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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, 2003
                                             -----------------

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

                 For the transition period from _______to_______

                          Commission file number 1-8191

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

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

6851 Jericho Turnpike, Syosset, New York                   11791
---------------------------------------                    -----
(Address of principal executive offices)                   (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act: None

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

Common Stock, par value $.01 per share

                                      None

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

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

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

      State aggregate market value of the voting stock held by non-affiliates of
the registrant: $199,446 as of June 30, 2003.

      Indicate  the  number of shares  outstanding  of each of the  registrant's
class of common stock, as of the latest  practicable  date:  9,972,284 shares of
Common Stock, par value $.01 per share, as of March 23, 2004.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None

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<PAGE>

                                     Part I

Item 1.  Business

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

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

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

      Computer-based  operation support systems. Our operations support systems,
which we call our OSS systems,  focus on the access loop and are  components  of
telephone  companies'  service assurance and service delivery  initiatives.  The
systems   primarily  focus  on  trouble   management,   line  testing,   network
provisioning,  inventory  and  assignment,  and automatic  activation,  and most
currently  single  ended  line  qualification  for the  delivery  of  xDSL  high
bandwidth  services.  In past years,  we marketed  these systems  principally to
foreign telephone  operating  companies in established and developing  countries
primarily in Asia,  South and Central America and Europe.  We are in the process
of scaling  back our OSS  operations  and limit our  activity in this segment to
performing maintenance for existing systems and seeking new business in selected
markets.

      Porta Systems Corp. is a Delaware corporation  incorporated in 1972 as the
successor to a New York corporation  incorporated in 1969. Our principal offices
are located at 6851 Jericho Turnpike, Syosset, New York 11791; telephone number,
516-364-9300. References to "we," "us," "our," and words of like import refer to
Porta  Systems  Corp.  and  its  subsidiaries,   unless  the  context  indicates
otherwise.

Forward-Looking Statements

      Statements  in  this  Form  10-K  annual  report  may be  "forward-looking
statements" within the meaning of the Private  Securities  Litigation Reform Act
of 1995.  Forward-looking statements include, but are not limited to, statements
that express our intentions, beliefs, expectations,  strategies,  predictions or
any other statements relating to our future activities or other future events or
conditions.  These statements are based on current  expectations,  estimates and
projections   about  our  business  based,  in  part,  on  assumptions  made  by
management.  These  statements  are not  guarantees  of future  performance  and
involve  risks,  uncertainties  and  assumptions  that are difficult to predict.
Therefore, actual outcomes and results may, and probably will, differ materially
from what is expressed or forecasted in the  forward-looking  statements  due to
numerous factors, including those risks discussed from time to time in this Form
10-K annual report,  including the risks  described  under "Risk Factors" and in
other  documents  which we file with the Securities and Exchange  Commission and
the matters described under  "Management's  Discussion and Analysis of Financial
Condition and Results of  Operations."  In addition,  such  statements  could be
affected by risks and uncertainties related to our financial conditions, factors
which affect the  telecommunications  industry,  market and customer acceptance,
competition,  government  regulations and requirements  and pricing,  as well as
general  industry and market  conditions and growth rates,  and general


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<PAGE>

economic conditions. Any forward-looking statements speak only as of the date on
which  they are made,  and we do not  undertake  any  obligation  to update  any
forward-looking  statement to reflect events or circumstances  after the date of
this Form 10-K.

Risk Factors

      We require substantial  financing to meet our working capital requirements
and we have no access to such  financing.  We had a working  capital  deficit at
December  31,  2003  of  $36,825,000.  As of  December  31,  2003,  our  current
liabilities  included  $25,387,000  due to our  senior  lender.  We do not  have
sufficient  resources to pay the senior  lender or to pay principal and interest
of $9,349,000  due at December 31, 2003 on the  outstanding  subordinated  notes
that became due on July 3, 2001,  and we do not expect to generate the necessary
cash from our  operations  to enable us to make  those  payments  and we have no
other  source of  outside  financing.  Because  our  senior  lender is no longer
advancing  funds to us, at present our only source of funds is from  operations.
To the extent that either our  operations  do not generate  sufficient  funds to
cover our expenses or our lenders demand payment which we are unable to make, it
may  be  necessary  for us to  seek  reorganization  or  liquidation  under  the
Bankruptcy  Code.  See  "Management's   Discussion  and  Analysis  of  Financial
Condition and Results of Operations."

      We  are  incurring  losses  from  our  operations,   and  our  losses  are
continuing.  We incurred a net loss of $3,357,000, or $0.34 per share (basic and
diluted),  on sales of $19,590,000 for 2003, following a loss of $4,114,000,  or
$.41 per share (basic and diluted) for 2002.  In each of these years,  our sales
declined from the level of the previous year,  reflecting both a general decline
in sales in the  telecommunication  industry and our clients' concerns about our
financial  condition.  Our losses are  continuing  and we expect that our losses
will continue unless we are able both to significantly  increase our revenue and
reduce our expenses.  We cannot give  assurance  that we will be able to operate
profitably in the future, and if we are unable to operate profitably,  we may be
unable to continue in business.

      Because  of our  decreasing  sales,  we may  not be able  to  continue  in
business.  Our sales  declined  significantly  (24%) from 2001 to 2002 and again
from 2002 to 2003 by 9%. Unless we are able to stop the downward  trend in sales
and generate a significant increase in sales, we will not be able to sustain our
operations  since  it is  unlikely  that we  will  be  able  to make  sufficient
reductions  in our  overhead  to  compensate  for the decline in sales and gross
profit.  We  cannot  assure  you  that we will be  able to  increase  our  sales
significantly,  if at all.  As a result of the  deterioration  of our  operating
revenue we are evaluating various options,  including the sale of one or more of
our divisions as well as a  reorganization  or liquidation  under the Bankruptcy
Code.

      Our independent  auditors have included an explanatory  paragraph relating
to our ability to continue as a going  concern in their report on our  financial
statements.  Because  of our  substantial  losses in 2003,  2002 and  2001,  our
stockholders'  deficit of  $33,238,000  at December  31,  2003,  and our working
capital deficit of $36,825,000 as of December 31, 2003, our auditors included in
their report an explanatory  paragraph  about our ability to continue as a going
concern.

      We are a defendant in material arbitration proceedings which, if adversely
determined,  would  impair our  ability to continue  in  business.  A vendor has
commenced an arbitration  proceeding against us seeking $3 million for breach of
contract.  If the claimant  obtains a  significant  judgment  against us and the
claimant  seeks to enforce  the  judgment,  it may be  necessary  for us, or our
senior lender may require us, to seek protection under the Bankruptcy Code.


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<PAGE>

      Because of our financial  position,  we are subject to claims by creditors
resulting  from our failure to make timely  payment.  A number of creditors have
threatened but not commenced  actions against us for goods and services provided
by the creditors. If one or more of these creditors obtain significant judgments
against us and seeks to enforce  the  judgments,  our  ability  to  continue  in
business  would be impaired and it may be necessary for us, or our senior lender
may require us, to seek protection under the Bankruptcy Code.

      If  our  scaled  back  OSS  operations  cannot  generate  profits,  we may
discontinue   these   operations.   We  have  scaled  back  our  OSS  operations
significantly,  and  we now  only  perform  maintenance  services  for  existing
customers and market our products in a few selected markets.  We may not be able
to generate any significant revenue in these markets,  and if we are not able to
generate profits from these operations, we may discontinue our OSS operations.

      Since we sell to telecommunications  companies,  our sales are affected by
economic and other  factors that affect that  industry,  both  domestically  and
internationally.  During the past three years, the  telecommunications  industry
has  been  affected  by an  international  slowdown,  and  many,  if  not  most,
telecommunications  companies  have scaled back plans for  expansion,  which has
resulted  in a  significant  drop in the  requirements  for  products  including
products such as our OSS products and our connection/protection products.

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

      We are heavily dependent on foreign sales.  Approximately 56% of our sales
in 2003 and 54% of our sales in 2002 and 2001,  were made to  foreign  telephone
operating  companies.  In selling to  customers  in  foreign  countries,  we are
exposed  to  inherent  risks not  normally  present  in the case of our sales to
United  States  customers,  including  extended  delays in both  completing  the
installation  and  receiving  the  final  payment  from  our  customers  for our
Operational  Support  Systems  contracts,  as well as further risks  relating to
political and economic changes, including the decline in the value of the dollar
against  other  major  currencies.  Furthermore,  our  financial  condition  has
impaired  our ability to generate new  business in the  international  market as
potential customers express concern about our ability to perform.

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

      We experience  difficulties with Operations Support Systems contracts.  We
experience delays in both purchaser acceptance of the Operations Support Systems
and receipt of final  contract  payments in connection  with a number of foreign
sales.  In  addition,  we have no  steady  or  predictable  flow of  orders  for
Operations  Support  Systems and the negotiation of a contract for an operations
support  system  is  an  individualized  and  highly  technical   process.   The
installation,  testing and purchaser  acceptance  phases of these  contracts may
last longer than  contemplated  by the contracts and,  accordingly,  amounts due
under the contracts


                                       3
<PAGE>

may not be collected for extended  periods.  Furthermore,  our Operation Support
Systems  contracts  typically contain  performance  guarantees by us and clauses
imposing  penalties if we do not meet  "in-service"  dates.  As a result,  it is
possible that we may lose money on Operations Support Systems contracts.

      Because  of our  small  size  and  our  financial  problems,  we may  have
difficulty  competing for business.  We compete  directly with a number of large
and small domestic and foreign telephone  equipment  manufacturers,  with Lucent
Technologies,  Inc. continuing to be our principal United States competitor. Our
competitors  are using our  financial  difficulties  in  successfully  competing
against us. We anticipate that our loss for 2003, our working capital deficiency
and absence of financing may continue to place us in a competitive disadvantage.

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

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

      Our stock is subject to the penny stock rules, which may make it difficult
for  stockholders  to sell our  stock.  Because  our  stock is traded on the OTC
Bulletin  Board and our stock  price is very low,  our stock is  subject  to the
Securities and Exchange  Commission's penny stock rules, which impose additional
sales practice  requirements on  broker-dealers  which sell our stock to persons
other than established customers and institutional  accredited investors.  These
rules may affect the ability of  broker-dealers to sell our common stock and may
affect the ability of our stockholders to sell any common stock they may own.

      We do not pay dividends on common stock. We presently intend to invest our
earnings, if any, into our operations and the reduction of debt.

Products

      Telecommunications  Connection Equipment. Our copper connection/protection
equipment and systems are used by domestic and international telephone operating
companies,   by  owners  of   private   telecommunications   equipment   and  by
manufacturers  and suppliers of telephone  central office and customer  premises
equipment.  Products of the types comprising our  telecommunications  connection
equipment are included as integral  parts of all domestic and foreign  telephone
and telecommunications systems

      Our  connection  equipment  consists of  connector  blocks and  protection
modules used by  telephone  companies to  interconnect  copper-based  subscriber
lines to switching equipment lines. The protector modules protect central office
personnel and equipment from electrical surges. The need for protection products
has


                                       4
<PAGE>

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

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

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

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

      Operations  Support  Systems.  We have sold our OSS systems  primarily  to
telephone operating  companies in established and developing  countries in Asia,
South and Central America and Europe. As a result of our scaling down of our OSS
operations,  we are now  only  marketing  OSS  systems  in  limited  areas,  and
performing maintenance service on existing installations.

      Our  principal  OSS  systems  are  computer-based  testing,  provisioning,
activation and trouble  management  products which include  software and capital
equipment and typically sell for prices ranging from several hundred thousand to
several million dollars. The testing products are designed to automatically test
for and diagnose  problems in customer  telephone lines and to notify  telephone
company  service  personnel  of required  maintenance.  The  associated  trouble
management  system  provides  automated  record  keeping  (including  repair and
disposition  records) and analyzes these records to enable the telephone company
to  identify  recurring  problems  and  equipment  deterioration  and to fulfill
maintenance  service  level  agreement  obligations.  The  integration  of these
systems provides a service assurance function for telephone companies.

