, primarily in Asia, South and Central America and Europe.

      Telecommunications  connection and protection equipment. These systems are
used  to  connect  copper-wired   telecommunications  networks  and  to  protect
telecommunications   equipment  from  voltage  surges.   The  Company's   copper
connection  equipment and systems are marketed to telephone  operating companies
in the United States and foreign countries.

      Signal  processing  equipment.  These products  support copper  wire-based
communications systems and are sold principally for use in defense and aerospace
applications.

      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.

Forward-Looking Statements

      The  statements in this Form 10-K Annual Report that are not  descriptions
of historical facts may be forward looking  statements that are subject to risks
and  uncertainties.  In particular,  statements in this Form 10-K Annual Report,
including any material  incorporated  by reference in this Form 10-K, that state
our  intentions,  beliefs,  expectations,  strategies,  predictions or any other
statements  relating  to  our  future  activities  or  other  future  events  or
conditions  are  forward-looking  statements.   Forward-looking  statements  are
subject to risks,  uncertainties and other factors,  including,  but not limited
to,  those  identified  under Risk  Factors,  which  begins on page 9, and those
described in  Management's  Discussion and Analysis of Financial  Conditions and
Results of Operations  and in any other filings with the Securities and Exchange
Commission,  as well as general  economic  conditions,  any one or more of which
could  cause  actual  results to differ  materially  from  those  stated in such
statements.

Products

      Operations  Support  Systems.  OSS systems are used primarily by telephone
operating  companies.  The Company's  principal  OSS systems are  computer-based
testing, provisioning, activation and trouble management products which includes
software  and capital  equipment  and  typically  sells for prices  ranging from
several hundred thousand to several million dollars.

      The  testing  products,  introduced  in the  mid-1970's,  were  the  first
computer-controlled  electronic  system  used  to  automatically  test  for  and
diagnose  problems in customer  telephone lines and to notify telephone  company
service personnel of required  maintenance.  The associated  Trouble  Management
System  provides  automated  record keeping  (including  repair and  disposition
records) and analyzes these records for identification of recurring problems and
equipment  deterioration.  The  integration of these systems  provides a service
assurance  function  for  telephone  companies.  The  OSS  systems  are  sold to
telephone operating companies in a number of foreign countries as well as in the
United States.


                                        1

<PAGE>

      A major component of the testing system is the "test head", which provides
the access to, and actual testing of, the required  telephone  line. The Company
has  continually   evolved  its  test  head  capability  to  meet  the  changing
requirements of the customer loop, and has recently introduced its latest (sixth
generation)  product,  the MkIII. The MkIII uses an advanced technology platform
and the Mach IV,  which  will be  introduced  later in 1999,  will  provide  the
capability  to  qualify  customer  lines  as xDSL  capable,  enabling  telephone
companies to optimize their responsiveness to market conditions.

      The Company's other software applications such as the automated assignment
of  facilities  and  activation of service,  form part of a telephone  companies
service activation function, and can be packaged and integrated with the testing
and trouble management systems, providing a comprehensive access loop capability
including flow-thru. In addition,  pursuant to certain contracts with customers,
the Company develops software to meet specific customer requirements.  Including
integration of its systems with telephone company legacy of third party OSS.

      The  Company's  OSS  products  are  complex  and,  in  most  applications,
incorporate  features  designed  to  respond  to  the  purchaser's   operational
requirements  and the particular  characteristics  of the purchaser's  telephone
system.  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 not experienced a steady
or predictable flow of orders for OSS systems.

      Telecommunications    Connection    Equipment.    The   Company's   copper
connection/protection  equipment  and  systems are used by  telephone  operating
companies,   by  owners  of   private   telecommunications   equipment   and  by
manufacturers  and suppliers of telephone  central office and customer  premises
equipment.   Products   of  the  types   comprising   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 generally grows in proportion to increases in
the number of  telephone  subscribers  and owners of private  telecommunications
equipment,  as well as to  increases  in  upgrades to modern  digital  switching
technology.

      The  Company's  connection  equipment  consists  of  connector  blocks and
protection  modules used by telephone  companies  to  interconnect  copper-based
subscriber lines to switching  equipment  lines.  The protector  modules protect
central office  personnel and equipment  from  electrical  surges.  The need for
protection  products has increased as a result of the worldwide  move to digital
technology,  which is extremely sensitive to damage by electrical overloads, and
because   private   owners  of   telecommunications   equipment   now  have  the
responsibility  to protect  their  equipment  from damage  caused by  electrical
surges.  Line  connecting/protecting  equipment usually  incorporates  protector
modules to safeguard  equipment and  personnel  from injury due to power surges.
Currently,  these  products  include a variety of  connector  blocks;  protector
modules  and  frames  used  in  telephone   central   switching   offices,   PBX
installations 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   produce
computer-assisted  analysis  and for the optimum  placement of  connections  for
telephone lines on the connector blocks mounted on the frame.


                                        2
<PAGE>

      The Company's copper connection/protection products are used by several of
the six 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  does  design
modifications to accommodate the specific needs of its customers.

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

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

                            Sales by Product Category
                            Years Ended December 31,

                      1998                 1997                1996
                      ----                 ----                ----
                                     (Dollars in thousands)

OSS Systems         $27,318        46%   $29,561        48%   $26,804        46%

Line Connecting
/Protecting
Equipment (*)        24,291        41%    23,753        38%    23,249        40%

Signal Processing     7,539        13%     8,280        13%     7,597        13%

Other                   195         0%       636         1%       337         1%
                    -------   -------    -------   -------    -------   -------
Total               $59,343       100%   $62,230       100%   $57,987       100%
                    =======   =======    =======   =======    =======   =======

(*)   Includes  sales of fiber optics  products of $447,000 in 1996.  The assets
      comprising 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 used to
provide  improved  services  to  ensure  communication  to their  customers.  In
addition,  the Company  provides  businesses  with systems,  which improve their
internal telecommunication systems.


                                        3
<PAGE>

      Typically,  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.   Countries  with  emerging  telecommunication
networks have 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  changing  telephone  network.  OSS systems  facilitate rapid change and
expansion  without  a  comparable   increase  in  the  requirement  for  skilled
technicians,  while the computerized  line test system insures increased quality
and rapid  maintenance  and repair of  subscriber  local  loops.  The  automated
database,  which  computerizes  the  inventory  and  maintenance  history of all
subscriber lines in service, helps to keep the rapid change under control.

      During 1998,  approximately  46% of the Company's  sales  consisted of OSS
products.

      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.  Recent trends towards the transmission of high frequency  signals
on copper lines are sustaining this market.  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.

      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  1998,  approximately  41% of the  Company's  sales  were  made  to
customers in this category.

      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 1998, signal processing  equipment  accounted for approximately 13%
of the Company's sales.


                                        4
<PAGE>

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.

      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 1998,  1997, and 1996, BT purchased  $11,345,000
(19% of  sales),  $9,397,000  (15% of  sales),  and  $9,296,000  (16% 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.


                                        5
<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,

                      1998                 1997                 1996
                      ----                 ----                 ----
                                      (Dollars in thousands)

North America       $20,830        35%   $19,269        31%   $17,644        30%

United Kingdom       20,441        34%    18,640        30%    16,000        28%

Other Europe          3,377         6%    10,587        17%     5,416         9%

Asia/Pacific          7,181        12%    10,278        17%    15,812        27%

Latin America         7,463        13%     2,429         4%     1,738         3%

Middle East              51         0%       879         1%     1,248         2%

Other                  --           0%       148         0%       129         1%
                    -------   -------    -------   -------    -------   -------
Total Sales         $59,343       100%   $62,230       100%   $57,987       100%
                    =======   =======    =======   =======    =======   =======

(1)   For information  regarding the amount of sales,  operating  profit or loss
      and identifiable  assets  attributable to each of the Company's  divisions
      and  geographic   areas,  see  Note  22  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
difficulty in 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.


                                        6
<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 or  UNIX  compatible  operating
systems. The testing products also incorporate disk data storage, data terminals
("CRTs"), teleprinters, minicomputers and personal computers (PC's) 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 and Matamoros,  Mexico.  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. In addition, the Company has software development sites in
Syosset, New York, Charlotte, North Carolina, and Coventry, United Kingdom.

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 majority of its 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.

Significant Customers

      During the years ended  December  31, 1998 and 1997,  the  Company's  five
largest  customers  accounted for sales of $28,797,000,  or approximately 49% of
sales,  and  $30,633,000,  or  approximately  49% of  sales,  respectively.  The
Company's  largest  customer is BT. Sales to BT for the year ended  December 31,
1998  and  1997  amounted  to  $15,349,000  and  $13,876,000,  respectively,  or
approximately 26% and 22%, respectively,  of the Company's sales for such years.
Therefore,  any  significant  interruption  or decline in sales to BT may have a
materially adverse effect upon the Company's operations. During 1998, sales to a
Chilean  telephone  company were $6,834,000,  or approximately  12% of sales. No
other customers account for 10% or more of the Company's sales for either year.

      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  industries.  Both  catalog and
custom  designed  products  are  sold to these  customers.  Some  contracts  are
multi-year procurements.


                                        7
<PAGE>

Backlog

      At December 31, 1998, the Company's  backlog was $8,800,000  compared with
approximately  $19,558,000  at  December  31,  1997.  Of the  December  31, 1998
backlog,  approximately  $6,600,000  represented  orders from foreign  telephone
operating companies,  including $1,549,000 attributable to the contract with BT.
See "Marketing and Sales".  The Company expects to ship substantially all of its
December 31, 1998 backlog  during 1999.

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  Lucent  Technologies
("Lucent")  continuing to be the Company's  principal United States  competitor.
Lucent's  greater  resources,  extensive  research and  development  facilities,
long-standing equipment supply relationships with the operating companies of the
regional holding companies and history of manufacturing  and marketing  products
similar in function to those produced by the Company  continue to be significant
factors in the Company's competitive environment.

      Currently,  Lucent  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, and
endeavors to offer its products at prices and with warranties that will make its
products competitive.


                                        8
<PAGE>

      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  Lucent,  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,  its ability to customize systems and endeavors to offer
such equipment at prices and with warranties that will make them competitive.

Research and Development Activities

      During the fiscal  years  ended  December  31,  1998,  1997 and 1996,  the
Company   spent   approximately   $6,510,000,    $5,361,000,   and   $3,848,000,
respectively,  on its  research  and  development  activities.  All research and
development was company sponsored and is expensed as incurred.

Employees

      As of February 27, 1999,  the Company had 446  employees of which 123 were
employed in the United States,  225 in Mexico,  39 in the United  Kingdom,  5 in
Poland,  10 in Chile,  11 in  China,  and 33 in Korea  (in  connection  with the
Company's  Korean joint venture).  The Company  believes that its relations with
its  employees  are good,  and it has never  experienced  a work  stoppage.  The
Company's employees are not covered by collective bargaining agreements,  except
for its hourly  employees in Mexico who are covered by a  collective  bargaining
agreement that expires on December 31, 1999.

Risk Factors

      We recently  incurred  net losses from our  operations.  We incurred a net
loss of  $6,899,000,  or  $2.22  per  share  (basic  and  diluted),  on sales of
$62,230,000  for 1997 after giving  effect to a non-cash  charge of  $11,458,000
related to the exchange of the Company's Zero Coupon Notes for common stock. See
Management's  Discussion  - Results of  Operations.  Although we  generated  net
income of  $527,000  and  comprehensive  net  income of  $800,000  in 1998,  our
year-end  results  reflect a loss in the fourth quarter of $802,000,  and we may
sustain additional losses in the near future.

      We  have  a  need  to  finance  our  working  capital  requirements.   See
Management's Discussion and Analysis - Liquidity and Capital Resources.