      A major component of the testing system is the "test head," which provides
the  access to,  and tests the  required  telephone  line.  We have  continually
developed  our test head  capability  to meet the changing  requirements  of the
customer  loop,  and have recently  introduced  our latest  advanced  technology
platform  (sixth  generation)  product,  the MKIII.  An enhanced  version of the
MKIII, the Sherlock, provides the capability to


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<PAGE>

determine whether customer lines are xDSL capable,  enabling telephone companies
to   expeditiously   characterize   their  outside  plant,  and  optimize  their
responsiveness to market conditions.

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

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

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

                            Sales by Product Category
                            Years Ended December 31,

                            2003                  2002                 2001
                    ------------------    -----------------    -----------------
                                      (Dollars in thousands)
Line Connecting
/Protecting
Equipment           $11,334        58%     9,598        45%    12,756        46%

Signal Processing     4,253        21%     4,523        21%     5,737        20%

OSS Systems           3,249        17%     6,414        30%     8,874        32%

Other                   754         4%       882         4%       695         2%
                    -------   --------   -------   --------   -------   --------

Total               $19,590       100%   $21,417       100%   $28,062       100%
                    =======   ========   =======   ========   =======   ========


                                       6
<PAGE>

Markets

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

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

      During 2003, approximately 58% of our sales were made to customers in this
category.

      Our line of signal  processing  products is supplied to  customers  in the
military and aerospace  industry as well as manufacturers  of medical  equipment
and video  systems.  The  primary  communication  standard in new  military  and
aerospace systems is the MIL-STD-1553  Command Response Data Bus, an application
which  requires an extremely  high level of  reliability  and  performance.  Our
wideband transformers are required for ground noise elimination in video imaging
systems  and are used in the  television  and  broadcast,  medical  imaging  and
industrial process control industries. If not eliminated, ground noise caused by
poor  electrical  system  wiring  or  power  supplies,  results  in  significant
deterioration in system performance,  including poor picture quality and process
failures in instrumentation.  The wideband transformers provide a cost-effective
and quick  solution to the  problem  without the need of redesign of the rest of
the system.  Products are designed to satisfy the specific  requirements of each
military or aerospace customer.

      During 2003, signal processing  equipment  accounted for approximately 21%
of our sales.

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

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


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<PAGE>

rapidly add access  lines in order to increase  the  availability  of  telephone
service  and to  significantly  upgrade  the  quality  of the lines  already  in
service.

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

      During 2003,  approximately 17% of our sales consisted of OSS products and
services.  As a result of the scaling down of our OSS operations,  we anticipate
that OSS sales will represent a declining percentage of total sales.

Marketing and Sales

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

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

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

      British Telecommunications  purchased line connecting/protecting  products
amounting to $867,000 (4% of sales) in 2003, $689,000 (3% of sales) in 2002, and
$3,339,000 (12% of sales) in 2001. During these years, we also sold our products
to unaffiliated  suppliers for resale to British  Telecommunications.  We have a
cross-licensing  agreement  with British  Telecommunications  which,  in effect,
enables British Telecommunications to use certain of our proprietary information
to modify or enhance products provided to British Telecommunications and permits
British  Telecommunications to manufacture or engage others to manufacture those
products.

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

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


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<PAGE>

                   Sales to Customers By Geographic Region (1)

                             Year Ended December 31,

                            2003                  2002                 2001
                    ------------------    -----------------    -----------------
                                      (Dollars in thousands)

North America       $ 9,647        49%   $10,442        49%   $13,356        48%

United Kingdom        7,523        38%     6,388        30%     8,060        29%

Asia/Pacific            954         6%     2,729        13%     4,597        16%

Other Europe          1,228         6%     1,600         7%     1,761         6%

Latin America           238         1%       258         1%       288         1%
                    -------   --------   -------   --------   -------   --------


Total Sales         $19,590       100%   $21,417       100%   $28,062       100%
                    =======   ========   =======   ========   =======   ========

(1)   For information  regarding the amount of sales,  operating  profit or loss
      and  identifiable  assets  attributable  to  each  of  our  divisions  and
      geographic  areas,  see  Note 21 of Notes  to the  Consolidated  Financial
      Statements.

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

Manufacturing

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

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

Source and Availability of Components

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


                                       9
<PAGE>

Significant Customers

      Our  five  largest  customers  accounted  for  sales  of  $8,507,000,   or
approximately 43% of sales, for 2003; $9,784,000, or approximately 46% of sales,
for 2002; and  $13,444,000,  or approximately  48% of sales,  for 2001.  Fujitsu
Telecommunications Europe LTD. was our largest customer for 2003, accounting for
sales of $3,150,000,  or approximately  16%.  Philippine Long Distance Telephone
was our largest customer for 2002 and 2001,  accounting for sales of $2,725,000,
or approximately 13%, for 2002 and $3,485,000, or approximately 12%, for 2001. A
significant   amount   of   sales   of  our   products   for   use  by   British
Telecommunications  were  sold  to  Fujitsu  as  purchasing  agent  for  British
Telecommunications. As a result, most of the sales to Fujitsu Telecommunications
were  for  use  by   British   Telecommunications.   Direct   sales  to  British
Telecommunications were $1,480,000, or 8% of sales, for 2003; $2,306,000, or 11%
of sales,  for  2002;  and  $3,339,000,  or 12% of  sales,  for  2001.  No other
customers account for 10% or more of our sales in 2003, 2002 or 2001.

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

Backlog

      At December 31, 2003, our backlog was  approximately  $6,000,000  compared
with  approximately  $4,400,000  at December 31, 2002.  The increase is from the
increased  requirement of British  Telecommunications.  Of the December 31, 2003
backlog,  approximately  $4,300,000  represented  orders from foreign  telephone
operating  companies.  We expect to ship  substantially  all of our December 31,
2003 backlog during 2004.

Intellectual Property Rights

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

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

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


                                       10
<PAGE>

      Under our  agreement  with  British  Telecommunications,  we gave  British
Telecommunications the right to use our connection/protection technology or have
products using our technology manufactured for it by others.

Competition

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

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

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

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

      We compete  directly  with a limited  number of  substantial  domestic and
international  companies  with respect to our sales of OSS  systems.  In meeting
this  competition,  we  rely  primarily  on the  features  of our  line  testing
equipment, our ability to customize systems and endeavor to offer such equipment
at prices and with warranties that make them  competitive.  However,  because of
our financial condition and our declining OSS business,  we have scaled back our
OSS operations and will be only marketing these systems in limited countries.

      In addition to the quality and price of the products  being  offered,  the
financial  stability of a supplier,  especially for OSS contracts,  is a crucial
element.  Because  these  contracts  require the supplier to spend  considerable
funds before the project is completed and require ongoing  maintenance  service,
potential  customers consider the financial stability of the supplier as a major
consideration in awarding a contract. Our financial position,  combined with our
recent losses,  our working capital  deficiency and the scheduled  expiration of
our financing  agreement with our senior lender,  and our decision to scale back
our OSS  operations  may place us at a competitive  disadvantage  in seeking new
business  and new orders for  existing  customers  in those  markets in which we
continue to market these products.


                                       11
<PAGE>

Research and Development Activities

      We spent  approximately  $2,100,000  in  2003,  $2,500,000  in  2002,  and
$4,400,000 in 2001 on research and development activities. These funds were used
to  develop a new OSS  product  and to  support  improvement  to  existing  OSS,
copper/connect and Signal processing products.  All research and development was
company  sponsored  and is expensed as  incurred.  As a result of our  financial
difficulties,  we have scaled down our research and  development  effort,  which
could hurt our ability to offer competitive products.

Employees

      As of December 31, 2003, we had 274 employees of which 48 were employed in
the United States,  193 in Mexico,  18 in the United Kingdom,  3 in Poland, 3 in
Chile,  and 9 in China.  We believe that our  relations  with our  employees are
good,  and we have never  experienced  a work  stoppage.  Our  employees are not
covered by collective bargaining agreements,  except for our hourly employees in
Mexico who are covered by a  collective  bargaining  agreement  that  expires on
December 31, 2004.

Item 2.  Properties

      We currently lease approximately  14,500 square feet of executive,  sales,
marketing  and  research  and  development   space  and  4,200  square  feet  of
manufacturing   space  in  Syosset,   New  York.  These   facilities   represent
substantially all of our office, plant and warehouse space in the United States.
The Syosset,  New York leases expire  February 2008 and May 2007,  respectively.
The annual rental related to the New York property is approximately $277,000.

      Our wholly-owned  United Kingdom  subsidiary leases  approximately  11,000
square foot facility in Coventry,  England,  which facility comprises all of our
office,  plant and warehouse  space.  The lease  expires in 2019.  The aggregate
annual rental is approximately $143,000.

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

      We believe our properties are adequate for our needs.

Item 3.  Legal Proceedings

      In June 2002, BMS Corp. commenced an arbitration  proceeding against us in
New York City seeking damages of  approximately  $3,000,000 and alleging that we
breached our agreement to market and sell an update to our OSS product which BMS
was to develop for us. We believe that we have defenses to the claims by BMS and
we have filed a  counterclaim  to recover the  $350,000 we advanced to BMS under
the contract.  The  arbitrator  has held three days of hearings and hearings are
scheduled to resume in April 2004.

      In July 1996, an action was commenced  against us and certain  present and
former  directors in the Supreme Court of the State of New York, New York County
by certain of the Company's  stockholders and warrant holders who acquired their
securities  in  connection  with  our  acquisition  of  Aster  Corporation.  The
complaint  alleges  breach of contract  against us and breach of fiduciary  duty
against  our  directors  arising out of an alleged  failure to register  certain
restricted  shares and warrants  owned by the  plaintiffs.  The complaint  seeks
damages of  $413,000;  however,  counsel for the  plaintiff  has advised us that
additional  plaintiffs  may be added  and,  as a result,  the  amount of damages
claimed may be  substantially  greater  than the amount  presently  claimed.


                                       12
<PAGE>

We  believe  that we have  valid  defenses  to the  claims.  There  has  been no
significant  activity in this matter  subsequent  to December 31, 1999,  and the
case has been administratively dismissed for failure to prosecute.

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

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

      During the fourth  quarter of 2003, no matters were submitted to a vote of
our security holders.


                                       13
<PAGE>

                                     Part II

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

      Our  common  stock is traded on the OTC  Bulletin  Board  under the symbol
PYTM.  Prior to November  11, 2002,  our stock was traded on the American  Stock
Exchange  under the symbol PSI.  The  following  table sets forth,  for 2003 and
2002,  the  quarterly  high and low sales  prices  for our  common  stock on the
consolidated  transaction  reporting  systems  for the OTC  Bulletin  Board  and
American Stock Exchange listed issues.

                                               High               Low
                                               ----               ---
2003     First Quarter                        $0.05              $0.01
         Second Quarter                        0.05              0.02
         Third Quarter                         0.04              0.01
         Fourth Quarter                        0.04              0.02

2002     First Quarter                        $0.20             $0.07
         Second Quarter                        0.10              0.06
         Third Quarter                         0.15              0.03
         Fourth Quarter                        0.08              0.01

      We did not declare or pay any cash dividends in 2003 or 2002,and we do not
anticipate paying cash dividends in the foreseeable  future.  Our agreement with
our senior lender prohibits us from paying cash dividends on our common stock.

      As of March 23, 2004, we had  approximately 976 stockholders of record and
the closing price of our common stock was $.06.

      We did not issue any unregistered securities during 2003.

Equity Compensation Plan Information

The following  table  summarizes the equity  compensation  plans under which our
securities may be issued as of December 31, 2003.