      We are heavily dependent on sales overseas for our revenues. Approximately
60%,  69% and 70% of our  sales for 1998,  1997 and 1996,  were made to  foreign
telephone operating companies.  In selling to customers in foreign countries, we
are exposed to inherent  risks not normally  present in the case of our sales to
United States  customers,  including  extended delays in completing and customer
final payment for our Operational  Support Systems contracts,  and political and
economic change. In foreign markets, we face considerable competition from other
United States and foreign telephone  equipment  manufacturers  most of which are
larger and have substantially  greater financial resources than us. In addition,
if we establish  facilities in foreign countries,  we face risks associated with
currency  devaluation,  difficulties  in either  converting  local currency into
dollars or  transferring  funds to the  United  States,  local tax and  currency
regulations and political instability.

      We rely heavily on a few customers for most of our sales. See "Significant
Customers" and Note 17 of Notes to the Consolidated Financial Statements.


                                       9
<PAGE>

      We experience  difficulties with Operational Support System contracts.  We
experience delays in purchaser acceptance of the Operational Support Systems and
our receipt of final  contract  payments in connection  with a number of foreign
sales.  In  addition,  we have no  steady  or  predictable  flow of  orders  for
Operational Support Systems.  The Operational Support System is a complex system
and,  in most  applications,  incorporates  features  designed  to  respond to a
purchaser's operational  requirements and the particular  characteristics of the
purchaser's  telephone system. As a result, the negotiation of a contract for an
Operational  Support System is an individualized  and highly technical  process.
Contracts  for these systems  frequently  provide for  manufacturing,  delivery,
installation,  testing and purchaser acceptance to take place over periods of up
to a year or more. These contracts typically contain  performance  guarantees by
us and  clauses  imposing  penalties  on us if we do not  meet  the  contractual
in-service dates. The installation,  testing and purchaser  acceptance phases of
these  contracts  may  last  longer  than  contemplated  by the  contracts  and,
accordingly,  amounts due under the  contracts may not be collected for extended
periods.

      Many of our  competitors  are larger  and have  vastly  greater  financial
resources.  We  compete  directly  with a number of large  and  small  telephone
equipment  manufacturers in the United States,  with Lucent  Technologies,  Inc.
continuing  to be our  principal  United  States  competitor.  Lucent's  greater
resources,   extensive  research  and  development   facilities,   long-standing
equipment  supply  relationships  with the regional  "Baby Bell"  companies  and
history of  manufacturing  and marketing  products  similar in function to those
produced  by  us  continue  to  be  significant   factors  in  our   competitive
environment.  Furthermore,  in the past,  competitors  have  used our  financial
difficulties as a sales tool.

      Intense competition,  rapid technological change and a movement to private
ownership  of  telecommunications   equipment   characterize  our  industry.  In
competing  for  telephone  operating  company  business,  the purchase  price of
equipment and associated  operating  expenses have become  significant  factors,
along with product design and long-standing  equipment supply relationships.  In
the  customer  premises  equipment  market,  we operate in a market in which the
products are comparable and the price is the crucial factor in generating sales.

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

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

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

      We may have problems with the year 2000 issue. See Management's Discussion
and Analysis - "Year 2000 Issue" disclosure.

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

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;  and 5,300  square  feet of office  space used for  software
development located in Charlotte, North Carolina. The Company also 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 December 2000, and the Charlotte,  North Carolina lease expires in
April 1999.  Management is in the process of  evaluating  its needs at its North
Carolina location and will make a determination regarding the lease prior to the
lease  expiration of April 1999.  The aggregate  annual rental is  approximately
$450,000.

      The Company's wholly-owned Mexican subsidiary owns an approximately 40,000
square foot manufacturing  facility in Matamoros,  Mexico. A wholly-owned United
Kingdom  subsidiary  owns a 34,300  square foot  facility in Coventry,  England,
which facility comprises all of the Company's office,  plant and warehouse space
in the United  Kingdom.  Subsequent  to year end, the Company's  United  Kingdom
subsidiary entered into a sale lease back agreement whereby the Company sold the
building  for   approximately   $400,000  and  entered  into  a  20  year  lease
arrangement.

      The Company believes its properties are adequate for its needs.


                                       10
<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 has 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. The action is currently in the discovery stage.

      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.  The  Company  is not  aware of any  further  activity
respecting this investigation since November 1996.

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

      During the fourth  quarter of 1998,  there were no matters  required to be
submitted to a vote of security holders of the Company.


                                       11
<PAGE>

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

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

William V. Carney                                             61
Chairman of the Board
Chief Executive Officer

Seymour Joffe                                                 69
President and Chief Operating Officer

Michael A. Tancredi                                           69
Senior Vice President, and Secretary and Treasurer

Edward B. Kornfeld                                            55
Senior Vice President - Operations
Chief Financial Officer

Ronald Wilkins                                                42
Senior Vice President and Managing
Director - OSS

John J. Gazzo                                                 55
Senior Vice President

Michael Bahlo                                                 40
Senior Vice President

Prem G. Chandran                                              46
Vice President                                        
                                                      
Edmund Chiodo                                                 44
Vice President                                        
                                                      
David Rawlings                                                55
Vice President                                        
                                                      
William Novelli                                               67
Vice President                                        
                                                      
Gerald Hammond                                                44
Vice President                                        
                                                 
Michael Lamb                                                  33
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.


                                       12
<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. Wilkins was elected a Senior Vice President and Managing Director, OSS
Division in 1998.  Prior to joining Porta Systems Corp. in 1998, Mr. Wilkins was
involved in the  wireless  telecommunication  industry as  President  and CEO of
Sycom  Technologies  from  November 1997 to August 1998,  and Vice  President of
Strategic Planning and Alliances at Conxus  Communications from December 1995 to
October  1997.  Prior to October  1997,  Mr.  Wilkins  held  various  management
positions with Digital Equipment Corporation.

      Mr. Gazzo was elected  Senior Vice  President  in March 1996.  He 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. Bahlo was elected  Senior Vice  President - OSS Sales and Marketing in
January 1999.  Prior to joining the Company,  Mr. Bahlo was the Vice  President,
Marketing and Sales for Daikin U.S. Comtec Laboratories from March 1997 to March
1999, and held various management and marketing positions with Digital Equipment
Corporation  from  October 1986 to March 1997 most  recently as Marketing  Group
Manager.

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

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

      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.

      Mr. Hammond was elected Vice President in March 1997. Mr. Hammond has been
with the Company since 1970. During that time he has held various positions with
the  Company,  most  recently  as  Assistant  Vice  President  of  Research  and
Development. 


                                       13
<PAGE>

      Mr. Lamb was elected Vice President - OSS Business  Development in January
1999.  Prior to joining the Company,  Mr. Lamb was most recently Vice President,
Sales and  Marketing  at  audiohighway.com,  Inc.  Before that he served as Vice
President,  Business Development at Sycom Technologies,  Inc. from 1993 to 1998,
where he continues to be a member of the board of directors.


                                       14
<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,
1997 through  December 31, 1998, 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
                                               ----              ---
1997
         First Quarter                       $2 1/8           $1 3/8
         Second Quarter                       2 15/16          1 1/4
         Third Quarter                        5 1/4            2 5/16
         Fourth Quarter                       4 1/4            3

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

      The Company did not declare or pay any cash  dividends in 1998 or 1997. 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 12, 1999, the Company had approximately 1,036  stockholders of
record.

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 effect to the one for five reverse  stock split which  became  effective on
August  2,  1996.  For  further  information,  see  the  Consolidated  Financial
Statements and other information set forth in Item 8 and Management's Discussion
and Analysis of Financial  Condition and Results of Operations set forth in Item
7.


                                       15
<PAGE>

                             Year Ended December 31,
<TABLE>
<CAPTION>
                                         1998        1997         1996       1995        1994
                                         ----        ----         ----       ----        ----
                                                 (In thousands, except per share data)

<S>                                    <C>         <C>         <C>         <C>         <C>     
Income Statement Data:

Sales                                  $ 59,343    $ 62,230    $ 57,987    $ 61,181    $ 68,985
Operating income (loss)                   4,566       6,101       3,982     (19,884)    (17,541)

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

Income (loss) before discontinued
   operations and extraordinary item        451      (7,021)      1,252     (29,297)    (39,995)

Net income (loss)                           527      (6,899)      5,174     (31,041)    (39,995)

Basic per share amounts:
      Continuing operations            $   0.05    $  (2.26)   $   0.57    $ (20.05)   $ (27.51)
      Net income (loss)                $   0.06    $  (2.22)   $   2.37    $ (21.25)   $ (27.51)

Diluted per share amounts:
      Continuing operations            $   0.04    $  (2.26)   $   0.23    $ (20.05)   $ (27.51)
      Net income (loss)                $   0.05    $  (2.22)   $   0.94    $ (21.25)   $ (27.51)

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

Number of shares used in
   calculating net income (loss)
   per share-basic                        9,281       3,111       2,184       1,461       1,454

Number of shares used in
   calculating net income (loss)
   per share-diluted                      9,785       3,111       5,528       1,461       1,454

Balance Sheet Data:

Total assets                           $ 52,136    $ 51,000    $ 51,660    $ 60,591    $ 84,963

Long-term debt excluding current
   maturities                          $ 17,238    $ 18,858    $ 45,804    $ 55,389    $ 57,310

Stockholders' equity (deficit)         $ 11,984    $  6,813    $(19,702)   $(29,323)   $  1,525
</TABLE>


                                       16
<PAGE>

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

      The Company's  consolidated  statements of operations  for the three years
ended December 31, 1998, 1997 and 1996,  respectively,  as a percentage of sales
follows:

                                                       Years Ended December 31,

                                                     1998       1997       1996
                                                     ----       ----       ----

Sales                                                100%       100%       100%
Cost of sales                                         59%        61%        63%
  Gross Profit                                        41%        39%        37%
Selling, general and
administrative expenses                               22%        20%        23%
Research and development expenses                     11%         9%         7%
                                                     ----       ----       ----
Operating income                                       8%        10%         7%
Interest expense                                      (6%)       (5%)       (9%)
Gain on sale of assets                                 --         --         4%
Other                                                  2%         2%         1%
Debt conversion expense                               (2%)      (19%)       --
                                                     ----       ----       ----
Income (loss) from continuing
   operations before income
   taxes and minority interest                         2%       (12%)        3%
Income tax expense (benefit)
   and minority interest                               1%        (1%)        1%
                                                     ----       ----       ----
Income (loss) before extraordinary gain                1%       (11%)        2%
Extraordinary gain on early
extinguishment of debt                                --         --          7%
                                                     ----       ----       ----
Net income (loss)                                      1%       (11%)        9%
                                                     ====       ====       ====


                                       17
<PAGE>


Results of Operations

Years Ended December 31, 1998 and 1997

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

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

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

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

      Cost of sales for the year ended  December  31, 1998,  as a percentage  of
sales  compared to 1997,  decreased  from 61% to 59%. The  improvement  in gross
margin  is   attributed  to  the   Company's   continuing   effort  to  increase
manufacturing productivity and the decrease of certain fixed expenses associated
with the OSS contracts.

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

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

      As a result of the above,  the Company had operating  income of $4,566,000
in 1998 versus  $6,101,000 in 1997, a decrease of 25%. The  Company's  decreased
operating income for the year ended December 31, 1998, when compared to the year
ended  December 31, 1997,  was  primarily  the result of lower levels of revenue
from OSS coupled with increased research and development expenses.

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


                                       18
<PAGE>

Results of Operations (continued)

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

      During 1998 and 1997,  the Company  recorded debt  conversion  expenses of
$945,000 and  $11,458,000  as a result of the exchange of Zero coupon notes into
common stock. The debt conversion  expense represents the difference between the
original  conversion  price per share of $6.55 and the reduced  conversion price
per share of $3.65 (see Notes to Consolidated Financial Statements, Note 6).

      During 1998 and 1997, the Company recorded an extraordinary  gain from the
early  extinguishment  of its  Debentures of $76,000 and $122,000,  respectively
(see Notes to Consolidated Financial Statements, Note 6).

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

      As the result of the  foregoing,  the 1998 net income was $527,000,  $0.06
per  basic  share  and  $0.05 per  diluted  share,  compared  with a net loss of
$6,899,000,  $2.22 per share,  for 1997.  Basic net  income  (loss) per share is
based on the weighted average number of shares  outstanding.  Diluted net income
(loss) per share is based on the weighted  average number of shares  outstanding
plus dilutive  potential  shares of common stock. The calculation of the diluted
net income per share for the year ended December 31, 1998,  assumes the exercise
of dilutive options and warrants and the conversion of the Debentures. For 1997,
no dilutive  potential shares of common stock were added to compute diluted loss
per share because the effect is anti-dilutive.