                                       14
<PAGE>

          Equity Compensation Plan Information as of December 31, 2003

<TABLE>
<CAPTION>

                                       Number of securities       Weighted-average           Number of securities
                                        to be issued upon          exercise price          remaining available for
                                     exercise of outstanding       of outstanding           future issuance under
     Plan Category                    options and warrants      options and  warrants     equity compensation plans
     -------------                    --------------------      ---------------------     -------------------------
<S>                                         <C>                        <C>                     <C>
Equity compensation plans
approved by security holders                795,030                    $2.13                   683,470

Equity compensation plan
not approved by security holders                 -0-                      -0-                  95,750
                                            -------                    -----                  -------
                                            795,030                    $2.13                  779,220
</TABLE>

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


                                       15
<PAGE>

Item 6.  Selected Financial Data

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

<TABLE>
<CAPTION>

                                                      Year Ended December 31,
                                       ---------------------------------------------------------
                                         2003         2002        2001        2000       1999
                                         ----         ----        ----        ----       ----
                                              (In thousands, except per share data)
<S>                                    <C>         <C>         <C>         <C>         <C>
Income Statement Data:

Sales                                  $ 19,590    $ 21,417    $ 28,062    $ 51,140    $ 38,936

Operating loss                           (2,352)     (2,881)    (11,453)     (5,153)     (9,709)

Net loss                                 (3,357)     (4,114)    (14,774)    (10,176)    (13,686)

Basic and diluted net loss per share   $  (0.34)   $  (0.41)   $  (1.50)   $  (1.04)   $  (1.44)

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

Number of shares used in
   calculating net loss
   per share-basic and diluted            9,972       9,972       9,878       9,763       9,489

Balance Sheet Data:

Total assets                           $ 12,355    $ 14,228    $ 17,833    $ 34,174    $ 43,448

Working capital (deficiency)           $(36,825)   $(34,199)   $(31,236)   $(24,152)   $  6,135

Current debt maturities                $ 31,916    $ 31,599    $ 28,621    $ 26,890    $  2,000

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

Stockholders' deficit                  $(33,238)   $(29,935)   $(25,849)   $(10,792)   $ (1,387)
</TABLE>


                                       16
<PAGE>

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

Critical Accounting Policies and Estimates

      The  discussion  and analysis of our  financial  condition  and results of
operations are based on our consolidated  financial statements,  which have been
prepared in conformity with accounting principles accepted in the United States.
The preparation of these financial  statements requires us to make estimates and
assumptions  that affect the reported amounts of assets,  liabilities,  revenues
and expenses  reported in those  financial  statements.  These  judgments can be
complex and consequently actual results could differ from those estimates. Among
the  more  significant  estimates  included  in  these  consolidated   financial
statements are revenue recognition,  allowance for doubtful accounts receivable,
inventory  reserves,  goodwill  valuation  and the deferred tax asset  valuation
allowance.  Because of our  substantial  losses in 2003,  2002 and 2001, and our
stockholders'  deficit of $33,238,000 and working capital deficit of $36,825,000
as of December 31, 2003,  our auditors  included in their report an  explanatory
paragraph  about our ability to continue as a going concern.  Note 1 of Notes to
Consolidated  Financial Statements,  included elsewhere on this annual report on
Form 10-K, includes a summary of the significant accounting policies and methods
used in the preparation of our consolidated financial statements.

Revenue Recognition

      Revenue,  other than from long-term contracts for specialized products, is
recognized  when a  product  is  shipped.  Revenues  and  earnings  relating  to
long-term  contracts for specialized  products,  principally  OSS products,  are
recognized  on the  percentage-of-completion  basis  primarily  measured  by the
attainment of  milestones.  Anticipated  losses,  if any, are  recognized in the
period in which  they are  identified.  The  percentage-of-completion  method is
based on judgments and estimates  that are complex and actual results may differ
from estimates.

Allowance for Doubtful Accounts Receivable

      We  record  an  allowance  for  doubtful  accounts   receivable  based  on
specifically  identified  amounts that we believe to be  uncollectible.  We also
record  additional   allowances  based  on  certain   percentages  of  our  aged
receivables,  which  are  determined  based  on  historical  experience  and our
assessment of the general financial  conditions  affecting our customer base. If
our actual  collections  experience  changes,  revisions to our allowance may be
required.  We have a limited number of customers with individually large amounts
due at any given balance sheet date.  Any  unanticipated  change in one of those
customers'  creditworthiness,  or other matters affecting the  collectability of
amounts due from such customers,  could have a material effect on our results of
operations  in the  period in which  such  changes  or events  occur.  After all
attempts to collect a receivable  have  failed,  the  receivable  is written off
against the allowance.

      We established an allowance for doubtful accounts receivable of $1,091,000
at December 31, 2003 and  $1,967,000  at December 31, 2002.  Our  allowance  for
doubtful accounts is a subjective  critical estimate that has a direct impact on
reported  net loss.  This  reserve  is based  upon the  evaluation  of  accounts
receivable aging and specific exposures.


                                       17
<PAGE>

Inventory Reserves

      Inventories  are stated at the lower of cost (on the average or  first-in,
first-out  methods)  or fair  market  value.  Our stated  inventory  reflects an
inventory  obsolescence  reserve that represents the difference between the cost
of the  inventory and its  estimated  market  value.  This reserve is calculated
based on historical usage and forecasted  sales.  Actual results may differ from
our estimates.

Goodwill

      Goodwill represents the difference between the purchase price and the fair
market  value  of net  assets  acquired  in  business  combinations  treated  as
purchases. Commencing January 1, 2002, goodwill is an indefinite lived asset and
as  such  is not  amortized.  On an  annual  basis,  we test  the  goodwill  for
impairment.  We determine the market value of the reporting  unit by considering
the projected cash flows generated from the reporting unit to which the goodwill
relates.  As of December 31, 2003, 2002 and 2001, all of our goodwill related to
our  signal  processing   division.   In  2002,  following  the  termination  of
negotiations to sell that division, we reduced goodwill by $800,000.

Deferred Income Tax Valuation Allowance

      Deferred taxes result from temporary  differences between the tax bases of
assets and liabilities and their reported  amounts in the financial  statements.
The temporary  differences  result from costs required to be capitalized for tax
purposes  by the US  Internal  Revenue  Code,  and  certain  items  accrued  for
financial  reporting  purposes in the year incurred but not  deductible  for tax
purposes  until paid.  Due to our  continued  losses in 2003,  2002 and 2001,  a
valuation  allowance  for the entire  deferred tax asset was provided due to the
uncertainty as to future realization.

Other Matters

Senior Debt

      Our agreement with our senior lender expires on April 15, 2004. Our senior
lender has granted us extensions in the past.  However,  at each maturity  date,
the senior lender reviews our financial condition,  business plan and prospects.
We cannot  assure you that the senior  lender will continue to extend the loans.
Any adverse  event,  including  declines  in business or attempts by  creditors,
including judgment creditors, to realize on their claims or judgments could have
an effect on the  decision of our senior  lender to extend or demand  payment on
our notes. In such event, it would be necessary for us to seek protection  under
the Bankruptcy Code.

Interest

      Pursuant  to our  agreement  with our senior  lender,  we have not paid or
accrued  interest on  $22,600,000  of senior debt since March 2002. As a result,
our statement of operations does not reflect any interest  charges on the senior
debt for 2003 and the last nine months of 2002.  The senior lender has the right
at any time to  require  us to pay  interest;  however,  our  obligation  to pay
interest  will not  require us to pay  interest  on such senior debt for periods
prior to the date the senior lender requires us to commence  interest  payments.
We continue to accrue  interest on  obligations  to our senior lender which were
incurred subsequent to March 2002.


                                       18
<PAGE>

Continuation of Our Businesses

      During the past several years we have,  on a number of occasions,  engaged
in negotiations  with respect to the sale of one or more of our divisions.  None
of our discussions  resulted in an agreement.  We may continue to engage in such
negotiations in the future.

Because  of the  decline  in volume and  margins  in our OSS  business,  we have
determined that we cannot operate our OSS business profitably in the same manner
as we operated that  business in the past. As a result,  we have scaled back our
OSS business,  by reducing our  personnel and by limiting our  operations to the
performance  of maintenance  service for our existing  customer base pursuant to
maintenance  contracts and by marketing our OSS services in a limited  number of
markets. If we are unable to generate  significant  business it may be necessary
for us to discontinue the OSS business.

Recent Increase in Copper Sales

We have recently  experienced an increase in our copper connection business as a
result of the requirements of British  Telecommunications  to provide  increased
DSL service. We can anticipate that British  Telecommunications will continue to
require copper  connection  products  while it is expanding its DSL service.  We
cannot predict how long BT will continue to place orders with us.

Results of Operations

      The following table sets forth our  consolidated  statements of operations
for the three years ended  December 31, 2003,  2002 and 2001, as a percentage of
sales:

                                                     Years Ended December 31,
                                                 -------------------------------
                                                  2003       2002          2001
                                                  ----       ----          ----
Sales                                            100%         100%         100%
Cost of sales                                     72%          68%          71%
                                                -----        -----        -----
  Gross profit                                    28%          32%          29%
Selling, general and
administrative expenses                           29%          30%          33%
Research and development expenses                 11%          12%          16%
Goodwill impairment                                0%           3%          21%
                                                ----         ----         ----
Operating loss                                   (12%)        (13%)        (41%)
Interest expense                                  (6%)         (8%)        (16%)
Gain on sale of assets                            --           --            2%
Gain on sale of investment in joint venture       --            2%          --

Other income, net                                 --           --           (1%)
                                                -----        -----        -----
Loss before income
   taxes and minority interest                   (18%)        (19%)        (54%)
Income tax benefit (expense)
   and minority interest                           1%          --            1%
                                                -----        -----        -----
Net loss                                         (17%)        (19%)        (53%)


                                       19
<PAGE>

Results of Operations
Years Ended December 31, 2003 and 2002

      Our sales for 2003 were  $19,590,000  compared to  $21,417,000  in 2002, a
decrease of $1,827,000 (9%). The decrease in revenue is primarily  attributed to
the decline in sales of OSS products  which more than offset  increases in sales
from our Line connection/protection equipment.

      Line   connection/protection    equipment   sales   for   2003   increased
approximately  $1,736,000  (18%) from $9,598,000 in 2002 to $11,334,000 in 2003.
The increased  sales level  results from an increased  level of sales to British
Telecommunications  commencing  in the  third  quarter  of 2003 as a  result  of
British Telecommunications increasing the availability of DSL lines. These gains
were offset by a decrease in sales from other customers.

      Signal processing  revenue for 2003 compared to 2002 decreased by $270,000
(6%) from  $4,523,000 to $4,253,000.  The decrease in sales  primarily  reflects
delays in shipments  from the backlog due to  shortages of materials  due to our
tight cash situation.

      OSS sales for 2003 were $3,249,000,  compared to 2002 sales of $6,414,000,
a decrease of $3,165,000  (49%). The decline in OSS sales in 2003 represented an
accelerated  decline in this line of business  which had  sustained  significant
declines in previous years as well.  OSS contracts  require  performance  over a
relatively  long  term,  and the  customers  are  generally  national  telephone
companies  in  developing  markets  many of which are operated or regulated by a
government  agency.  As a result,  our ability to maintain OSS business has been
impaired both by our financial condition, since our financial condition may give
customers  concern about our ability to perform,  and the worldwide  slowdown in
this segment of the  telecommunications  industry.  In addition,  our failure to
provide a  significant  component  for a major OSS  customer  has  resulted in a
decision by that  customer not to give us new OSS  contracts.  We are  currently
engaged in arbitration proceedings with the company that was to have supplied us
with that component.  See "Item 3. Legal  Proceedings." Sales of OSS systems are
not made on a  recurring  basis to  customers,  but are the  result of  extended
negotiations  that  frequently  cover many months and do not always  result in a
contract. In addition,  OSS contracts may include conditions precedent,  such as
the customer  obtaining  financing or bank  approval,  and the contracts are not
effective until the conditions are satisfied.