Years Ended December 31, 1997 and 1996

      The Company's sales for 1997 were  $62,230,000  compared to $57,987,000 in
1996, an increase of $4,243,000  (7%).  The increase in revenue is attributed to
improvement in all of the Company's divisions.

      OSS  sales  for  1997  were   $29,561,000,   compared  to  1996  sales  of
$26,804,000,  an  increase of  $2,757,000  (10%).  The  increased  sales  relate
primarily to higher volumes  generated from the  installation of the OSS systems
to the existing customer base.

      Line   connection/protection    equipment   sales   for   1997   increased
approximately  $504,000 (2%) from $23,249,000 in 1996 to $23,753,000  1997. This
increase  relates to improved  domestic  sales,  which were offset by  decreased
sales of a certain  product  line to BT.  During  1997,  the  Company  completed
delivery of products to BT under a prior  agreement and commenced  delivery of a
replacement product. The decline reflected both a decline in the number of units
sold and a lower selling price per unit for the replacement product. At December
31, 1997, the orders from BT for this product reflect a continuation of sales at
the reduced level.

      Signal processing  revenue for 1997 compared to 1996 increased by $683,000
(9%) from $7,597,000 to $8,280,000. The increased revenue was generated from the
earlier than anticipated completion of military orders and non-recurring revenue
from certain engineering services.


                                       19
<PAGE>

Results of Operations (continued)

      Cost of sales for the year ended  December  31, 1997,  as a percentage  of
sales  compared to 1996,  decreased  from 63% to 61%. The  improvement  in gross
margin  is   attributed  to  the   Company's   continuing   effort  to  increase
manufacturing  productivity  and the absorption,  over a larger revenue base, of
certain fixed expenses associated with the OSS contracts.

      Selling,  general and  administration  expenses decreased by $748,000 (6%)
from  $13,566,000  to  $12,818,000  from December 31, 1997 compared to 1996. The
decrease  reflects  the  Company's  continuing  efforts  to reduce its costs and
expenses.

      Research  and  development  expenses  increased by  $1,513,000  (39%) from
$3,848,000 in 1996 to $5,361,000 in 1997.  The increased  expenses  results from
the  Company's  efforts to develop new  products,  primarily  related to the OSS
business.

      As a result of the above,  the Company had operating  income of $6,101,000
in 1997 versus  $3,982,000 in 1996, an increase of 53%. The Company's  operating
improvement  for the year ended  December  31, 1997,  when  compared to the year
ended December 31, 1996, were the results of increased revenue which allowed for
greater manufacturing  efficiencies,  and the reduced level of selling,  general
and administrative expenses.

      Interest expense for 1997 decreased by $1,949,000 from $5,328,000 for 1996
to  $3,379,000  in 1997.  The  decrease  in  interest  expense  is  attributable
primarily to the exchange of the  Company's  6%  Debentures  for the Zero coupon
notes and  common  stock,  which  occurred  primarily  in the  first and  second
quarters of 1996, and repayment of principal to the Company's senior lender.  In
addition,   during  1996,  the  Company  incurred  additional  interest  expense
resulting from  recognition of certain  deferred  borrowing costs related to its
loans from its senior lender.

      Other  income  for  1997  included  $700,000  from  the  settlement  of an
insolvency   procedure   involving  the  purchaser  of  the  Company's   Israeli
operations, which the Company sold in 1992.

      During 1997, the Company recorded debt conversion  expenses of $11,458,000
as a result of the  exchange of Notes into  common  stock.  The debt  conversion
expense  represents the  difference  between the original  conversion  price per
share of $6.55 and the reduced conversion price per share of $3.65. In addition,
in connection  with this  transaction  the Company  incurred  legal  expenses of
$234,000 and incurred expenses of $578,000  representing the value of the common
stock and warrants issued (see Notes to Consolidated Financial Statements,  Note
6).

      During 1997 and 1996, the Company recorded an extraordinary  gain from the
early   extinguishment   of  its  6%  Debentures  of  $122,000  and  $3,922,000,
respectively (see Notes to Consolidated Financial Statements, Note 6).

      At  December  31,  1997 the  Company  recorded  an income  tax  benefit of
$585,000,  reflecting the difference  between a $802,000  deferred tax asset and
the Company's tax expenses of $217,000, at December 31, 1997.

      As the  result  of the  foregoing,  the  Company  incurred  a net  loss of
$6,899,000,  $2.22 per share, for 1997,  compared with net income of $5,174,000,
$2.37 per basic share and $0.94 per diluted  share,  for the year ended December
31, 1996.  Basic net income  (loss) per share is based on the  weighted  average
number of shares  outstanding.  Diluted net income  (loss) per share is based on
the weighted average number of shares outstanding plus dilutive potential shares
of common  stock.  The  calculation  of the diluted net income per share for the
year ended  December 31, 1996,  assumes the  conversion of the Zero coupon notes
which are dilutive.  For 1997, no dilutive potential shares of common stock were
added to compute diluted loss per share because the effect is anti-dilutive.


                                       20
<PAGE>

Liquidity and Capital Resources

      At  December  31,  1998 the  Company  had cash  and  cash  equivalents  of
$3,044,000  compared with $5,091,000 at December 31, 1997. The Company's working
capital at December 31, 1998 was $14,262,000, compared to $7,286,000 at December
31, 1997. The  improvement in working capital from December 31, 1997 to December
31, 1998 reflects (i) increased accounts  receivable which reflects higher sales
at the end of 1998 of line connection  equipment and (ii) the reduced balance of
the Convertible subordinated debentures.

      As of December 1, 1998, the Company's loan and security agreement with its
senior secured lender, Foothill Capital Corporation  ("Foothill"),  was amended,
pursuant to which the loan agreement was extended  through  January 2, 2001, and
the quarterly loan amortization  payment was increased from $325,000 to $400,000
effective for the September  1998 payment.  In addition,  the revised  agreement
requires  all  principal  payments  after  August  1998 be applied  first to the
non-interest  bearing notes payable until the notes are paid in full and then to
the term loan. The Company had a revolving line of credit and a letter of credit
facility of $9,000,000 as of December 31, 1998. Availability under this facility
as of that date was  approximately  $4,000,000.  During 1998, the Company repaid
$4,780,000 to Foothill of which $2,950,000 was provided from the proceeds of its
12 % Subordinated Note private placement as described below.

      As of December 31, 1998, the Company had remaining outstanding $365,000 of
the 6% Debentures,  net of original issue discount of $20,000, which mature July
2, 2002.  The face amount of the  outstanding  6% Debentures  was $385,000.  The
interest  accrued on the 6%  Debentures is payable on July 1 of each year and as
of December 31, 1998 was $12,000.  At December 31, 1998, the Company was current
on its interest  obligations,  which were in arrears in 1997,  1996 and 1995 for
failing to make the interest payments due. Accordingly, the 6% Debentures are no
longer in default.

      In January 1998, the Company raised  $6,000,000 from the private placement
of 60 units at $100,000 per unit.  Each unit consisted of (a) the Company's 12 %
Subordinated Note due January 3, 2000 (a "Subordinated  Note"), in the principal
amount of $100,000,  and (b) a Series B Common Stock Purchase Warrant (a "Series
B Warrant") to purchase 10,000 shares of Common Stock at $3.00 per share through
December 31, 2002. The proceeds from the sale of the Units was used  principally
to pay the  remaining  $2,796,000  principal  amount of Notes which had not been
converted (See Notes to Consolidated Financial Statements, Note 6) and to reduce
the Company's senior debt to Foothill by approximately  $2,950,000 (See Notes to
Consolidated  Financial  Statements,  Note 7). The balance of such  proceeds was
added to working capital.

      The Company believes that its current cash position,  internally generated
cash flow and its loan  facility  will be  sufficient  to satisfy the  Company's
anticipated operating needs for at least the ensuing twelve months.  However, as
of December  31, 1998 the  Company's  long-term  debt  includes  $6,000,000  12%
Subordinated  Notes,  all of which are due and  payable on  January 3, 2000.  At
December  31, 1998 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 and believes it will be able to prior to the maturity  date,  no assurance
can be given that it will be  successful  in these  efforts.  If the  Company is
unable to refinance or restructure the Company's  business may be materially and
adversely affected.


                                       21
<PAGE>

Year 2000 Issue

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

      The  Company has  assigned a team to monitor  Year 2000  compliance.  With
respect to the  products the Company  offers for sale,  the Company has verified
that the products  are Year 2000  compliant.  The team is charged with  ensuring
Year  2000  compliance  for all  hardware  and  software  products  through  its
purchasing process, as well as assessing the Year 2000 readiness and risk to the
Company of its critical  vendors and suppliers.  The team is also responsible to
coordinate  Year 2000  compliance  for its  internal  systems  and  devices.  At
present,  Year 2000 compliance of the Company's  internal systems and devices is
scheduled to be substantially complete by September 1999.

      The  Company  expects  to  incur  internal  staff  costs  as well as other
expenses necessary to prepare its systems for the year 2000. The Company expects
to both replace some systems and upgrade  others.  Maintenance  or  modification
costs will be expensed as incurred.  Management  estimates that the cost of this
program will approximate  $500,000,  with  approximately  $200,000  representing
incremental  costs to the  Company.  The  total  cost  effort  does not  include
potential  costs related to any customer or other claims or the cost of internal
hardware  or  software  replaced in the normal  course of  business.  Based upon
current  information and assessment,  the Company does not believe that the Year
2000 issue as  discussed  above will be  material to its  financial  position or
results of  operations  or that its business  will be adversely  affected in any
material respect. Nevertheless, achieving Year 2000 compliance is dependent upon
many factors,  some of which are not  completely  within the Company's  control.
Should  either the  Company's  internal  systems or one or more of its  critical
vendors or suppliers  fail due to Year 2000 issues,  the Company's  business and
its results of operations could be adversely affected.

      The Company has evaluated  the worst case  scenarios in the event that its
products,  systems,  or  business  partners  are not  Year  2000  ready  and has
formulated contingency plans to operate. If the Company's investigations suggest
that there is a significant  risk that certain  products,  systems,  or business
partners might not be Year 2000 ready,  the Company will execute its contingency
plans accordingly.

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


                                       22
<PAGE>

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

      Not Applicable.

Item 8. Financial Statements and Supplementary Data.

      See Exhibit I

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

      Not Applicable

                                    Part III

Item 10, 11, 12, and 13.

      The information called for by Item 10 (Directors and Executive  Officers),
Item  11  (Executive  Compensation),  Item 12  (Security  Ownership  of  Certain
Beneficial  Owners  and  Management),  and Item 13  (Certain  Relationships  and
Related  Transactions)  is  incorporated  herein by reference from the Company's
definitive  proxy  statement for the Annual Meeting of  Shareholders to be filed
with the  Securities  and Exchange  Commission not later than 120 days after the
close of the year ended December 31, 1998.


                                       23
<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 Report on 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  Report on
                  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.

      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.


                                       24
<PAGE>

Exhibits (continued)

Exhibit No.       Description of Exhibit

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

     4.2.2        Amendment No. 2 to Rights  Agreement,  dated December 24, 1997
                  between  the Company and The Chase  Manhattan  Bank  (formerly
                  known  as   Chemical   Bank,   as   successor   by  merger  to
                  Manufacturers Hanover Trust Company) as Rights Agent.

     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  Report  on 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 Report
                  on 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  Report  on Form 10K for the year  ended  December  31,
                  1995.

     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  Report  on  Form  10K for  the  year  ended
                  December 31, 1995.

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

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


                                       25
<PAGE>

Exhibits (continued)

Exhibit No.       Description of Exhibit

      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 Report
                  on 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.

      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.

      4.19        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.


                                       26
<PAGE>

Exhibits (continued)

Exhibit No.       Description of Exhibit

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

     4.24         Amendment  No. Six dated as of August 1, 1998 to  Amended  and
                  Restated Loan and Security  agreement between Foothill Capital
                  Corp. ("Foothill") and the Company.