      Gross  margin  decreased  from  32%  in  2002  to 28% in  2003.  The  line
protection/connection  and Signal processing margins increased,  but were offset
by lower  OSS  margins.  The gains  were the  result  of  better  absorption  of
manufacturing  overhead  created  by the  increased  copper/connection  level of
business.

      Selling,  general and administrative  expenses decreased by $654,000 (10%)
from $6,383,000 in 2002 to $5,729,000 in 2003. This decrease  relates  primarily
to reduced salaries and benefits, consulting services and commissions reflecting
our current level of business.

      Research  and  development  expenses  decreased  by  $450,000  (18%)  from
$2,516,000  in 2002 to  $2,066,000  in 2003.  This  decrease  resulted  from our
efforts to reduce  expenses in all  divisions to better match  expense  level to
sales levels.

      At December 31, 2001, our goodwill was $3,761,000, all of which related to
our Signal  division.  We determined  that this goodwill had been impaired as of
June 30,  2002.  We  engaged  in  discussions  with  respect to the sale of that
division  during the second quarter of 2002,  and based on those  discussions we
estimated that the impairment loss was approximately  $800,000.  This amount was
charged to  operations  in the quarter  ended June 30,  2002.  Furthermore,  the
negotiations relating to the sale of the Signal division have been discontinued.
There  was no  impairment  adjustment  required  in  2003.  We  cannot  give any
assurances that further write-downs


                                       20
<PAGE>

Results of Operations (continued)

will not be  necessary  in the  future,  although  management  believes  that no
additional goodwill impairment charges are necessary at this time.

      As a result of the above,  we had an operating  loss of $2,352,000 in 2003
versus an operating loss of $2,881,000 in 2002.

      Interest  expense for 2003 decreased by $520,000 from  $1,798,000 for 2002
to $1,278,000 in 2003. The reduced level of interest  expense is attributable to
our amended  agreement  with our senior lender whereby the old term loan, in the
principal  amount of  approximately  $23,000,000,  bears no interest  commencing
March 1, 2002,  until such time as the senior  lender,  in its sole  discretion,
notifies us that interest shall be payable.

      The tax benefit for 2003 resulted  principally  from the  settlement of an
outstanding tax obligation of $274,000 of one of our subsidiaries for $30,000.

      In April 2002,  we sold our 50% interest in our Korean  joint  venture for
$450,000 to our joint venture  partner.  Payment was made by the  forgiveness of
commissions,  totaling  $450,000,  which  we  owed to our  sales  representation
company  owned by our joint venture  partner,  with respect to sales made by the
Korean joint venture in Korea. There were no sales in Korea in 2002 or 2003.

      As the result of the foregoing,  the 2003 net loss was  $3,357,000,  $0.34
per share (basic and diluted), compared with a net loss of $4,114,000, $0.41 per
share (basic and diluted) for 2002.

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

Years Ended December 31, 2002 and 2001

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

      OSS sales for 2002 were $6,414,000,  compared to 2001 sales of $8,874,000,
a  decrease  of  $2,460,000  (28%).  The  decline  in sales from 2001 to 2002 is
attributed  to the failure to secure new  contracts  as a result of the negative
impact of reduced  opportunities  in Europe,  delays we encountered in obtaining
software from a vendor necessary to complete certain contracts and our financial
difficulties.  Sales  of OSS  systems  are not  made  on a  recurring  basis  to
customers,  but are the result of extended  negotiations  that frequently  cover
many months and do not always result in a contract.  In addition,  OSS contracts
may include conditions  precedent,  such as the customer obtaining  financing or
bank  approval,  and the contracts are not effective  until the  conditions  are
satisfied.

      Line   connection/protection    equipment   sales   for   2002   decreased
approximately  $3,158,000  (25%) from $12,756,000 in 2001 to $9,598,000 in 2002.
The reduced sales level reflected a decrease in volume of sales to United States
and United  Kingdom  customers due to in part from the weaken  telecommunication
market and our weak financial condition.


                                       21
<PAGE>

Results of Operations (continued)

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

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

      Selling, general and administrative expenses decreased by $2,933,000 (31%)
from  $9,316,000 in 2001 to  $6,383,000 in 2002.  The decrease from 2002 to 2001
primarily  reflects reduced  professional  legal expenses and decreased expenses
reflecting  our  reorganization  of our sales and  marketing  efforts of the OSS
division.

      Research  and  development  expenses  decreased by  $1,911,000  (43%) from
$4,427,000 in 2001 to $2,516,000 in 2002. The decreased expense in 2002 resulted
from our efforts to reduce our expenses primarily related to the OSS business.

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

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

      Interest expense for 2002 decreased by $2,682,000 from $4,480,000 for 2001
to $1,798,000 in 2002.  The decrease in interest  expense is due to an agreement
with our senior lender which  provides that all  indebtedness  prior to March 1,
2002 is  reflected  as an old term  loan in the  amount  of  $22,610,000,  which
includes the  principal  balance due at December 31, 2001 plus accrued  interest
though March 1, 2002. The old term loan bears no interest until such time as the
senior lender in its sole discretion notifies the Company that interest shall be
payable.

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

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


                                       22
<PAGE>

Liquidity and Capital Resources

      At  December  31,  2003,  we had  cash and cash  equivalents  of  $469,000
compared with  $779,000 at December 31, 2002.  Our working  capital  deficit was
$36,825,000  at December  31,  2003  compared  to a working  capital  deficit of
$34,199,000  at December  31, 2002.  The working  capital  deficit  reflects the
current  liabilities to the senior and  subordinated  lenders  together with the
effect of the  reduced  level of  business,  which  resulted  in  reduced  cash,
receivables and inventory.  During 2003, our senior lender refused to advance us
any funds.  As a result,  our only source of funds was from  operations.  To the
extent that we are not able to generate  sufficient funds to cover our expenses,
we may have to consider reorganization or liquidation under the Bankruptcy Code.

      As of December  31, 2003,  our debt  includes  $25,387,000  of senior debt
which matures on April 15, 2004, and $6,144,000 principal amount of subordinated
debt  which  became  due on July 3,  2001.  We were  unable to pay the  interest
payment on the subordinated  notes of approximately  $3,205,000 which represents
interest from July 2000 through  December 2003. As of December 31, 2003, we also
had $385,000  outstanding  of 6%  Debentures  which  matured  July 2, 2002.  The
interest accrued at December 31, 2003 was $85,000. We have also been notified by
the trustee that the  non-payment of the principal and interest  caused an event
of default.  At December 31, 2003, we did not have  sufficient  resources to pay
either the senior lender or the subordinated  lenders and it is unlikely that we
can  generate  such cash from our  operations.  Further,  our senior  lender has
precluded us from making payments on the subordinated debt.

      On January 14,  2004,  our senior  lender and we agreed to an extension to
April 15, 2004.  As of December 31, 2003,  we did not have  resources to pay our
senior lender.

      As a result of our continuing financial difficulties:

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

      o     a number of creditors have engaged collection agencies; and

      o     we have  continued  to suffer a  decline  in sales in 2003 from 2002
            which was partially  offset by  additional  products sold to British
            Telecommunications, following a significant decline in sales in 2002
            from 2001.

      In addition,  a vendor has commenced  arbitration  proceedings  against us
alleging breach of contract.

      We  have  sought  to  address  our  need  for   liquidity   by   exploring
alternatives,  including  the  possible  sale of one or  more of our  divisions.
During  2002 and 2003,  we were  engaged  in  discussions  with  respect  to the
possible sale of our divisions;  however,  those  negotiations  were  terminated
without an agreement  having been reached,  and we may not be able to sell those
divisions on acceptable, if any, terms.  Furthermore,  if we sell a division, we
anticipate that a substantial  portion,  if not all, of the net proceeds will be
paid to our senior  lender and we will not  receive  any  significant  amount of
working  capital from such a sale.  During 2002 and 2003, we have taken steps to
reduce  overhead by relocating  the executive,  sales/marketing,  accounting and
research and development  departments to less expensive  offices in Syosset,  NY
and further  reduced the OSS  personnel as part of the scaling  down effort.  We
will continue to look to reduce costs while we seek additional business from new
and existing customers.


                                       23
<PAGE>

      Because of our present  stock  price,  we cannot  raise funds  through the
sales of our equity  securities,  and our financial  condition  prevents us from
issuing  debt  securities.  In the event  that we are  unable to extend our debt
obligations and sell one or more of our divisions,  we cannot assure you that we
will be able to continue in operations.  Furthermore, we believe that our losses
and our  financial  position  are  having and will  continue  to have an adverse
effect upon our ability to develop new  business as  competitors  and  potential
customers  question  our  ability  both to  perform  our  obligations  under any
agreements we may enter and to continue in business.

      As of December 31, 2003,  we did not have any material  off-balance  sheet
arrangements that have or are reasonably likely to have a material effect on our
current or future  financial  condition,  results of operations,  liquidity,  or
capital resources.

      The following table summarizes our principal contractual obligations as of
December 31, 2003 and the effects such  obligations  are expected to have on our
liquidity and cash flow in future periods.

                             Payments Due by Period

Contractual
Obligations                      2004      2005-2006    2007-2008   Thereafter
-----------                      ----      ---------    ---------   ----------
                                              (in thousands)

Long-term                      $35,479          --          --          --
Debt

Operating                          628       1,136         860       2,996
Leases

Deferred Compensation

Obligations                         58         102         116         707

Purchase

Obligations                        951          --           --         --
                               -------     -------     -------     -------
         Total                 $37,116     $ 1,238     $   976     $ 3,703
                               =======     =======     =======     =======

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

      Although we conduct operations  outside of the United States,  most of our
contracts  and sales are dollar  denominated.  A portion of the revenue from our
United Kingdom  operations  and the majority of our United Kingdom  expenses are
denominated  in  Sterling.  Any   Sterling-denominated   receipts  are  promptly
converted into United States  dollars.  We do not engage in any hedging or other
currency  transactions.  For 2003, the currency  translation  adjustment was not
significant in relation to our total revenue.

Item 8.  Financial Statements and Supplementary Data.

      See Exhibit I


                                       24
<PAGE>

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

      Not Applicable

Item 9A.  Controls and Procedures.

Disclosure Controls and Procedures

      As of the end of the period  covered by this report,  our Chief  Executive
Officer  and  Chief  Financial   Officer  evaluated  the  effectiveness  of  our
disclosure  controls  and  procedures.  Based on  their  evaluation,  the  Chief
Executive  Officer  and the Chief  Financial  Officer  have  concluded  that our
disclosure  controls and  procedures  are effective in alerting them to material
information  that is required  to be  included  in the  reports  that we file or
submit under the Securities Exchange Act of 1934.

Internal Control Over Financial Reporting

      There has been no change in our internal control over financial  reporting
that occurred during our last fiscal quarter that has materially affected, or is
reasonably  likely to materially  affect,  our internal  control over  financial
reporting.


                                       25
<PAGE>

                                    Part III

Item 10.  Directors and Executive Officers

      Set forth below is information concerning our directors:

<TABLE>
<CAPTION>

    Name                   Principal Occupation or Employment                     Director Since       Age
    ----                   ----------------------------------                     --------------       ---
<S>                        <C>                                                    <C>                  <C>
William V. Carney(1)       Chairman of the board and chief executive officer      1970                 67
Michael A. Tancredi(1)     Senior vice president, secretary and treasurer         1970                 74
Warren H. Esanu(1),(2)     Of counsel to Esanu Katsky Korins & Siger, LLP,
                           attorneys at law                                       1997                 61
Herbert H. Feldman(1),(2)  President, Alpha Risk Management, Inc., independent
                           risk management consultants                            1989                 70
Marco M. Elser(2)          Managing director of Elser & Co., an investment
                           advisory firm                                          2000                 45
</TABLE>
----------
(1)   Member of the executive committee.
(2)   Member of the audit and compensation committees.