     4.25         Amendment  No.  Seven  dated as of December 1, 1998 to Amended
                  and Restated  Loan and  Security  agreement  between  Foothill
                  Capital Corp. ("Foothill") and the Company.

      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.

      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 10.3 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.

      10.6        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,
                  incorporated  by reference to Exhibit  10.6.1 of the Company's
                  Annual  Report on Form 10-K for the year  ended  December  31,
                  1996.


                                       27
<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 Report on Form 10K for
                  the year ended December 31, 1995.

      10.11       (Deleted)

      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.

      10.15       Form of subscription  agreement for Units,  including the form
                  of  12%  Note,   Series  B  Warrant   and  Series  C  Warrant,
                  incorporated  by reference to Exhibit  10.15 of the  Company's
                  Form 8-K dated January 2, 1998.

      10.16       Agreement dated January 26, 1998, among the Company and Henley
                  Group, Ltd., Woodstead Associates,  L.P., Lake Trust and Smith
                  Management Company,  Inc. incorporated by reference to Exhibit
                  10.16 of the Company's Form 8-K dated January 2, 1998.

      10.17       1998 Stock  Option  Plan filed as Exhibit  4.2 to the Form S-8
                  dated December 3. 1998 and incorporated herein by reference.

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

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

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

      23          Consent of Independent Auditors.


                                       28
<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 23, 1999                       By    /s/ William V. Carney
                                                       -------------------------
                                                       William V. Carney
                                                       Chairman of the Board and
                                                       Chief Executive Officer

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

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

     /s/William V. Carney         Chairman of the Board,          March 23, 1999
--------------------------------  Chief Executive Officer and 
        William V. Carney         Director (Principal Executive
                                  Officer)

     /s/Edward B. Kornfeld         Senior Vice President and      March 23, 1999
--------------------------------   Chief Financial Officer
        Edward B. Kornfeld         (Principal Financial and 
                                   Accounting Officer)

      /s/Seymour Joffe             Director                       March 23, 1999
--------------------------------
        Seymour Joffe

     /s/Michael A. Tancredi        Director                       March 23, 1999
--------------------------------
        Michael A. Tancredi

     /s/Warren H. Esanu            Director                       March 23, 1999
--------------------------------
        Warren H. Esanu

     /s/Herbert H. Feldman         Director                       March 23, 1999
--------------------------------
        Herbert H. Feldman

     /s/Stanley Kreitman           Director                       March 23, 1999
--------------------------------
        Stanley Kreitman

     /s/Lloyd I. Miller, III       Director                       March 23, 1999
--------------------------------
        Lloyd I. Miller, III

     /s/Robert Schreiber           Director                       March 23, 1999
--------------------------------
        Robert Schreiber


                                       29
<PAGE>

Exhibit I

Item 8.  Financial Statements and Supplementary Data

Index                                                                       Page
-----                                                                       ----

Report of Independent Certified Public Accountants                           F-2

Consolidated Financial Statements and Notes:

     Consolidated Balance Sheets,
     December 31, 1998 and 1997                                              F-3

     Consolidated Statements of Operations and
     Comprehensive Income (Loss),
     Years Ended December 31, 1998, 1997 and 1996                            F-4

     Consolidated Statements of Stockholders'
     Equity (Deficit), Years Ended
     December 31, 1998, 1997 and 1996                                        F-5

     Consolidated Statements of Cash Flows
     for the Years Ended December 31, 1998,
     1997 and 1996                                                           F-6

     Notes to Consolidated Financial Statements                              F-7



                                       F-1
<PAGE>

               Report of Independent Certified Public Accountants

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

We have audited the  accompanying  consolidated  balance sheets of Porta Systems
Corp.  and  subsidiaries  as of  December  31,  1998 and 1997,  and the  related
consolidated   statements  of  operations  and   comprehensive   income  (loss),
stockholders'  equity  (deficit),  and cash flows for each of the three years in
the period ended December 31, 1998. 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,  1998 and 1997,  and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.

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

Melville, New York
March 12, 1999



                                       F-2
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
                           Consolidated Balance Sheets
                           December 31, 1998 and 1997
                             (Dollars in thousands)


                         Assets                              1998          1997
                         ------                              ----          ----
Current assets:
    Cash and cash equivalents                              $  3,044       5,091
    Accounts receivable - trade, less allowance for 
       doubtful accounts of $915 in 1998 and $1,058 
       in 1997                                               19,802      14,891
    Inventories                                               8,944       8,159
    Prepaid expenses and other current assets                 1,716       1,266
                                                           --------    --------
                  Total current assets                       33,506      29,407
                                                           --------    --------
Property, plant and equipment, net                            4,213       4,667
Deferred computer software, net                                  82         543
Goodwill, net of amortization of $3,763 in 1998 and 
  $3,301 in 1997                                             11,597      12,059
Other assets                                                  2,738       4,324
                                                           --------    --------
                  Total assets                             $ 52,136      51,000
                                                           ========    ========

                      Liabilities and Stockholders' Equity
Current liabilities:
    Current portion of senior debt                         $  2,000       1,900
    6% Convertible subordinated debentures                     --         1,758
    Accounts payable                                          6,893       5,796
    Accrued expenses                                          6,266       8,656
    Accrued interest payable                                    545         398
    Accrued commissions                                       2,438       2,444
    Accrued deferred compensation                               196         196
    Income taxes payable                                        762         853
    Short-term loans                                            144         120
                                                           --------    --------
                  Total current liabilities                  19,244      22,121
                                                           --------    --------

Senior debt net of current maturities                        11,188      16,062
12% subordinated notes                                        5,685        --
6% Convertible subordinated debentures                          365        --
Zero coupon senior subordinated convertible notes              --         2,796
Deferred compensation                                         1,021       1,032
Income taxes payable                                            719         649
Other long-term liabilities                                     776         487
Minority interest                                             1,154       1,040
                                                           --------    --------
                  Total long-term liabilities                20,908      22,066
                                                           --------    --------
Commitments and contingencies

Stockholders' equity:
    Preferred stock, no par value; authorized 1,000,000 
       shares, none issued                                       --          --
    Common stock, par value $.01; authorized 20,000,000
       shares, issued 9,484,742 and 8,644,304 shares in 
       1998 and 1997, respectively                              95          86
    Additional paid-in capital                               75,135      70,926
    Accumulated deficit                                     (57,273)    (57,799)
    Accumulated other comprehensive loss:
      Foreign currency translation adjustment                (3,754)     (4,027)
                                                           --------    --------
                                                             14,203       9,186
    Treasury stock, at cost, 30,940 shares                   (1,938)     (2,066)
    Receivable for employee stock purchases                    (281)       (307)
                                                           --------    --------
                  Total stockholders' equity                 11,984       6,813
                                                           --------    --------
                  Total liabilities and stockholders'
                    equity                                 $ 52,136      51,000
                                                           ========    ========

          See accompanying notes to consolidated financial statements.


                                       F-3
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
      Consolidated Statements of Operations and Comprehensive Income (Loss)
                  Years ended December 31, 1998, 1997 and 1996
                    (in thousands, except per share amounts)

                                                 1998        1997         1996
                                                 ----        ----         ----

Sales                                          $ 59,343      62,230      57,987
Cost of sales                                    35,188      37,950      36,591
                                               --------    --------    --------
       Gross profit                              24,155      24,280      21,396
                                               --------    --------    --------
Selling, general and administrative expenses     13,079      12,818      13,566
Research and development expenses                 6,510       5,361       3,848
                                               --------    --------    --------
       Total expenses                            19,589      18,179      17,414
                                               --------    --------    --------
       Operating income                           4,566       6,101       3,982

Interest expense                                 (3,750)     (3,379)     (5,328)
Interest income                                     272         259         136
Gain on sale of assets                             --          --         2,264
Other income (expense), net                       1,028       1,047         402
Debt conversion expense                            (945)    (11,458)       --
                                               --------    --------    --------
       Income (loss) before
          income taxes and minority interest      1,171      (7,430)      1,456

Income tax expense (benefit)                        606        (585)        100
Minority interest                                   114         176         104
                                               --------    --------    --------
       Income (loss) before extraordinary item      451      (7,021)      1,252

Extraordinary gain on early extinguishment of
  debt                                               76         122       3,922
                                               --------    --------    --------
       Net income (loss)                       $    527      (6,899)      5,174
                                               ========    ========    ========
Other comprehensive income (loss), net of tax:
   Foreign currency translation adjustments         273      (1,015)      1,187
                                               --------    --------    --------
       Comprehensive income (loss)             $    800      (7,914)      6,361
                                               ========    ========    ========
Basic per share amounts:
   Income (loss) before extraordinary item     $   0.05       (2.26)       0.57
   Extraordinary item                              0.01        0.04        1.80
                                               --------    --------    --------
        Net income (loss) per share
        of common stock                        $   0.06       (2.22)       2.37
                                               ========    ========    ========
   Weighted average shares of common 
     stock outstanding                            9,281       3,111       2,184
                                               ========    ========    ========
Diluted per share amounts:
   Income (loss) before extraordinary item     $   0.04       (2.26)       0.23
   Extraordinary item                              0.01        0.04        0.71
                                               --------    --------    --------
       Net income (loss) per share
       of common stock                         $   0.05       (2.22)       0.94
                                               ========    ========    ========
   Weighted average shares of common stock 
     outstanding                                  9,785       3,111       5,528
                                               ========    ========    ========

          See accompanying notes to consolidated financial statements.


                                       F-4
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
            Consolidated Statements of Stockholders' Equity (Deficit)
                  Years ended December 31, 1998, 1997 and 1996
                                 (In thousands)
<TABLE>
<CAPTION>

                                                                   Accumulated                        Receivable       Total
                                      Common Stock                    Other      Retained                 for         Stock-
                                   ------------------- Additional Comprehensive  Earnings              Employee       holders'
                                   No. of    Par Value   Paid-in     Income    (Accumulated Treasury     Stock        Equity/
                                   Shares      Amount    Capital     (Loss)      Deficit)     Stock    Purchases     (Deficit)
                                   ------      ------    -------   ----------    --------     -----    ---------     ---------
<S>                                 <C>         <C>     <C>        <C>          <C>         <C>          <C>         <C>      
Balance at December 31, 1995        1,492       $15     $33,308    $(4,199)     $(56,074)   $(2,066)     $(307)      $(29,323)

Net income 1996                         -         -           -          -         5,174          -          -          5,174
Common stock issued                   732         7       2,873          -             -          -          -          2,880
Warrants issued                         -         -         380          -             -          -          -            380
Foreign currency translation
   adjustment                           -         -           -      1,187             -          -          -          1,187
                                    -----       ---     -------    -------      --------    -------      -----        -------
Balance at December 31, 1996        2,224        22      36,561     (3,012)      (50,900)    (2,066)      (307)       (19,702)

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

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

Net income 1998                         -         -           -          -           527          -          -            527
Common stock issued                   841         9       3,702          -             -          -          -          3,711
Warrants issued                         -         -         630          -             -          -          -            630
Restructure of receivable for
   employee stock purchases             -         -        (123)         -            (1)       128        294            298
Receivable from directors and
   officers stock purchase program      -         -           -          -                        -       (268)          (268)
Foreign currency translation
   adjustment                           -         -           -        273             -          -          -            273
                                    -----       ---     -------    -------      --------    -------      -----        -------
Balance at December 31, 1998        9,485       $95     $75,135    $(3,754)     $(57,273)   $(1,938)     $(281)       $11,984
                                    =====       ===     =======    =======      ========    =======      =====        =======
</TABLE>