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

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

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

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

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


                                       26
<PAGE>

      Set forth is information concerning our executive officers:

Name of Executive Officer                       Position                     Age
-------------------------                       --------                     ---
William V. Carney          Chairman of the board and chief executive
                           officer                                            67
Michael A. Tancredi        Senior vice president, secretary and treasurer     74
Edward B. Kornfeld         Senior vice president-operations and chief         60
                           financial officer; and effective April 1, 2004,
                           president, chief operating officer and chief
                           financial officer

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

      Mr. Kornfeld, 60, has been senior vice president-operations since 1996 and
chief financial officer since October 1995.  Effective April 1, 2004, he will be
president, chief operating officer and chief financial officer. Since June 2002,
Mr.  Kornfeld has also been a partner of the firm of Tatum CFO  Partners,  which
provides  chief  financial  officer  services  to medium  and  large  companies;
however,  he continues to devote full time effort to our  business.  He was vice
president-finance  from October 1995 until 1996.  For more than five years prior
thereto,  Mr. Kornfeld held positions with several  companies for more than five
years,   including  Excel   Technology  Inc.   (Quantronix   Corp.)  and  Anorad
Corporation.

      We  maintain  a code of ethics  that  applies to our  principal  executive
officer, principal financial officer,  controller, or persons performing similar
functions.  Any waiver of the code must be approved by the Audit  Committee  and
must be disclosed in  accordance  with SEC rules.  During the second  quarter of
2004,  we  expect  to  adopt  and  have  publicly  available  a code of  conduct
applicable to directors, officers and employees.

      Our board of directors has determined  that Mr. Marco Elser,  based on his
experience as a financial  investment  advisor,  is an audit committee financial
expert, as defined in Item 402(h) of Regulation S-K.


                                       27
<PAGE>

Item 11.  Executive Compensation

      The following table shows the  compensation we paid to our chief executive
officer and the only executive officer,  other than the chief executive officer,
whose salary and bonus earned exceeded  $100,000 for the year ended December 31,
2003.

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>

                                              Annual                    Long-Term
                                              Compensation              Compensation (Awards)
                                              --------------------      ------------------------
                                                                         Restricted     Options,
                                                                        Stock Awards      SARs           All other
Name and Principal Position           Year     Salary         Bonus       (Dollars)     (Number)       Compensation
---------------------------           ----     ------         -----       ---------     --------       ------------
<S>                                   <C>     <C>                <C>         <C>              <C>        <C>
William V. Carney, Chairman of the    2003    $133,000          --          --               --          $7,734
board and chief executive officer     2002     240,000          --          --               --           9,858
                                      2001     240,000          --          --               --           7,981

Edward B. Kornfeld, Senior vice       2003     192,000          --          --               --           5,022
president - operations and chief      2002     192,000          --          --               --           5,022
financial officer                     2001     192,000          --          --               --           4,872
</TABLE>

-----------
      "All Other  Compensation"  includes a payment to the  executive's  account
pursuant to our 401(k) Plan,  group life insurance in amounts  greater than that
available to all employees and special long term disability coverage.

      Compensation to Mr. Kornfeld does not include fees of $36,000 paid in 2003
to Tatum CFO Partners, of which Mr. Kornfeld is a partner.

      Set forth below is a chart that shows,  for 2003,  the  components of "All
Other Compensation" listed in the Summary Compensation Table.

                                   Mr. Carney   Mr. Kornfeld
                                   ----------   ------------
401(k) Match                        $ 1,350      $ 2,700
Supplemental Insurance                6,384        2,322

      During 2003, we did not grant Mr. Carney or Mr. Kornfeld any options,  and
neither of them exercised any options to purchase shares of our common stock. As
of December 31, 2003,  Mr.  Carney held  options to purchase  176,250  shares of
common stock and Mr.  Kornfeld held options to purchase  63,000 shares of common
stock. All of these options are currently  exercisable and, because the exercise
price  is less  than  the  market  price  of the  common  stock,  they  were not
in-the-money  options  and,  accordingly,  their  options had  nominal  value at
December 31, 2003.


                                       28
<PAGE>

      Employment  Agreements.  We have amended our employment agreement with Mr.
Carney  whereby he is  required to work at a rate of two and  one-half  days per
week, and half of his current base pay is deferred until the  termination of his
amended employment agreement on December 31, 2005. No further compensation shall
be paid to Mr. Carney, including the deferred amount, if we do not terminate Mr.
Carney's employment prior to December 31, 2005.

      We have  entered  into an  employment  agreement  with Mr.  Kornfeld.  The
agreement continues on a year-to-year basis, from January 1 of each year, unless
terminated on prior notice of not less than 90 days. Salary is determined by the
board,  except  that the salary may not be reduced  except as a part of a salary
reduction  program  applicable  to  all  executive   officers.   Upon  death  or
termination  of  employment  as a result of a  disability,  Mr.  Kornfeld or his
estate is to receive a payment equal to three months salary.  Upon a termination
without  cause Mr.  Kornfeld is entitled to receive his then current  salary for
six  months  plus one  month  for each  full  year of  service  up to a  maximum
aggregate  of 24  months.  In the  event  that Mr.  Kornfeld  is  covered  by an
executive severance agreement,  including the salary continuation agreements (as
described below),  which provides for payments upon termination  subsequent to a
"change of  control,"  the  executive  would be  entitled  to the greater of the
severance  arrangements as described in this paragraph or the severance payments
under the executive severance agreements.  We also have month-to-month agreement
with Tatum CFO Partners of which Mr. Kornfeld is a partner, pursuant to which we
pay Tatum CFO Partners $3,000 per month.

      Salary  Continuation  Agreement.  We are  party to a  salary  continuation
agreement with Mr. Kornfeld. The salary continuation agreement provides that, in
the event that a change of control occurs and Mr. Kornfeld's  employment with us
is subsequently  terminated by us other than for cause, death or disability,  or
is  terminated by Mr.  Kornfeld as a result of a  substantial  alteration in his
duties,  compensation or other benefits,  the executive shall be entitled to the
payment of an amount equal to his monthly salary at the rate in effect as of the
date of his termination (or, if higher,  as in effect  immediately  prior to the
change in control)  plus the pro rata monthly  amount of his most recent  annual
bonus  paid  immediately  before the  change of  control  multiplied  by 24. For
purposes of the salary continuation agreement, a change of control is defined as
one which  would be required to be reported in response to the proxy rules under
the Securities  Exchange Act of 1934, as amended,  the acquisition of beneficial
ownership,  directly  or  indirectly,  by a person  or group of  persons  of our
securities  representing  25% or more of the  combined  voting power of our then
outstanding  securities,  or,  during any period of two  consecutive  years,  if
individuals who at the beginning of such period  constituted the board cease for
any reason to constitute at least a majority thereof unless the election of each
new director was  nominated or ratified by at least  two-thirds of the directors
then still in office who were  directors  at the  beginning  of the period.  The
change  of  control  must  occur  during  the  term of the  salary  continuation
agreement,  which  is  currently  through  December  31,  2004  and  is  renewed
automatically unless we give timely notice prior to January 1 of any year of our
election not to renew the  agreement.  If such a change of control occurs during
the effectiveness of the salary continuation agreement,  any termination of such
covered  employee  during the 18 months  following  the  change of control  will
result in the payment of the compensation described above.

Item 12.  Principal Holders of Securities and Security Holdings of Management

      The following table and discussion  provides  information as to the shares
of common stock beneficially owned on March 15, 2004 by:

      o     each director;
      o     each officer named in the summary compensation table;
      o     each person  owning of record or known by us,  based on  information
            provided to us by the persons named below,  to own  beneficially  at
            least 5% of our common stock; and
      o     all officers and directors as a group.


                                       29
<PAGE>


                              Shares of Common
                              Stock Beneficially       Percentage of Outstanding
       Name                        Owned                    Common Stock
       -----                  ------------------       -------------------------
William V. Carney                303,021                       3.0%
Michael A. Tancredi              114,238                       1.1%
Warren H. Esanu                  116,500                       1.2%
Herbert H. Feldman                76,000                         *
Marco M. Elser                   325,592                       3.3%
Edward B. Kornfeld               114,317                       1.1%

All directors and officers
as a group (8 individuals)     1,076,036                      10.8%

* Less than 1%

      Except as otherwise  indicated  each person has the sole power to vote and
dispose of all shares of common stock listed opposite his name.

      The number of shares  owned by our  directors  and  officers  named in the
summary  compensation  table includes  shares of common stock which are issuable
upon exercise of options and warrants that are  exercisable at March 15, 2004 or
will become  exercisable  within 60 days after that date. Set forth below is the
number of shares of common stock  issuable  upon  exercise of those  options and
warrants for each of these directors and officers.

                Name                                       Shares
                ----                                       ------
       William V. Carney                                   176,250
       Michael A. Tancredi                                  72,530
       Warren H. Esanu                                      71,500
       Herbert H. Feldman                                   61,000
       Marco M. Elser                                       15,000
       Edward B. Kornfeld                                   63,000

       All officers and directors as a group               479,780

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


                                       30
<PAGE>

Item 13.  Certain Relationships and Related Transactions

      During 2003, Warren H. Esanu, a director,  served as a member of our audit
and compensation committees.  During 2003, the law firm of Esanu Katsky Korins &
Siger, LLP, to which Mr. Esanu is of counsel, provided legal services to us, for
which it  received  fees of  $283,616.  Esanu  Katsky  Korins  &  Siger,  LLP is
continuing to render legal services to us during 2004.

Item 14.  Principal Accountant Fees and Services.

The following is a summary of the fees for professional services rendered by our
independent  accountants,  BDO Seidman, LLP, for the fiscal years ended December
31, 2003 and December 31, 2002:

                                                  Fees
                                      ------------------------------
        Fee Category                  Fiscal 2003        Fiscal 2002
        ------------                  -----------        -----------
        Audit fees                     $ 170,200          $193,700
        Audit-related fees                10,000             9,500
        Tax fees                           5,500             5,500
                                       ---------          --------
        Total Fees                     $ 185,700          $208,700
                                       =========          ========

      Audit fees. Audit fees represent fees for professional  services performed
by BDO Seidman,  LLP for the audit of our annual  financial  statements  and the
review of our  quarterly  financial  statements,  as well as  services  that are
normally  provided  in  connection  with  statutory  and  regulatory  filings or
engagements.

      Audit-related  fees.  Audit-related  fees represent fees for assurance and
related services  performed by BDO Seidman,  LLP that are reasonably  related to
the performance of the audit or review of our financial statements. The specific
service was the audit of our retirement plan.

      Tax Fees. Tax fees represent fees for tax compliance services performed by
BDO Seidman,  LLP.

      All other fees.  BDO Seidman,  LLP did not perform any services other than
the services described above.

Policy  on Audit  Committee  Pre-Approval  of Audit  and  Permissible  Non-Audit
Services of Independent Auditors

      The Audit  Committee's  policy is to pre-approve all audit and permissible
non-audit  services  provided by the  independent  auditors.  These services may
include audit services, audit-related services, tax services and other services.
The independent  auditors and management are required to periodically  report to
the Audit Committee regarding the extent of services provided by the independent
auditors in  accordance  with this  pre-approval,  and the fees for the services
performed to date. The Audit Committee may also pre-approve  particular services
on a case-by-case basis. All services were pre-approved by the Audit Committee.


                                       31
<PAGE>

                                     Part IV

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

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

      (i)   Financial Statements.