           See accompanying notes to consolidated financial statements



                                       F-5

<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
                 Consolidated Statements of Cash Flows (Note 21)
                  Years ended December 31, 1998, 1997 and 1996
                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                                                          1998       1997       1996
                                                                          ----       ----       ----
<S>                                                                     <C>         <C>         <C>  
Cash flows from operating activities:
    Net income (loss)                                                   $   527     (6,899)     5,174
    Adjustments to reconcile net income (loss) to net cash
       provided by (used in) operating activities:
          Gain on sale of assets                                           --         --       (2,264)
          Extraordinary gain                                                (76)      (122)    (3,922)
          Non-cash debt conversion expense                                  945     10,646       --
          Non-cash financing expenses                                       473        274      2,280
          Non-cash compensation expense                                     298       --         --
          Realized gain on litigation settlement                           --         (229)      (174)
          Depreciation and amortization                                   2,195      3,040      3,941
          Amortization of debt discounts                                    323         40        104
          Minority interest                                                 114       (176)       104
    Changes in operating assets and liabilities:
       Accounts receivable                                               (4,911)     1,143     (3,408)
       Inventories                                                         (785)      (735)     1,555
       Prepaid expenses                                                    (450)      (484)      (123)
       Other receivables                                                   --           31       --
       Other assets                                                         962       (122)      (743)
       Accounts payable, accrued expenses and other liabilities             276       (999)    (1,788)
                                                                        -------    -------    -------
                  Net cash provided by (used in) operating activities      (109)     5,408        736
                                                                        -------    -------    -------
Cash flows from investing activities:
    Proceeds from disposal of assets held for sale, net                    --          500      7,393
    Proceeds from sale of assets                                           --         --        3,456
    Capital expenditures, net                                              (665)      (409)      (125)
                                                                        -------    -------    -------
                  Net cash provided by (used in) investing activities      (665)        91     10,724
                                                                        -------    -------    -------

Cash flows from financing activities:
    Proceeds from senior debt                                                 6        306      1,343
    Repayments of senior debt                                            (4,780)    (3,013)   (10,403)
    Proceeds from 12% subordinated debentures and warrants                6,000       --         --
    Repayment of Zero coupon senior subordinated convertible notes       (2,796)      --         --
    Proceeds (repayments) of notes payable/short-term loans                  24         89       (337)
                                                                        -------    -------    -------
                  Net cash used in financing activities                  (1,546)    (2,618)    (9,397)
                                                                        -------    -------    -------
Effect of exchange rate changes on cash                                     273       (374)      (588)
                                                                        -------    -------    -------
Increase (decrease) in cash and cash equivalents                         (2,047)     2,507      1,475
Cash and equivalents - beginning of year                                  5,091      2,584      1,109
                                                                        -------    -------    -------
Cash and equivalents - end of year                                      $ 3,044      5,091      2,584
                                                                        =======    =======    =======
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       F-6
<PAGE>

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

(1)   Summary of Significant Accounting Policies

      Nature of Operations and Principles of Consolidation

      Porta Systems Corp.  (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
          in which they are identified.

      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  exceeds  the FDIC
          insurance limit.

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

      Cash Equivalents

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

      Inventories

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

                                                                     (Continued)

                                       F-7
<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 $461,000, $1,133,000 and $1,551,000 in 1998,
          1997, and 1996, 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, 1998, $9,587,000 of the goodwill is being
          amortized  over   approximately  20  years  and  $2,010,000  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 tax law or rate changes are
          included in income as part of deferred  tax expense or benefit for the
          period that includes the enactment date (note 13).

      Foreign Currency Translation

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

                                                                     (Continued)

                                       F-8
<PAGE>

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

      Net Income (Loss) Per Share

      Basic net income (loss) per share is based on the weighted  average number
          of shares outstanding. Diluted net income (loss) per share is based on
          the  weighted  average  number of  shares  outstanding  plus  dilutive
          potential shares of common stock, if such shares had been issued.  The
          calculation  of the  diluted  net  income per share for the year ended
          December  31,  1998,  assumes the  exercise  of  dilutive  options and
          warrants and the  conversion of the 6%  Subordinated  Debentures.  For
          1997 no dilutive potential common shares were added to compute diluted
          loss per share because the effect was  anti-dilutive.  The calculation
          of diluted net income per share for the year ended  December 31, 1996,
          assumes  the  conversion  of  the  Zero  coupon  senior   subordinated
          convertible notes which were dilutive.

      All  share  and per  share  information  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 1998 presentation.

      Accounting for Stock-Based Compensation

      The Company  follows 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

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

      Use of Estimates

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

                                                                     (Continued)

                                       F-9
<PAGE>

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

      New Accounting Standards

      In  June 1998, the Financial  Accounting  Standards  Board issued SFAS No.
          133,  "Accounting for Derivative  Instruments and Hedging Activities".
          SFAS No. 133 requires companies to recognize all derivative  contracts
          at their fair market  values,  as either assets or  liabilities on the
          balance  sheet.  If certain  conditions  are met, a derivative  may be
          specifically designated as a hedge, the objective of which is to match
          the timing of gain or loss recognition on the hedging  derivative with
          recognition  of (1) the changes in the fair value of the hedged  asset
          or  liability  that are  attributable  to the hedge  risk,  or (2) the
          earnings effect of the hedged forecast  transaction.  For a derivative
          not designated as a hedging instrument, the gain or loss is recognized
          in income in the period of change.  SFAS No. 133 is effective  for all
          fiscal  quarters of fiscal years  beginning  after June 15, 1999.  The
          Company  believes  the  adoption  of this  statement  will  not have a
          material  effect on the  Company's  consolidated  financial  position,
          results of operations or cash flows.

      The Company has adopted the following  standards for the current financial
          statement periods and any required comparative information for earlier
          years has been restated.  Results of operations and financial position
          have been unaffected by the implementation of these new standards.

      Statement of Financial Standards (SFAS) No. 130, "Reporting  Comprehensive
          Income",   establishes   standards   for   reporting  and  display  of
          comprehensive   income,  its  components  and  accumulated   balances.
          Comprehensive  income is  defined  to  include  all  changes in equity
          except those resulting from investments by owners and distributions to
          owners. Other comprehensive income (loss) consists of foreign currency
          translation adjustments.

      SFASNo. 131,  "Disclosures  About  Segments of an  Enterprise  and Related
          Information",  which supersedes SFAS No. 14, "Financial  Reporting for
          Segments of a Business Enterprise",  establishes standards for the way
          that public enterprises report information about operating segments in
          financial  statements  issued  to  the  public.  It  also  establishes
          standards regarding products and services,  geographic areas and major
          customers. SFAS No. 131 defines operating segments as components of an
          enterprise  about which  separate  financial  information is available
          that is evaluated  regularly by the chief operating  decision maker in
          deciding how to allocate resources and in assessing performance.

(2)   Accounts Receivable

      Accounts receivable included  approximately  $5,657,000 and $0 at December
          31,  1998 and  1997,  respectively,  of  revenues  earned  but not yet
          contractually billable relating to long-term contracts for specialized
          products.  All such  amounts at December  31, 1998 are  expected to be
          billed  in the  subsequent  year.  In  addition,  accounts  receivable
          included approximately  $2,860,000 and $3,820,000 at December 31, 1998
          and 1997, respectively, of retainage balances due on various long-term
          contracts.  All such amounts are  expected to be collected  during the
          subsequent  year. The allowance for doubtful  accounts  receivable was
          $915,000   and   $1,058,000   as  of  December   31,  1998  and  1997,
          respectively.  The  allowance  for doubtful  accounts was increased by
          provisions  of  $210,000,  $107,000,  and  $553,000  and  decreased by
          write-offs  of  $353,000,  $599,000,  and $254,000 for the years ended
          December 31, 1998, 1997, and 1996, respectively.

                                                                     (Continued)

                                      F-10

<PAGE>

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

(3)   Inventories

      Inventories consist of the following:
                                                            December 31,
                                                  ------------------------------
                                                     1998                 1997
                                                     ----                 ----

             Parts and components                 $4,959,000           5,349,000
             Work-in-process                         743,000           1,079,000
             Finished goods                        3,242,000           1,731,000
                                                  ----------          ----------
             
                                                  $8,944,000           8,159,000
                                                  ==========          ==========

(4)   Property, Plant and Equipment

      Property, plant and equipment consists of the following:

                                              December 31           
                                           ------------------       Estimated
                                           1998          1997      useful lives
                                           ----          ----      ------------
Land                                   $   246,000       246,000            --
Buildings                                2,585,000     2,525,000   20-50 years
Machinery and equipment                  7,947,000     7,385,000     3-8 years
Furniture and fixtures                   3,566,000     3,424,000    5-10 years
Transportation equipment                   129,000       126,000      4 years
Tools and molds                          3,124,000     3,067,000      8 years
Leasehold improvements                     805,000       793,000   Term of lease
                                        ----------    ----------
                                        18,402,000    17,566,000
Less accumulated depreciation
   and amortization                     14,189,000    12,899,000
                                        ----------    ----------
                                       $ 4,213,000     4,667,000
                                       ===========    ==========

Total depreciation and amortization expense for 1998, 1997 and 1996, related to
      property, plant and equipment amounted to approximately $1,197,000,
                    $1,468,000 and $1,746,000, respectively.

                                                                     (Continued)


                                      F-11
<PAGE>

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

(5)   Senior Debt

      On  December 31, 1998 and 1997, the Company's  long-term debt consisted of
          senior debt under its credit facility in the amount of $10,682,000 and
          $14,878,000,   respectively,   and   $2,512,000   and   $3,084,000  of
          non-interest bearing deferred funding fee notes payable, respectively.
          Of these amounts outstanding  $2,000,000 and $1,900,000 are classified
          as the  current  portion of senior  debt as of  December  31, 1998 and
          1997,  respectively.  The  credit  facility  consists  of  a  combined
          revolving  line  of  credit  and  letter  of  credit  availability  of
          $9,000,000.  The balance of the  facility is comprised of a term loan.
          The credit facility is secured by  substantially  all of the Company's
          assets.  All obligations  except undrawn letters of credit,  letter of
          credit guarantees and the deferred fee notes bear interest at 12%. The
          Company incurs a fee of 2% on the average  balance of letter of credit
          guarantees outstanding.

      During 1998 the Company extended its Loan and Security  Agreement with its
          senior lender from August 31, 1999 to January 2, 2001.

      The agreement (as revised)  provides for loan principal  payments $400,000
          on the last day of each quarter during the term of the  agreement.  As
          part of the revised  agreement,  the loan amortization  shall first be
          applied to the  non-interest  bearing  notes payable until these notes
          are paid in full and then to the term loan.  Commencing June 30, 1997,
          the agreement  also requires the Company to pay  additional  principal
          payments if its cash flow exceeds certain amounts.

      Through December 31, 1998,  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.  The  Company  incurred  a
          $300,000 fee on February 13, 1995, evidenced by a non-interest bearing
          note 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. The original  aggregate  balance of the non-interest
          bearing notes was $3,084,000. As noted above, pursuant to an amendment
          to the loan agreement the loan amortization payments are being applied
          against these non-interest  bearing notes. As of December 31, 1998 the
          balance  of the  notes  is  $2,512,000  of which  $2,000,000  has been
          classified  as the current  portion of long term debt.  The  agreement
          requires  a  monthly  facility  fee  payment  of  $50,000,  commencing
          November 30, 1996, and continuing to the end of the agreement.

      In  connection  with the credit  facility,  in  November  1994 the Company
          issued  warrants  to its senior  lender to purchase  82,500  shares of
          common stock, exercisable at $17.20 per share and expiring in November
          1999. 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.  The
          value of the  warrants,  as  issued  in  March  1996 of  $380,000  was
          recorded as deferred  financing expense and additional paid in capital
          in 1996.

                                                                     (Continued)


                                      F-12
<PAGE>

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

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

      Financial debt  covenants  include an  interest  coverage  ratio  measured
          quarterly  with   limitations  on  the  incurrence  of   indebtedness,
          limitations on capital expenditures,  and prohibitions on declarations
          of any cash or stock  dividends  or the  repurchase  of the  Company's
          stock. As of December 31, 1998, the Company was in compliance with the
          above covenants.

      Maturities  of  the  Company's  long-term  debt,   including   convertible
          subordinated  debentures and 12%  subordinated  notes (notes 6 and 7),
          are as follows:

                      1999                       $ 2,000,000
                      2000                         7,685,000
                      2001                         9,188,000
                      2002                           365,000
                                                 -----------
                                                 $19,238,000
                                                 ===========

                                                                     (Continued)


                                      F-13
<PAGE>

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

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

      As  of December 31, 1998 and 1997 the Company had outstanding $365,000 and
          $1,758,000 of its 6% convertible  Subordinated  Debentures due July 1,
          2002 (the "Debentures"), net of original issue discount of $20,000 and
          $137,000,  respectively. The face amount of the outstanding Debentures
          was   $385,000  and   $1,895,000   at  December  31,  1998  and  1997,
          respectively.  The  Debentures  are  convertible  at any time prior to
          maturity  into  Common  Stock of the Company at a  conversion  rate of
          8.333  shares for each $1,000 face  amount of  Debentures,  subject to
          adjustment under certain circumstances.

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

      Interest on the Debentures is payable on July 1 of each year. The interest
          accrued as of  December  31,  1998 and 1997  amounted  to $12,000  and
          $398,000,  respectively.  As of December 31, 1998 the Company remedied
          its prior default by paying the interest due through July 1, 1998.

      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 was 19.4 shares of common  stock and $767.22 of
            principal of Notes in exchange for each $1,000  principal  amount of
            Debentures converted. Accrued interest on the Debentures, which were
            exchanged, was eliminated.

      The Notes were unsecured and did not bear interest.  There were no sinking
          fund requirements for the Notes. Each Note was convertible into common
          stock  at a  conversion  price  of $6.55  prior  to the  amendment  as
          discussed  below.  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  were  exchanged,  is  4,225,600.  The  Notes  were
          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.

      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  represented  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 had
          been  converted  into 3,600 shares of stock.  As of December 31, 1996,
          $25,885,000 Notes were outstanding.

                                                                     (Continued)


                                      F-14
<PAGE>

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

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

      Effective November 13, 1997,  the Company  amended the terms of the Notes.
          Under the amended terms, the conversion price of the Notes was reduced
          to  $3.65  from  $6.55.   As  of  December  31,  1997,   approximately
          $23,400,000   of  principal   amount  of  Notes  were  converted  into
          approximately  6,412,000 shares of common stock. The conversion of the
          Notes for common stock reduced debt by $23,400,000,  increased  equity
          by  $34,049,000  and  resulted  in  a  primarily  non-cash  charge  of
          $11,458,000.  The non-cash charge was based on the difference  between
          the value of the  shares  issuable  under the  original  terms and the
          value of the shares issued with respect to the Notes under the amended
          terms.  In connection  with the  conversion  of the debt,  the Company
          issued to its investment  banking firm 120,000 shares of common stock.
          As of December 31, 1997, $2,796,000 of the Notes remained outstanding.

      During 1998,  the  Company (i) repaid the  remaining  balance of the Notes
          from  the  proceeds  of the  12%  Subordinated  Notes  (note  7)  (ii)
          exchanged $250,000  additional  principal amount of the Debentures for
          5,000  shares of common  stock and  $192,000  of Notes which were then
          converted to 53,000  shares of common stock based on the amended terms
          of the Notes as described above and (iii) issued approximately 330,000
          shares of common stock in exchange for $1,260,000  principal amount of
          its  Debentures  and accrued  interest.  The  Company  recorded a debt
          conversion  expense  of  approximately   $945,000,   net  of  interest
          forgiven,  in the first quarter of 1998.  After giving effect to these
          transactions,  as of  December  31,  1998  the  Company  has no  Notes
          outstanding and $385,000 principal amount of Debentures outstanding.

      The exchange  of the  Debentures  for  the  Notes  and  common  stock  was
          accounted for as a troubled  debt  restructuring  in  accordance  with
          Statement of Financial  Accounting  Standards No. 15. Since the future
          principal  and  interest  payments  under  the  Notes is less than the
          carrying  value of the  Debentures,  the Notes were  recorded  for the
          amount of the future cash  payments,  and not  discounted,  the common
          stock issued was recorded at the market value at the time of issuance,
          and  an   extraordinary   gain  on   restructuring   was  recorded  of
          approximately  $76,000,  $122,000,  and  $3,922,000 in 1998,  1997 and
          1996,  respectively.  Accordingly,  no  future  interest  expense  was
          recorded on the Notes, subsequent to the time of issuance.

                                                                     (Continued)


                                      F-15
<PAGE>

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

   (7) 12% Subordinated Notes

      In  January 1998, the Company raised $6,000,000 from the private placement
          of 60 units at $100,000 per unit which mature on January 3, 2000. Each
          unit consisted of (a) the Company's 12 % Subordinated Note due January
          3, 2000 (a "12% Note"), in the principal amount of $100,000, and (b) a
          Series B Common  Stock  Purchase  Warrant  (a "Series B  Warrant")  to
          purchase  10,000  shares  of Common  Stock at $3.00 per share  through
          December 31, 2002. In the event that any 12% Note is  outstanding  one
          year from the date on which such 12% Note is issued (the  "Anniversary
          Date of the Note"),  the Company shall issue to the holder of such 12%
          Note on the  Anniversary  Date  of the  Note a  Series  C  Warrant  to
          purchase 25 shares of Common Stock for each $1,000 principal amount of
          12% Notes  outstanding on the Anniversary Date of the Note. The Series
          C Warrant  will have an exercise  price  equal to the average  closing
          prices of the Common Stock on each of the five trading days  preceding
          the  Anniversary  Date of the Note with  respect to which the Series C
          Warrant is being  issued and will expire on  December  31,  2003.  The
          proceeds  from the sale of the Units was used  principally  to pay the
          remaining  principal  amount of Zero  Coupon  Notes which had not been
          converted  of  approximately  $2,800,000  (note 6) and to  reduce  the
          Company's  senior  debt by  approximately  $2,950,000  (note  5).  The
          balance of such proceeds was added to working capital.

      The Series B and  Series C  Warrants  were  valued  at  $630,000  and were
          recorded  as part of  additional  paid in  capital.  Accordingly,  the
          Company  recorded  the net 12% Notes at a value of  $5,370,000.  As of
          December  31,  1998,   the  Company  had  12%  Notes   outstanding  of
          $5,685,000, net of original issue discount of $315,000.  Subsequent to
          December  31,  1998,  pursuant to the terms of the Notes,  the Company
          issued  150,000  Series C Warrants  to the  holders of the Notes.  The
          Series C Warrants  were issued at an average  exercise  price of $1.94
          pursuant to the terms of the Notes.

(8)   Joint Venture

      The Company  entered into a joint  venture  agreement as of April 24, 1986
          with a Korean  partner  whereby  each owns a 50% interest in the joint
          venture.  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  $190,000,  to purchase an additional 1%
          interest in the joint  venture,  which would  increase  the  Company's
          ownership  percentage to 51%. The Company  consolidates the operations
          of the  joint  venture  since the  Company  can  obtain a  controlling
          interest at its election and the joint  venture is entirely  dependent
          on the  Company  for the  products  it  sells  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-16
<PAGE>

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

(9)   Stockholders' Equity

      On  June 6, 1996, the  stockholders of the Company approved 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 date 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 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.

      During 1996, the Company  settled a class action  lawsuit.  The settlement
          included 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,
          1998, all shares have been issued pursuant to such settlement.

      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. In March 1996,  the Company,  in
          connection  with an agreement to amend and extend certain senior debt,
          issued  warrants  to  purchase  200,000  shares of common  stock at an
          exercise  price  of  $5.00  per  share  that  expire  March  2001.  In
          consideration  of the  November  30,  1997  extension  of  the  credit
          facility,  the  Company  agreed  to amend  the  terms of the  warrants
          previously  issued  to its  senior  lender.  The  82,500  and  200,000
          warrants,  after adjustment for the antidilution  provisions contained
          in the  warrant  agreement,  allow for the  purchase  of  164,627  and
          295,441  shares  of common  stock,  respectively  and are  immediately
          exercisable  at $3.00 per share and expire on November  30,  2002.  In
          connection with the change of the warrant terms,  the Company recorded
          deferred financing costs of $45,000 (note 5).

      In  1997, as remuneration for advisory  services by an investment  banking
          firm, the Company issued warrants to purchase 400,000 shares of common
          stock which are  exercisable  at $1.56 per share,  and expire in April
          2002. In addition,  as remuneration for the advisory  services related
          to the debt conversion,  the Company issued to its investment  banking
          firm 120,000  shares of common stock (note 6). In 1997,  in connection
          with these services, the Company recorded deferred consulting and debt
          conversion   expense   of   approximately    $80,000   and   $580,000,
          respectively.

      During 1998,  pursuant  to the  private  placement  of  $6,000,000  of 12%
          Subordinated  Notes (note 7) the Company  issued Series B Common Stock
          Purchase  Warrants to purchase 600,000 shares of common stock at $3.00
          per  share.  The Series  B  Warrants  expire  on  December  31,  2002.
          Subsequent  to December 31, 1998,  pursuant to the terms of the Notes,
          the Company issued Series C Common Stock Purchase Warrants to purchase
          150,000 shares of common stock to the holders of the Notes. The Series
          C Warrants were issued at an average  exercise price of $1.94 pursuant
          to the terms of the Notes and expire  December 31, 2003.  The Series B
          and Series C Warrants  were  valued at $630,000  and were  recorded as
          part of additional paid in capital in 1998.

                                                                     (Continued)


                                      F-17
<PAGE>

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

      As  of December 31, 1998,  the Company  also had stock  purchase  warrants
          outstanding  to purchase  53,000 shares of common stock at an exercise
          price of $17.50  per share  expiring  in  November  2001 to its former
          lenders in return for a discount  with respect to the repayment of its
          debt in 1994.

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

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


(10)  Stockholder Rights Plan

      The Company  has a  Stockholder  Rights  Plan  in  which  preferred  stock
          purchase rights were  distributed to stockholders as a dividend at the
          rate of one right for each  common  share.  Each  right  entitles  the
          holder to buy from 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 22.5 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 22.5 percent or more
          of the common stock.

                                                                     (Continued)


                                      F-18
<PAGE>

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

      If  any person becomes the beneficial owner of 22.5 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 22.5 percent position has been acquired.

(11)  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 1998, 1997 and 1996, the Company
          accrued approximately $185,000,  $203,000 and $180,000,  respectively,
          under these agreements.

      In  1986, the Company  established the Porta Systems Corp.  401(k) Savings
          Plan for the benefit of eligible employees,  as defined in the Savings
          Plan.  Participants  contribute a specified  percentage  of their base
          salary up to a maximum of 15%. The Company will match a  participant's
          contribution  by an  amount  equal  to 25% 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, 1998, 1997 and
          1996,  the  Company's  contribution  amounted to $96,000,  $96,000 and
          $90,000, respectively.

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

(12)  Incentive Plans

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

                                                                     (Continued)


                                      F-19
<PAGE>

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

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

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

      During 1998, pursuant to a certain employment contract, the Company issued
          30,000  options to purchase  common stock of the  Company.  Under this
          agreement,  the options are exercisable at $1.25,  which  approximated
          market value on the date of issuance and expire on August 31, 2004. As
          of December 31, 1998 none of the options are vested.

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

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

              (Dollars in thousands, except per share data)

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

      The  weighted-average  fair value of options  granted was $ 1.47 and $0.35
per share in 1998 and 1997.

                                                                     (Continued)


                                      F-20
<PAGE>

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

      The fair  value of each  option  grant is  estimated  on the date of grant
          using  the  Black-Scholes  option-pricing  model  with  the  following
          assumptions for 1998 and 1997:

                 Dividends:                             $0.00 per share
                 Volatility:                            46.10%-80.00%
                 Risk-free interest:                    4.80%-  6.40%
                 Expected term:                         5 years

      Such pro forma  information  has  not  been  presented  for  1996  because
          management has determined that the compensation  costs associated with
          options  granted in 1996 are not material to net income  (loss) or net
          income (loss) per share.