            See Index to Consolidated Financial Statements under Item 8 hereof.

      (ii)  Financial Statement Schedules.

            None

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

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

(b) Reports on Form 8-K

On November  18,  2003,  we filed a Form 8-K under Item 12, to furnish our press
release  reporting  our  results of  operations  for the third  quarter and nine
months of 2003.

(c) Exhibits

      Exhibit
         No.    Description of Exhibit

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

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

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


                                       32
<PAGE>

Exhibits (continued)

      Exhibit
         No.    Description of Exhibit

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

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

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

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

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

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

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

        4.8     Combined Amendment No. Four dated as of March 1, 2002 to Amended
                and Restated Loan and Security  agreement  between  Foothill and
                the  Company,  incorporated  by  reference to Exhibit 4.8 of the
                Company's  Annual Report on Form 10K for the year ended December
                31, 2001.

        4.9     Combined  Amendment No. Five dated as of May 10, 2002 to Amended
                and Restated Loan and Security  agreement  between  Foothill and
                the  Company,  incorporated  by  reference to Exhibit 4.9 of the
                Company's  Annual Report on Form 10K for the year ended December
                31, 2002.

        4.10    Combined Amendment No. Six dated as of March 19, 2003 to Amended
                and Restated Loan and Security  agreement  between  Foothill and
                the  Company,  incorporated  by reference to Exhibit 4.10 of the
                Company's  Annual Report on Form 10K for the year ended December
                31, 2002.


                                       33
<PAGE>

Exhibits (continued)

      Exhibit
         No.    Description of Exhibit

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

        10.2    Lease dated November 6, 2002 between the Company and Long Island
                Industrial Group LLC., incorporated by reference to Exhibit 10.2
                of the  Company's  Annual  Report on Form 10K for the year ended
                December 31, 2002.

        10.3    Lease  dated May 1, 2002  between  the  Company  and Long Island
                Industrial Group LLC., incorporated by reference to Exhibit 10.3
                of the  Company's  Annual  Report on Form 10K for the year ended
                December 31, 2002.

        14.1    Code of Ethics of the Company dated March 23, 2004.

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

        23      Consent of Independent Certified Public Accountants.

        31.1    Certification of Chief Executive Officer pursuant to Section 302
                of the Sarbanes-Oxley Act of 2002.

        31.2    Certification of Chief Financial Officer pursuant to Section 302
                of the Sarbanes-Oxley Act of 2002.

        32.1    Certification  of Chief  Executive  Officer and Chief  Financial
                Officer  pursuant  to Section 906 of the  Sarbanes-Oxley  Act of
                2002.


                                       34
<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 26, 2004               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 26, 2004
    -------------------    Chief Executive Officer and Director
    William V. Carney      (Principal Executive Officer)

/s/ Edward B. Kornfeld     Senior Vice President and              March 26, 2004
    -------------------    Chief Financial Officer
    Edward B. Kornfeld     (Principal Financial and
                           Accounting Officer)

/s/ Warren H. Esanu        Director                               March 26, 2004
    -------------------
    Warren H. Esanu

/s/ Michael A. Tancredi    Director                               March 26, 2004
    -------------------
    Michael A. Tancredi

/s/ Herbert H. Feldman     Director                               March 26, 2004
    -------------------
    Herbert H. Feldman

/s/ Marco Elser            Director                               March 26, 2004
    -------------------
    Marco Elser


                                       35
<PAGE>


Exhibit I

Item 8.  Financial Statements and Supplementary Data

Index                                                                       Page
-----                                                                       ----
Report of Independent Certified Public Accountants                           F-2

Consolidated Financial Statements and Notes:

     Consolidated Balance Sheets,
     December 31, 2003 and 2002                                              F-3

     Consolidated Statements of Operations and Comprehensive Loss,
     Years Ended December 31, 2003, 2002 and 2001                            F-4

     Consolidated Statements of Stockholders' Deficit, Years Ended
     December 31, 2003, 2002 and 2001                                        F-5

     Consolidated Statements of Cash Flows for the Years Ended
     December 31, 2003, 2002 and 2001                                        F-6

     Notes to Consolidated Financial Statements                              F-7


                                      F-1
<PAGE>

               Report of Independent Certified Public Accountants

The Board of Directors and Stockholders
Porta Systems Corp.
Syosset, New York

We have audited the  accompanying  consolidated  balance sheets of Porta Systems
Corp.  and  subsidiaries  as of  December  31,  2003 and 2002,  and the  related
consolidated  statements of operations  and  comprehensive  loss,  stockholders'
deficit, and cash flows for each of the three years in the period ended December
31, 2003.  These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Porta Systems Corp.
and  subsidiaries  as of December  31,  2003 and 2002,  and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting  principles  generally accepted
in the United States of America.

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

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 2 to the
consolidated   financial  statements,   the  Company  has  suffered  substantial
recurring   losses  from  operations  and,  as  of  December  31,  2003,  has  a
stockholders'   deficit  of  $33,238,000   and  a  working  capital  deficit  of
$36,825,000.  These factors raise  substantial doubt about the Company's ability
to continue as a going  concern.  Management's  plans in regard to these matters
are also  described  in Note 2. The  financial  statements  do not  include  any
adjustments that might result from the outcome of this uncertainty.

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

Melville, New York
March 24, 2004


                                      F-2
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
                           Consolidated Balance Sheets
                           December 31, 2003 and 2002
                   (in thousands, except shares and par value)

<TABLE>
<CAPTION>

                                 Assets                                2003          2002
                                                                       ----          ----
<S>                                                                <C>                   <C>
Current assets:
    Cash and cash equivalents                                      $     469             779
    Accounts receivable - trade, less allowance for
       doubtful accounts of $1,091 in 2003 and
       $1,967 in 2002                                                  3,898           4,654
    Inventories                                                        3,004           3,363
    Prepaid expenses and other current assets                            472             329
                                                                   ---------       ---------
                  Total current assets                                 7,843           9,125

Property, plant and equipment, net                                     1,466           1,802
Goodwill                                                               2,961           2,961
Other assets                                                              85             340
                                                                   ---------       ---------
                  Total assets                                     $  12,355          14,228
                                                                   =========       =========

                      Liabilities and Stockholders' Deficit

Current liabilities:
    Senior debt                                                    $  25,387       $  25,070
    Subordinated notes                                                 6,144           6,144
    6% Convertible subordinated debentures                               385             385
    Accounts payable                                                   5,635           5,241
    Accrued expenses                                                   3,117           2,640
    Accrued interest payable                                           3,563           2,639
    Accrued commissions                                                  284             566
    Deferred compensation                                                 58             329
    Income taxes payable                                                  95             302
    Short-term loans                                                      --               8
                                                                   ---------       ---------
                  Total current liabilities                           44,668          43,324
                                                                   ---------       ---------
Deferred compensation                                                    925             839
                                                                   ---------       ---------
                  Total long-term liabilities                            925             839
                                                                   ---------       ---------
                  Total liabilities                                   45,593          44,163
                                                                   ---------       ---------

Commitments and contingencies

Stockholders' deficit:
    Preferred stock, no par value; authorized 1,000,000
      shares, none issued                                                 --              --
    Common stock, par value $.01; authorized 20,000,000
       shares, issued 10,003,224 shares in both 2003 and 2002            100             100
    Additional paid-in capital                                        76,059          76,059
    Accumulated deficit                                             (103,380)       (100,023)
    Accumulated other comprehensive loss:
       Foreign currency translation adjustment                        (4,079)         (4,133)
                                                                   ---------       ---------
                                                                     (31,300)        (27,997)

    Treasury stock, at cost, 30,940 shares                            (1,938)         (1,938)
                                                                   ---------       ---------
                  Total stockholders' deficit                        (33,238)        (29,935)
                                                                   ---------       ---------
                  Total liabilities and stockholders' deficit      $  12,355       $  14,228
                                                                   =========       =========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-3
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
          Consolidated Statements of Operations and Comprehensive Loss
                  Years ended December 31, 2003, 2002 and 2001
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>

                                                                        2003           2002           2001
                                                                        ----           ----           ----
<S>                                                                   <C>              <C>            <C>
Sales                                                                 $ 19,590         21,417         28,062
Cost of sales                                                           14,147         14,599         19,970
                                                                      --------       --------       --------
                  Gross profit                                           5,443          6,818          8,092
                                                                      --------       --------       --------
Selling, general and administrative expenses                             5,729          6,383          9,316
Research and development expenses                                        2,066          2,516          4,427
Goodwill impairment                                                         --            800          5,802
                                                                      --------       --------       --------
                  Total expenses                                         7,795          9,699         19,545
                                                                      --------       --------       --------
                  Operating loss                                        (2,352)        (2,881)       (11,453)

Interest expense                                                        (1,278)        (1,798)        (4,480)
Interest income                                                              1              7             31
Gain on sale of assets                                                      --             --            684
Gain on sale of investment in joint venture                                 --            450             --
Equity in net loss of joint venture                                         --             --           (175)
Other income, net                                                           --            119            191
                                                                      --------       --------       --------

                  Loss before income taxes and minority interest        (3,629)        (4,103)       (15,202)

Income tax benefit (expense)                                               272            (11)           203
Minority interest                                                           --             --            225
                                                                      --------       --------       --------
                  Net loss                                            $ (3,357)        (4,114)       (14,774)
                                                                      ========       ========       ========
Other comprehensive income (loss):

   Foreign currency translation adjustments                                 54             24           (360)
                                                                      --------       --------       --------
                  Comprehensive loss                                  $ (3,303)        (4,090)       (15,134)
                                                                      ========       ========       ========
Basic and diluted per share amounts:

   Net loss per share of common stock                                 $  (0.34)         (0.41)         (1.50)
                                                                      ========       ========       ========
   Weighted average shares of common stock outstanding                   9,972          9,972          9,878
                                                                      ========       ========       ========
</TABLE>

          See accompanying notes to consolidated financial statements.



                                      F-4
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
                Consolidated Statements of Stockholders' Deficit
                  Years ended December 31, 2003, 2002 and 2001
                                 (In thousands)

<TABLE>
<CAPTION>

                                      Common Stock                 Accumulated                              Total
                                  -------------------- Additional     Other                                Stock-
                                  No.  of   Par  Value  Paid-in   Comprehensive Accumulated   Treasury     holders'
                                   Shares    Amount     Capital        Loss)      Deficit      Stock       Deficit
                                   ------    ------     -------        -----      -------      -----       -------
<S>                                <C>     <C>         <C>         <C>          <C>          <C>          <C>
Balance at December 31, 2000       9,817   $      98   $  75,980   $  (3,797)   $ (81,135)   $  (1,938)   $ (10,792)


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

Net loss 2002                         --          --          --          --       (4,114)          --       (4,114)
Common stock issued                   56           1           3          --           --           --            4
Foreign currency translation
   adjustment                         --          --          --          24           --           --           24
                                  ------   ---------   ---------   ---------    ---------    ---------    ---------
Balance at December 31, 2002      10,003         100      76,059      (4,133)    (100,023)      (1,938)     (29,935)

Net loss 2003                         --          --          --          --       (3,357)          --       (3,357)

Foreign currency translation

   adjustment                         --          --          --          54           --           --           54
                                  ------   ---------   ---------   ---------    ---------    ---------    ---------
Balance at December 31, 2003      10,003   $     100   $  76,059   $  (4,079)   $(103,380)   $  (1,938)   $ (33,238)
                                  ======   =========   =========   =========    =========    =========    =========
</TABLE>

          See accompanying notes to consolidated financial statements


                                      F-5
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                       (Note 20) Years ended December 31,
                               2003, 2002 and 2001
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                    2003       2002       2001
                                                                    ----       ----       ----
<S>                                                               <C>         <C>       <C>
Cash flows from operating activities:
    Net loss                                                      $(3,357)    (4,114)   (14,774)
    Adjustments to reconcile net loss to net cash
       used in operating activities:
          Depreciation and amortization                               483        713      1,909
          Goodwill impairment                                          --        800      5,802
          Amortization of debt discounts                               --          3          6
          Gain on sale of investment in joint venture                  --       (450)        --
          Non-cash financing expenses                                  --         --        123
          Gain on sale of assets                                       --         --       (684)
          Minority interest                                            --         --       (225)
          Equity in loss of joint venture                              --         --        175
    Changes in operating assets and liabilities:

       Accounts receivable                                            756       (370)     3,141
       Inventories                                                    359      1,843      1,944

       Prepaid expenses                                              (143)       523        278
       Other assets                                                   255       (142)       867
       Accounts payable, accrued expenses and other liabilities     1,122     (2,044)    (2,341)
                                                                  -------    -------    -------
                  Net cash used in operating activities              (525)    (3,238)    (3,779)
                                                                  -------    -------    -------

Cash flows from investing activities:

    Net proceeds from the sale of assets                               --         --      1,670
    Capital expenditures, net                                         (72)      (124)      (196)
                                                                  -------    -------    -------
                  Net cash used in investing activities               (72)      (124)    (1,474)
                                                                  -------    -------    -------

Cash flows from financing activities:

    Proceeds from senior debt                                         317      2,975      2,222
    Repayments of senior debt                                          --         --       (873)
    Proceeds from the issuance of common stock                         --          4         38
    Proceeds (repayments) of notes payable/short-term loans            (8)        (3)        10
                                                                  -------    -------    -------
                  Net cash provided by financing activities           309      2,976      1,397
                                                                  -------    -------    -------

Effect of exchange rate changes on cash and cash equivalents          (22)       (39)      (254)
                                                                  -------    -------    -------
Decrease in cash and cash equivalents                                (310)      (425)    (1,162)
Cash and equivalents - beginning of year                              779      1,204      2,366
                                                                  -------    -------    -------

Cash and equivalents - end of year                                $   469        779      1,204
                                                                  =======    =======    =======
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-6
<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                           December 31, 2003 and 2002

(1)   Summary of Significant Accounting Policies

      Nature of Operations and Principles of Consolidation

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

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

      Revenue Recognition

      Revenue, other than from long-term contracts for specialized  products, is
          recognized when a product is shipped.  Revenues and earnings  relating
          to long-term contracts for specialized  products are recognized on the
          percentage-of-completion basis primarily measured by the attainment of
          milestones.  Anticipated  losses, if any, are recognized in the period
          in  which  they  are   identified.   The  Company  engages  solely  in
          development of software products for specific  customer  contracts and
          as such  costs are  charged to cost of sales at the time  revenues  on
          such contracts are recognized.

      Concentration of Credit Risk

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

      As  discussed in notes 17 and 21,  substantial  portions of Porta's  sales
          are to customers in foreign countries.  The Company's credit risk with
          respect to new foreign customers is reduced when possible by obtaining
          letters of credit for a substantial portion of the contract price, and
          by monitoring credit exposure related to each customer.

      Cash Equivalents

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

                                                                     (Continued)


                                      F-7
<PAGE>

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

      Accounts Receivable

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

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

      Inventories

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

      Property, Plant and Equipment

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

      Goodwill

      Goodwill represents the difference between the purchase price and the fair
          market  value  of  net  assets  acquired  in  business   combinations.
          Commencing January 1, 2002,  goodwill is an indefinite lived asset and
          as such is not amortized.  On an annual basis,  or more  frequently if
          certain events occur,  the Company tests the goodwill for  impairment.
          The  Company  determines  the market  value of the  reporting  unit by
          considering the projected cash flows generated from the reporting unit
          to which the goodwill relate.  Goodwill at December 31, 2003 and 2002,
          related only to the Company's signal processing division.

                                                                     (Continued)


                                      F-8
<PAGE>

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

      Income Taxes

      Deferred income taxes are recognized based on the differences  between the
          tax bases of assets and liabilities and their reported  amounts in the
          financial statements that will result in taxable or deductible amounts
          in future years, and tax benefits of net operating loss carryforwards.
          Further, the effects of tax law or rate changes are included in income
          as part of  deferred  tax  expense  or  benefit  for the  period  that
          includes  the  enactment  date.  A valuation  allowance is recorded to
          reduce net  deferred  tax assets to amounts  that are more likely than
          not to be realized (note 14).

      Foreign Currency Translation

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

      Net Loss Per Share

      Basic net loss per share is based on the weighted average number of shares
          outstanding.  Diluted  net  loss per  share  is based on the  weighted
          average  number  of shares  outstanding  plus the  dilutive  effect of
          potential  shares of common stock,  as if such shares had been issued.
          For 2003, 2002 and 2001, no dilutive  potential shares of common stock
          were added to compute  diluted loss per share because the effect would
          be anti-dilutive.

      Reclassifications

      Certain   reclassifications   have  been  made  to  conform  prior  years'
          consolidated financial statements to the 2003 presentation.

                                                                     (Continued)


                                      F-9
<PAGE>

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

      Accounting for Stock-Based Compensation

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

<TABLE>
<CAPTION>

                                                                           Year Ended
                                                                           December 31
                                                              -----------------------------------
                                                                   2003       2002        2001
                                                                   ----       ----        ----
                                                             (In thousands, except per share data)
      <S>                                                       <C>         <C>         <C>
      Net loss, as reported                                     $ (3,357)   $ (4,114)   $(14,774)
      Deduct: Total stock-based employee compensation expense
          determined under fair value method for all awards           (1)         (1)        (13)
                                                                --------    --------    --------
      Pro forma net loss                                        $ (3,358)   $ (4,115)   $(14,787)
                                                                ========    ========    ========

      Loss per share of common stock:

        Basic and diluted - as reported                         $  (0.34)   $  (0.41)   $  (1.50)
                                                                ========    ========    ========
        Basic and diluted - pro forma                           $  (0.34)   $  (0.41)   $  (1.50)
                                                                ========    ========    ========
</TABLE>

      Accounting for the Impairment of Long-Lived Assets

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

                                                                     (Continued)


                                      F-10
<PAGE>

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

      Use of Estimates

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

      New Accounting Pronouncements

      In  May 2003, the Financial  Accounting  Standards  Board ("FASB")  issued
          SFAS No. 150.  "Accounting  for  Certain  Financial  Instruments  with
          Characteristics   of  both  Liabilities  and  Equity."  SFAS  No.  150
          clarifies the  definition of a liability as currently  defined in FASB
          Concepts Statement No. 6, "Elements of Financial  Statements," as well
          as other  planned  revisions.  This  statement  requires  a  financial
          instrument  that  embodies an obligation of an issuer to be classified
          as a liability.  In addition,  the statement establishes standards for
          the initial and subsequent  measurement of these financial instruments
          and  disclosure  requirements.  SFAS 150 was  effective  for financial
          instruments  entered  into or  modified  after May 31,  2003.  For all
          instruments  entered into or last modified prior to May 31, 2003, SFAS
          150 was effective at the  beginning of the Company's  third quarter of
          2003.  The adoption of SFAS 150 did not have a material  effect on the
          Company's financial position or results of operations.

      In  January  2003,  the  FASB  issued   interpretation   ("FIN")  No.  46,
          "Consolidation of Variable Interest  Entities" and in December 2003, a
          revised  interpretation  was issued (FIN No.  46(R)).  In  general,  a
          variable interest entity ("VIE") is a corporation, partnership, trust,
          or any other legal  structure  used for business  purposes that either
          does not have  equity  investors  with  voting  rights  or has  equity
          investors that do not provide sufficient  financial  resources for the
          entity  to  support  its  activities.  FIN  46  requires  a VIE  to be
          consolidated by a company if that company is designated as the primary
          beneficiary. Application of FIN 46 is required in financial statements
          of  public  entities  that have an  interest  in  structures  that are
          commonly referred to as special-purpose entities, or SPEs, for periods
          ending after December 15, 2003. Application by public entities,  other
          than  small  business  issuers,  for all  other  types  of VIEs  (i.e.
          non-SPEs) is required in financial statements for periods ending after
          March 15, 2004. The adoption of FIN 46 did not have a material  effect
          on the Company's financial position or results of operations.

                                                                     (Continued)


                                      F-11
<PAGE>

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

      In  December  2002,  the  FASB  issued  FAS  No.  148,   "Accounting   for
          Stock-Based  Compensation-Transition  and Disclosure."  This statement
          amends FAS No. 123,  "Accounting  for  Stock-Based  Compensation,"  to
          provide  alternative  methods of transition for a voluntary  change to
          the fair value based method of  accounting  for  stock-based  employee
          compensation.  In addition, FAS 148 amends the disclosure requirements
          of FAS 123 to require prominent disclosures in both annual and interim
          financial  statements  about the method of accounting for  stock-based
          employee  compensation  and the effect of the method  used on reported
          results.  The  Company  adopted  the  disclosure  provisions  of  this
          standard.

      In  November 2002, the FASB reached a consensus  regarding Emerging Issues
          Task  Force  ("EITF")  Issue No.  00-21,  "Revenue  Arrangements  with
          Multiple   Deliverables."   EITF  00-21   addresses   accounting   for
          arrangements  that may involve the delivery or performance of multiple
          products, services, and/or rights to use assets. The guidance provided
          by EITF 00-21 is effective for contracts entered into on or after July
          1, 2003. The adoption of EITF 00-21 did not have a material  effect on
          the Company's financial position or results of operations.

      In  November 2002, the FASB issued FIN No. 45, "Guarantor's Accounting and
          Disclosure Requirements for Guarantees,  Including Indirect Guarantees
          of  Indebtedness  of Others." FIN 45 addresses the  disclosures  to be
          made by a guarantor  in its interim  and annual  financial  statements
          about its obligations under certain guarantees.  FIN 45 also clarifies
          that a guarantor  is  required to  recognize,  at the  inception  of a
          guarantee, a liability for the fair value of the obligation undertaken
          in  issuing  the  guarantee.   The  disclosure  requirements  in  this
          Interpretation  are effective  for financial  statements of interim or
          annual  periods ending after December 15, 2002. The adoption of FIN 45
          did not have a material effect on the Company's  financial position or
          results of operations.

      In  June 2002, the FASB issued FAS 146,  "Accounting for Costs  Associated
          with Exit or Disposal Activities".  This Statement addresses financial
          accounting  and reporting for costs  associated  with exit or disposal
          activities and nullifies EITF Issue No. 94-3,  "Liability  Recognition
          for Certain Employee  Termination  Benefits and Other Costs to Exit an
          Activity  (including Certain Costs Incurred in a Restructuring)".  The
          principal  difference  between this Statement and EITF 94-3 relates to
          the Statement's requirements for recognition of a liability for a cost
          associated with an exit or disposal activity.  This Statement requires
          that a  liability  for a cost  associated  with an  exit  or  disposal
          activity be recognized  when the liability is incurred,  whereas under
          EITF 94-3,  a  liability  was  recognized  at the date of an  entity's
          commitment  to an exit plan.  This  Statement is effective for exit or
          disposal  activities  that are initiated  after December 31, 2002. The
          adoption  of FAS 146 did not have a material  effect on the  Company's
          financial position or results of operations.