      A   summary of the status of the  Company's  1986 stock  option plan as of
          December 31, 1998, 1997, and 1996, and changes during the years ending
          on those dates is presented below:

<TABLE>
<CAPTION>
                                            1998                    1997                       1996
                                   ----------------------   ----------------------    -----------------------
                                   Shares  Weighted         Shares  Weighted          Shares   Weighted
                                   Under   Average          Under   Average           Under    Average
                                   Option  Exercise Price   Option  Exercise Price    Option   Exercise Price
                                   ------  --------------   ------  --------------    ------   --------------
<S>                                <C>       <C>            <C>         <C>           <C>           <C>
Outstanding beginning of year      16,392    $    57        16,397      $ 57          56,360        $58
Granted                              --                       --                        --          
Exercised                            --                       --                        --          
Forfeited                            (865)        63            (5)       38         (39,963)        58
                                   ------                   ------                    ------                              
Outstanding end of year            15,527    $    57        16,392      $ 57          16,397        $57
                                   ======                   ======                    ======                              
Options exercisable at year-end    15,527                   16,392                    16,397                              
                                   ======                   ======                    ======                              
</TABLE>

      The following table summarizes information about stock options outstanding
under the 1986 Plan at December 31, 1998:

<TABLE>
<CAPTION>
                                     Options Outstanding                      Options Exercisable
                      -------------------------------------------------  -----------------------------
Range of              Outstanding   Remaining          Weighted-average  Exercisable  Weighted-Average
Exercise Prices       at 12/31/98   Contractual Life   Exercise Price    at 12/31/98  Exercise Price
---------------       -----------   ----------------   ----------------  -----------  ----------------
<S>                       <C>           <C>                 <C>              <C>          <C>
$ 5 to  25                3,000         3.7 years           $ 5              3,000        $ 5
 25 to  75                9,970         0.8                  65              9,970         65
 75 to 100                2,557         0.3                  86              2,557         86
                         ------                                             ------
$ 5 to 100               15,527         1.3                 $57             15,527        $57
                         ======                                             ======
</TABLE>

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

                                                                     (Continued)


                                      F-21
<PAGE>

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

<TABLE>
<CAPTION>
                                       1998                      1997                    1996
                             -----------------------   -----------------------   -----------------------
                             Shares   Weighted         Shares   Weighted         Shares   Weighted
                             Under    Average          Under    Average          Under    Average
                             Option   Exercise Price   Option   Exercise Price   Option   Exercise Price
                             ------   --------------   ------   --------------   ------   --------------
<S>                         <C>           <C>          <C>           <C>             <C>      <C>  
   Outstanding beginning   
      of year               437,988       $1.67        79,448        $2.45          -0-       $0.00
   Granted                   12,000        3.85       358,780         1.50       79,448        2.45
   Exercised                   --           --           --            --          --           --
   Forfeited                 (2,050)       1.51          (240)        2.00         --           --
                            -------                   -------                    ------
   Outstanding end of year  447,938       $1.73       437,988        $1.67       79,448       $2.45
                            =======                   =======                    ======
Options exercisable at
  year-end                  447,938                   333,488                    63,050
                            =======                   =======                    ======
</TABLE>

      The following table summarizes information about stock options outstanding
under the 1996 Plan at December 31, 1998:

<TABLE>
<CAPTION>
                                    Options Outstanding                      Options Exercisable
                    -------------------------------------------------   -------------------------------
Range of            Outstanding   Remaining          Weighted-average   Exercisable    Weighted-Average
Exercise Prices     at 12/31/98   Contractual Life   Exercise Price     at 12/31/98    Exercise Price
---------------     -----------   ----------------   ----------------   -----------    ----------------
<S>                   <C>            <C>                 <C>              <C>              <C>   
$ 1 to 5              447,938        7.5 years           $ 1.73           447,938          $ 1.73
                      =======                                             =======
</TABLE>

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

                                                              1998
                                                --------------------------------
                                                Shares            Weighted
                                                Under             Average
                                                Option            Exercise Price
                                                ------            --------------
Outstanding beginning of year                         0             $   0.00
Granted                                         448,000                 3.25
Exercised                                          --                    --
Forfeited                                        (3,500)                3.25
                                                -------
Outstanding end of year                         444,500             $   3.25
                                                =======
  Options exercisable at year-end                   -0-        
                                                =======
                                                              
      The following table summarizes information about stock options outstanding
under the 1998 Plan at December 31, 1998:

<TABLE>
<CAPTION>
                                   Options Outstanding                     Options Exercisable
                     -----------------------------------------------  -----------------------------
Range of             Outstanding  Remaining         Weighted-average  Exercisable  Weighted-Average
Exercise Prices      at 12/31/98  Contractual Life  Exercise Price    at 12/31/98  Exercise Price
---------------      -----------  ----------------  ----------------  -----------  ----------------
<S>                    <C>           <C>                <C>                <C>         <C>   
$ 1 to 5               444,500       5.1 years          $ 3.25            -0-          $ 0.00
                       =======                                           =====
</TABLE>

                                                                     (Continued)


                                      F-22
<PAGE>

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

(13)  Income Taxes

      The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
                                       1998                        1997                        1996
                                       ----                        ----                        ----
                              Current       Deferred     Current         Deferred      Current        Deferred
                              -------       --------     -------         --------      -------        --------
<S>                         <C>              <C>          <C>           <C>                                
Federal                     $    --          (8,000)      40,000        (708,000)         --             --
State and foreign             615,000        (1,000)     177,000         (94,000)      100,000           --
                            ---------        ------      -------        --------       -------        --------
             Total          $ 615,000        (9,000)     217,000        (802,000)      100,000           --
                            =========        ======      =======        ========       =======        ========
</TABLE>

      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:

                                             1998           1997         1996
                                             ----           ----         ----
Tax expense (benefit) at statutory 
   rate                                  $   398,000     (2,526,000)    495,000
Increase (decrease) in income tax 
   benefit resulting from:
   Decrease in valuation allowance        (4,097,000)   (22,740,000)   (495,000)
   State and foreign taxes, less 
      applicable federal benefits            615,000         83,000     100,000
   Debt conversion expense not 
      deductible for tax                     411,000      3,620,000        --
   Other expenses not deductible 
      for tax                                136,000        206,000        --
   Foreign income taxed at rates 
      lower than U.S. statutory rate        (239,000)      (730,000)       --
   Utilization of net operating loss
      carryforward                          (118,000)      (669,000)       --
   Expiration of capital loss and
      investment tax credit 
      carryforwards                        4,387,000        642,000        --
   Estimated NOL in excess of
      382 limitation                        (719,000)    21,500,000        --
   Other                                    (168,000)        29,000        --
                                         -----------    -----------    --------
                                         $   606,000       (585,000)    100,000
                                         ===========    ===========    ========

      The Company  has  unused  United  States  tax  net  operating  loss  (NOL)
          carryforwards of approximately  $66,682,000  expiring at various dates
          between 2007 and 2011.  No tax benefit or expense was  apportioned  to
          the  extraordinary  gains, as such amounts are immaterial.  Due to the
          change  in  ownership  which  resulted  from  the  conversion  of  the
          Company's Zero coupon subordinated  convertible notes to common stock,
          the  Company's  usage of its NOL will be  limited in  accordance  with
          Internal   Revenue  Code  section  382.  The  Company's   carryforward
          utilization  of  the  NOL is  limited  to  $1,767,000  per  year.  The
          carryforward  amounts  are subject to review by the  Internal  Revenue
          Service (IRS). The capital loss carryforwards expired during 1998 and,
          as a result of the section 382 limitation,  no benefit from tax credit
          carryforwards will be available.

      The Company's net operating  loss  carryforwards,  limited by section 382,
          expire in the following years:

                       2009                       $ 3,757,000
                       2010                        18,880,000
                       2011                           884,000
                                                  -----------
                                                  $23,521,000
                                                  ===========

                                                                     (Continued)


                                      F-23
<PAGE>

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

      The components of the deferred tax assets and liabilities, the net balance
          of which is  included  in  prepaid  and other  current  assets,  as of
          December 31, 1998 and 1997 are as follows:
                                                       1998             1997
                                                       ----             ----
Deferred tax assets:
   Inventory                                      $  1,488,000        1,634,000
   Allowance for doubtful accounts
      receivable                                       345,000          307,000
   Benefits of tax loss carryforwards                9,056,000        8,455,000
   Benefit plans                                       871,000        1,007,000
   Accrued Commissions                                 913,000          941,000
   Other                                               290,000          422,000
   Depreciation                                        487,000             --
   Benefit of investment tax credit
      carryforwards                                       --            658,000
   Benefit of capital loss carryforwards                  --          4,387,000
                                                  ------------     ------------

                                                    13,450,000       17,811,000
   Valuation allowance                             (12,607,000)     (16,704,000)
                                                  ------------     ------------
                                                       843,000        1,107,000
                                                  ------------     ------------
Deferred tax liabilities:
   Capitalized software costs                          (32,000)        (240,000)
   Depreciation                                           --            (65,000)
                                                  ------------     ------------

                                                       (32,000)        (305,000)
                                                  ------------     ------------

                                                  $    811,000          802,000
                                                  ============     ============

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

      Because of the Company's US tax losses in 1996, a valuation  allowance for
          the  deferred  tax asset was  provided  due to the  uncertainty  as to
          future realization. During the years ended December 31, 1998 and 1997,
          the  valuation  allowance  was reduced to reflect a net  deferred  tax
          asset  equal  to  the   anticipated   tax  benefit  of  the  temporary
          differences which are expected to be realized within one year based on
          the Company's 1999 and 1998 projected US taxable income, respectively.

      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.  The  Company is  currently  in a  structured
          settlement with the IRS, which is reviewed  annually,  whereby monthly
          payments will be made to liquidate the  settlement.  Aggregate  annual
          amounts  payable  by the  Company,  including  interest  on the unpaid
          amounts at a current  rate of 7%, is $240,000 in 1998.  As of December
          31, 1998, the Company has made all the required  payments through that
          date  under  the  settlement  and   approximately   $770,000   remains
          outstanding.

                                                                     (Continued)


                                      F-24
<PAGE>

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

      No  provision was made for U.S. income taxes on the undistributed earnings
          of the Company's foreign subsidiaries as it is management's  intention
          to utilize those earnings in the foreign  operations for an indefinite
          period of time or repatriate  such earnings only when tax effective to
          do so. At December  31,  1998,  undistributed  earnings of the foreign
          subsidiaries   amounted  to  approximately   $5,980,000.   It  is  not
          practicable to determine the amount of income or withholding  tax that
          would be payable upon the remittance of those earnings.

(14)  Sale of Israeli Subsidiary

      In  1992 the Company sold its Israeli network communications  business. As
          a result of an  insolvency  procedure  involving the purchaser of this
          business and pursuant to the sale of the business out of receivership,
          the Company's  receivable was represented by shares of common stock of
          the entity which  acquired the  discontinued  operation.  In 1996, the
          Company  sold  such  shares  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. In 1998
          and 1997, the Company  received  $241,000 and $700,000,  respectively,
          representing final payments  resulting from the insolvency  procedure.
          Such payments are included in other income.

(15)  Leases

      At  December  31,   1998,   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 1998, 1997, and 1996 amounted to
          approximately $716,000, $827,000 and $871,000,  respectively.  Minimum
          rental commitments,  exclusive of future escalation charges,  for each
          of the next five years are as follows:

                            1999                      $  469,000
                            2000                         383,000
                            2001                          64,000
                            2002                          55,000
                            2003                          29,000
                            Thereafter                    10,000
                                                      ----------
                                                      $1,010,000
                                                      ==========

(16)  Contingencies

      At  December 31, 1998, the Company was contingently liable for outstanding
          letters of credit aggregating approximately $5,340,000 as security for
          the performance of certain long-term contracts.

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

                                                                     (Continued)


                                      F-25
<PAGE>

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

(17)  Major Customers

      During the years ended  December 31, 1998,  1997 and 1996,  the  Company's
          five  largest  customers  accounted  for  sales  of  $28,797,000,   or
          approximately  49% of  sales,  $30,633,000,  or  approximately  49% of
          sales, and $ 27,807,000, or approximately 48% of sales,  respectively.
          The  Company's  largest  customer  is British  Telecommunications  plc
          ("BT").  Sales to BT for the year ended  December 31,  1998,  1997 and
          1996   amounted   to   $15,349,000,   $13,876,000   and   $11,308,000,
          respectively,  or approximately 26%, 22% and 20%, respectively, of the
          Company's   sales  for  such   years.   Therefore,   any   significant
          interruption  or decline in sales to BT may have a materially  adverse
          effect upon the Company's operations.  During 1998, sales to a Chilean
          telephone  company were  $6,834,000,  or  approximately  12% of sales.
          During 1996, sales to a Philippines telephone company were $7,034,000,
          or approximately  12% of sales. No other customers  account for 10% or
          more of the  Company's  sales for any year.  Approximately  64% of the
          Company's accounts  receivable are due from the five largest customers
          as of December 31, 1998 and 1997.

(18)  Fair Values of Financial Instruments

      Cash equivalents, 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  senior  long-term debt  approximates
          fair value as the  extension  of the Loan and Security  Agreement  was
          re-negotiated on December 1, 1998.

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

                                December 31, 1998         December 31, 1997
                                -----------------         -----------------
                               Carrying    Estimated     Carrying    Estimated
                                 amount   fair value       amount   fair value
                                 ------   ----------       ------   ----------
6% Convertible 
  Subordinated Debentures    $  365,000      108,000    1,758,000    1,471,000
                             ==========   ==========   ==========   ==========

Zero Coupon Subordinated 
  Convertible Notes          $     --           --      2,796,000    2,796,000
                             ==========   ==========   ==========    =========

12% Subordinated Notes       $5,685,000    5,685,000         --           --
                             ==========   ==========   ==========    =========

      Management's  estimated  fair value of the  Debentures  as of December 31,
          1998 is estimated  based on the conversion  features on the Debentures
          at the market  value of the  Company's  common  stock at December  31,
          1998.  Management's  estimated  fair  value  of the  Debentures  as of
          December 31, 1997 is based on market  prices of the  Company's  common
          stock price,  which were issued in January 1998 for the  conversion of
          $1,260,000 of principal amount of the Debentures.

      Management estimates that the fair value of the 12% Subordinated  Notes as
          of December 31, 1998  approximates  the carrying value of the debt due
          to stability of interest  rates from the date of the debt  origination
          of January 1998 as compared to December 31, 1998.

                                                                     (Continued)


                                      F-26
<PAGE>

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

(19)  Net Income (Loss) Per Share

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

Numerator-Basic and diluted
  net income (loss) per share:              1998          1997          1996
                                        -----------   -----------    -----------

    Income (loss) from continuing
       operations                       $   451,000   $(7,021,000)   $ 1,252,000
    Extraordinary item                       76,000       122,000      3,922,000
                                        -----------   -----------    -----------
    Net income (loss)                       527,000   $(6,899,000)   $ 5,174,000
                                        ===========   ===========    ===========

Denominator:
    Denominator for basic net income
       (loss) per share - weighted-
       average shares                     9,281,000     3,111,000      2,184,000
    Effect of dilutive securities:
       Options and Warrants                 452,000          --             --
       6% Convertible Subordinated 
         Notes                               52,000          --             --
       Zero Coupon Senior 
         Subordinated Convertible 
         Notes                                 --            --        3,344,000
                                        -----------   -----------    -----------
    Denominator for diluted net 
       income (loss) per share- 
       adjusted  weighted-average  
       shares and assumed conversions     9,785,000     3,111,000      5,528,000
                                        ===========   ===========    ===========
    Basic per share amounts:
       Continuing operations            $      0.05   $     (2.26)   $      0.57
       Extraordinary item                      0.01          0.04           1.80
                                        -----------   -----------    -----------
         Net income (loss) per 
         share of common stock          $      0.06   $     (2.22)   $      2.37
                                        ===========   ===========    ===========
   Diluted per share amounts:
       Continuing operations            $      0.04   $     (2.26)   $      0.23
       Extraordinary item                      0.01          0.04           0.71
                                        -----------   -----------    -----------
         Net income (loss) per share
         of common stock                $      0.05   $     (2.22)   $      0.94
                                        ===========   ===========    ===========

      For additional  disclosure  regarding the Zero Coupon Senior  Subordinated
Notes see note 6.

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

                                                                     (Continued)


                                      F-27
<PAGE>

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

      Options to purchase 486,577,  25,442 and 25,447 shares of common stock for
          1998, 1997 and 1996,  respectively,  with exercise prices ranging from
          $3.25 to $86.25, $3.69 to $86.25 and $3.69 to $8.25 for 1998, 1997 and
          1996,   respectively,   were  outstanding  but  not  included  in  the
          computation  of  diluted  net  income  (loss)  per share  because  the
          exercise  prices were greater than the average  market price of common
          stock during such years.

      Warrants to purchase  53,000,  548,668 and 360,500  shares of common stock
          for 1998,  1997 and 1996,  respectively,  with exercise prices ranging
          from  $17.50,  $3.00 to $50.00 and $5.00 to $33.10 for 1998,  1997 and
          1996,   respectively,   were  outstanding  but  not  included  in  the
          computation  of  diluted  net  income  (loss)  per share  because  the
          exercise  prices were greater than the average  market price of common
          stock during such years.

(20)  Legal Matters

      In  July 1996,  an action was  commenced  against  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.  There  has  been no  further  activity
          respecting this investigation since November 1996.

                                                                     (Continued)


                                      F-28
<PAGE>

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

(21)  Cash Flow Information

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

                                                 1998         1997         1996
                                                 ----         ----         ----

Cash paid for interest                          $2,411        2,844        2,751
                                                ======        =====        =====
Cash paid for income taxes                      $  223          117          105
                                                ======        =====        =====

      (2) Non-cash transactions:

          (i) During 1998,  1997 and 1996, the Company  exchanged  approximately
          $250,000, $410,000 and $33,770,000 principal amount of its Debentures,
          net of unamortized discount and accrued interest, for 5,000, 8,000 and
          655,000 shares of Common stock, and $192,000, $315,000 and $25,909,000
          of Notes, respectively (note 6).

          (ii) During 1996, the Company issued 3,600 shares of common stock as a
          result of the conversion of Notes under the original terms (note 6).

          (iii) During 1998 and 1997,  the Company  issued  53,000 and 6,412,000
          shares of common  stock,  respectively,  upon the  conversion of Notes
          (note 6).

          (iv) During 1998,  the Company  issued  330,000 shares of common stock
          upon the conversion of $1,260,000 of Debentures (note 6)

          (v) During 1998 and 1996, the Company issued 147,000 and 73,000 shares
          of common  stock to  satisfy a portion  of the final  settlement  of a
          class action lawsuit (note 9).

          (vi) 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  (note 5). The value of the
          warrants was  recorded as deferred  financing  expense and  additional
          paid in capital.

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

          (viii) In  connection  with advisory  services  provided in 1997 by an
          investment  banking firm,  the Company issued 120,000 shares of common
          stock in 1998 and warrants to purchase  400,000 shares of common stock
          were issued in 1997 (notes 6 and 9).

          (ix) In 1998,  in  connection  with the 12%  subordinated  notes,  the
          Company  issued  Series B and Series C Warrants,  which were valued at
          $630,000 and were recorded as part of  additional  paid in capital and
          original issue discount (note 7).

                                                                     (Continued)


                                      F-29
<PAGE>

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

(22)  Segment and Geographic Data

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

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

                                              1998          1997         1996
                                              ----          ----         ----
Revenue:
      Line                                $24,291,000    23,753,000   23,249,000
      OSS                                  27,318,000    29,561,000   26,804,000
      Signal                                7,539,000     8,280,000    7,597,000
                                          -----------    ----------   ----------
                                          $59,148,000    61,594,000   57,650,000
                                          ===========    ==========   ==========
                     
Segment profit:                    
      Line                                $ 6,580,000     7,091,000    6,329,000
      OSS                                    (365,000)      634,000    1,078,000
      Signal                                1,953,000     2,325,000    2,222,000
                                          -----------    ----------   ----------
                                          $ 8,168,000    10,050,000    9,629,000
                                          ===========    ==========   ==========
                                      
Depreciation and amortization:        
      Line                                $   722,000       831,000      906,000
      OSS                                   1,170,000     1,850,000    2,526,000
      Signal                                  200,000       215,000      359,000
                                          -----------    ----------   ----------
                                          $ 2,092,000     2,896,000    3,791,000
                                          ===========    ==========   ==========
                                      
Total identifiable assets:            
      Line                                $10,330,000     9,329,000    9,182,000
      OSS                                  28,283,000    25,018,000   28,197,000
      Signal                                8,176,000     8,273,000    7,330,000
                                          -----------    ----------   ----------
                                          $46,789,000    42,620,000   44,709,000
                                          ===========    ==========   ==========
                                      
Capital expenditures:                 
      Line                                $   280,000       277,000       33,000
      OSS                                     283,000        97,000       45,000
      Signal                                   93,000        12,000       40,000
                                          -----------    ----------   ----------
                                          $   656,000       386,000      118,000
                                          ===========    ==========   ==========
                                      
                                                                     (Continued)


                                      F-30
<PAGE>

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

      The following table reconciles segment totals to consolidated totals:

                                          1998           1997          1996
                                          ----           ----          ----
Revenue:
      Total revenue for reportable 
         segments                      $59,148,000    61,594,000    57,650,000
      Other revenue                        195,000       636,000       337,000
                                       -----------    ----------    ----------
   Consolidated total revenue          $59,343,000    62,230,000    57,987,000
                                       ===========    ==========    ==========

Operating income:                     
      Total segment profit for        
         reportable segments           $ 8,168,000    10,050,000     9,629,000
      Corporate and unallocated         (3,602,000)   (3,949,000)   (5,647,000)
                                       -----------    ----------    ----------
   Consolidated total operating       
      income                           $ 4,566,000     6,101,000     3,982,000
                                       ===========    ==========    ==========
                                      
Depreciation and amortization:        
      Total for reportable segments    $ 2,092,000     2,896,000     3,791,000
      Corporate and unallocated            103,000       144,000       150,000
                                       -----------    ----------    ----------
   Consolidated total deprecation     
      and amortization                 $ 2,195,000     3,040,000     3,941,000
                                       ===========    ==========    ==========
                                      
Total assets:                         
      Total for reportable segments    $46,789,000    42,620,000    44,709,000
      Corporate and unallocated          5,347,000     8,380,000     5,949,000
                                       -----------    ----------    ----------
   Consolidated total assets           $52,136,000    51,000,000    50,658,000
                                       ===========    ==========    ==========
                                      
Capital expenditures:                 
      Total for reportable segments    $   656,000       386,000       118,000
      Corporate and unallocated              9,000        23,000         7,000
                                       -----------    ----------    ----------
   Consolidated total capital         
      expenditures                     $   665,000       409,000       125,000
                                       ===========    ==========    ==========

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

                                          1998           1997          1996
                                          ----           ----          ----
Revenue:
      United States                  $18,951,000      17,980,000      17,644,000
      Other North America              1,879,000       1,289,000               0
      United Kingdom                  20,441,000      18,640,000      16,000,000
      Asia/Pacific                     7,181,000      10,278,000      15,812,000
      Latin America                    7,463,000       2,429,000       1,738,000
      Other Europe                     3,377,000      10,587,000       5,416,000
      Other                               51,000       1,027,000       1,377,000
                                     -----------     -----------     -----------

Consolidated total revenue           $59,343,000      62,230,000      57,987,000
                                     ===========     ===========     ===========

Consolidated long-lived assets:
      United States                  $12,317,000      13,044,000      13,943,000
      Other North America                663,000         650,000         504,000
      United Kingdom                   2,520,000       2,776,000       2,706,000
      Asia/Pacific                       273,000         245,000         590,000
      Latin America                       26,000               0               0
      Other                               11,000          11,000           4,000
                                     -----------     -----------     -----------
                                      15,810,000      16,726,000      17,747,000
   Current and other assets           36,326,000      34,274,000      32,911,000
                                     -----------     -----------     -----------
Consolidated total assets            $52,136,000      51,000,000      50,658,000
                                     ===========     ===========     ===========


                                      F-31