                                                                     (Continued)


                                      F-12
<PAGE>

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

(2)   Liquidity

      As  of December 31, 2003, the Company's  debt included (a)  $25,387,000 of
          senior debt including principal and interest,  which, as a result of a
          January 14, 2004 extension,  matures on April 15, 2004, (b) $6,144,000
          principal amount of subordinated  debt, which matured on July 3, 2001,
          and (c) $385,000 of 6% Debentures  which matured on July 2, 2002.  The
          Company  was  unable to pay the  principal  ($6,144,000)  or  interest
          ($3,205,000) on the subordinated notes or the principal  ($385,000) or
          interest  ($81,000) on the 6%  Debenture.  At December  31, 2003,  the
          Company  did not have  sufficient  resources  to pay either the senior
          lender or the  subordinated  lenders  and it is likely  that it cannot
          generate  such cash from its  operations,  and the  senior  lender had
          precluded  the  Company  from  making  payments  on  any  subordinated
          indebtedness,  other than  accounts  payable  in the normal  course of
          business. Accordingly, all senior and subordinated debt are classified
          as current liabilities (note 7).

      The Company has suffered substantial recurring losses from operations and,
          as of December 31, 2003, has a working capital deficit of $36,825,000.
          In  addition,  the Company  continued  to suffer a decline in sales in
          2003 from 2002  following a significant  decline in sales in 2002 from
          2001.

      As a result of its continuing financial difficulties:

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

          o   a number of creditors have engaged collection agencies; and

          o   the Company has  significantly  scaled back its Operating  Support
              Systems ("OSS") operations.

      A   vendor has commenced an arbitration  proceeding  against us seeking $3
          million for breach of contract (see note 19). If the claimant  obtains
          a significant  judgment  against the Company and the claimant seeks to
          enforce  the  judgment,  or if one or  more  of  the  Company's  other
          creditors obtain significant judgments against it and seeks to enforce
          the judgments,  the Company's ability to continue in business would be
          impaired and it may be necessary for the Company, or its senior lender
          may require the Company, to seek protection under the Bankruptcy Code.

      The Company  is seeking to address  its need for  liquidity  by  exploring
          alternatives,  including  the  possible  sale  of one or  more  of its
          divisions.  If the  Company  sells  any or all of its  divisions,  the
          agreement with the Company's  senior lender requires it to pay the net
          proceeds to the senior  lender.  As a result of this provision and the
          Company's  obligations to the holders of subordinated debt, unless the
          lenders consent to the Company retaining a portion of the net proceeds
          from any sale for its  operations,  the  Company  will not receive any
          significant  amount, and may not receive any, of the net proceeds from
          any such sale for working  capital.  During 2003,  2002 and 2001,  the
          Company was engaged in  discussions  with respect to the possible sale
          of its divisions;  however, those negotiations were terminated without
          an agreement having been reached.


                                      F-13
<PAGE>

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

      During 2002 and 2003,  the  Company  has taken  steps to reduce  overhead,
          including a reduction in personnel.  The Company will continue to look
          to  reduce  costs  while it  seeks  additional  business  from new and
          existing  customers.  Because of its present stock price,  the Company
          cannot  raise funds  through the sales of its equity  securities,  and
          Porta's financial  condition prevents it from issuing debt securities.
          In the event that the Company is unable to extend or  restructure  its
          debt  obligations and sell one or more of its divisions,  it cannot be
          assured  that the  Company  will be able to  continue  in  operations.
          Furthermore,  the Company  believes  that its losses and its financial
          position,  together with the continuing economic climate affecting the
          telecommunications  industry  generally,  are having an adverse effect
          upon its ability to develop new business as competitors  and potential
          customers  question its ability both to perform its obligations  under
          any  agreements it may enter and to continue in business.  The Company
          was informally advised, in 2001, by British Telecommunications,  which
          is one of its largest  customers  that,  because of Porta's  financial
          position, this customer will not place orders with the Company for its
          OSS products until it can demonstrate  that it is financially  viable.
          However,  this customer  continues to place orders for OSS maintenance
          and is  placing  orders  for  line  test  products.  The  loss of this
          customer  would  have a material  adverse  effect  upon the  Company's
          operations.

      The Company's  obligations  to its senior lender mature on April 15, 2004,
          at which time,  unless extended,  all of the principal and interest on
          the senior debt becomes due and payable. The senior lender has granted
          the Company  extensions in the past.  However,  at each maturity date,
          the senior lender reviews the Company's financial condition,  business
          plan and prospects.  The Company cannot  determine  whether the senior
          lender will continue to extend the loans. Any adverse event, including
          continuing  declines in business or attempts by  creditors,  including
          judgment creditors, to realize on their claims or judgments could have
          an effect on the  decision  of the  senior  lender to extend or demand
          payment on the notes.  In such event,  it would be  necessary  for the
          Company to seek protection under the Bankruptcy Code.

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

                                                                     (Continued)


                                      F-14
<PAGE>

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

(3)   Accounts Receivable

      Accounts receivable are customer obligations due under normal trade terms.
          The Company sells its products directly to customers,  to distributors
          and  original  equipment   manufacturers  involved  in  a  variety  of
          industries, principally telecommunications and military/aerospace. The
          Company  performs  continuing  credit  evaluations  of its  customers'
          financial  condition  and  although  it  generally  does  not  require
          collateral,  letters  of credit  may be  required  from  customers  in
          certain  circumstances.  Senior management reviews accounts receivable
          on a monthly basis to determine if any receivables will potentially be
          uncollectible.  Included are any accounts receivable balances that are
          determined to be uncollectible,  along with a general reserve,  in the
          overall allowance for doubtful accounts. After all attempts to collect
          a receivable  have failed,  the  receivable is written off against the
          allowance.  Based on the  information  available  to the  Company,  it
          believes the allowance  for doubtful  accounts as of December 31, 2003
          is  adequate.  However,  actual  write-offs  might exceed the recorded
          allowance.

      Accounts  receivable  included  approximately  $1,213,000  and $873,000 at
          December 31, 2003 and 2002,  respectively,  of revenues earned but not
          yet  contractually   billable  pursuant  to  long-term  contracts  for
          specialized  products.  All such  amounts  at  December  31,  2003 are
          expected  to be  billed  in 2004.  In  addition,  accounts  receivable
          included  approximately $224,000 and $300,000 at December 31, 2003 and
          2002, respectively,  of retainage balances,  representing amounts held
          back  by  customers  to  insure  performance  by  the  Company  of its
          obligations under various long-term  contracts.  All such amounts,  at
          December 31, 2003 are expected to be collected in 2004.  The allowance
          for doubtful  accounts  receivable was $1,091,000 and $1,967,000 as of
          December 31, 2003 and 2002,  respectively.  The allowance for doubtful
          accounts was increased by provisions of $210,000,  $23,000, and $0 and
          decreased by write-offs of $1,086,000,  $224,000, and $309,000 for the
          years ended December 31, 2003, 2002, and 2001, respectively.

(4)   Inventories

      Inventories consist of the following:
                                                  December 31,
                                           -------------------------------
                                               2003                2002
                                               ----                ----
               Parts and components        $1,673,000           1,767,000
               Work-in-process                427,000             208,000
               Finished goods                 904,000           1,388,000
                                           ----------           ---------
                                           $3,004,000           3,363,000
                                           ==========           =========

                                                                     (Continued)


                                      F-15
<PAGE>

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

(5)   Property, Plant and Equipment

      Property, plant and equipment consists of the following:

<TABLE>
<CAPTION>

                                                 December 31
                                        -----------------------------
                                            2003              2002          useful lives
                                            ----              ----          ------------
     <S>                               <C>                    <C>            <C>
      Land                             $   132,000            132,000            --
      Buildings                          1,110,000          1,110,000          20 years
      Machinery and equipment            7,991,000          7,821,000         3-8 years
      Furniture and fixtures             2,295,000          2,551,000        5-10 years
      Transportation equipment              74,000             74,000           4 years
      Tools and molds                    3,833,000          3,774,000           8 years
      Leasehold improvements               882,000            858,000   Lesser of term of lease
                                       -----------          ---------   or estimated life of asset
                                        16,317,000         16,320,000
      Less accumulated depreciation
         and amortization               14,851,000         14,518,000
                                       -----------          ---------
                                       $ 1,466,000          1,802,000
                                       ===========          =========
</TABLE>

(6)   Goodwill

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

       Effective January 1, 2002,  the Company ceased  amortization  of goodwill
           resulting  in a decrease  of $795,000  in  amortization  for the year
           ended December 31, 2002 compared to the same period in 2001.  Instead
           of amortizing  goodwill over a fixed period of time, the Company will
           measure the fair value of the acquired  business at least annually to
           determine if goodwill  has been  impaired.  In addition,  the Company
           completed  the first  step of the  goodwill  transitional  impairment
           test,  which  required  determining  the fair value of the  reporting
           units as of January 1, 2003 and comparing it to the carrying value of
           the reporting unit net assets.  The Company determined that there was
           no impairment loss resulting from the transitional impairment test as
           of January 1, 2003.

                                                                     (Continued)


                                      F-16
<PAGE>

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

       As  of December 31, 2003 and 2002, goodwill totaled  $2,961,000.  At such
           dates,  all of the goodwill related to the Company's Signal division.
           During  the  second  quarter  of 2002,  the  Company  was  engaged in
           discussions with respect to the sale of the Signal division. Based on
           those  discussions the Company  determined that goodwill was impaired
           and it estimated that the amount of the impairment was $800,000. This
           amount was charged to  operations in the quarter ended June 30, 2002.
           Furthermore,   the  Company  cannot  give   assurances  that  further
           write-downs will not be necessary,  although management believes that
           no additional goodwill impairment charges are necessary at this time.

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

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

                                              Year Ended December 31
                                    ------------------------------------------
                                       2003            2002           2001
                                       ----            ----           ----
                                      (In thousands, except per share data)

Reported net loss                   $(3,357)        $(4,114)        $(14,774)
    Add back:
    Goodwill amortization                --              --              795
                                    -------         -------         --------

Adjusted net loss                   $(3,357)        $(4,114)        $(13,979)
                                    =======         =======         ========

Basic and Diluted net loss
   per share of common stock:

    Reported net loss               $ (0.34)        $ (0.41)        $  (1.50)
    Goodwill amortization                --              --              .08
                                    -------         -------         --------

    Adjusted net loss               $ (0.34)        $(0.41)         $  (1.42)
                                    =======         =======         ========

                                                                     (Continued)


                                      F-17
<PAGE>

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

(7)   Senior Debt

      On  December  31, 2003 and 2002,  Porta's  senior debt  consisted  of debt
          under  its  credit   facility  in  the  amount  of   $25,387,000   and
          $25,070,000,  respectively.  Substantially all of the Company's assets
          are pledged as collateral for the senior debt.  The current  agreement
          with the senior  lender,  as amended  in  January  2004 and  described
          below, will expire on April 15, 2004 and, accordingly, the senior debt
          has been classified as a current liability (see note 2).

      In  March 2002,  the senior  lender agreed to an amended and restated loan
          and security  agreement whereby a new term loan was established with a
          maximum  principal amount of $1,500,000 and subsequently  increased in
          May 2002 to  $2,250,000.  The  agreement  allowed  the Company to draw
          monies subject to the senior lender's receipt and approval of a weekly
          disbursement  budget.  Any advances  under this  agreement were at the
          discretion of the senior lender.  Obligations  under the new term loan
          bear interest at 12%, which interest shall accrue monthly and be added
          to the principal  until  September 1, 2002 when interest for the month
          of August 2002 became payable and current interest became payable. The
          agreement  provides  that all  indebtedness  prior to March 1, 2002 is
          reflected  as an old term  loan in the  amount of  $22,610,000,  which
          includes the  principal  balance due at December 31, 2001 plus accrued
          interest  though  March 1, 2002.  The old term loan bears no  interest
          until such time as the senior lender in its sole  discretion  notifies
          the Company that interest shall be payable.  Additionally,  the senior
          lender prohibited the Company from making any payments on indebtedness
          to any subordinated creditors,  but the Company is not prohibited from
          paying accounts  payable in the ordinary course of business.  Finally,
          the  agreement  allowed for standby  letters of credit not to exceed a
          maximum of $573,000. As of December 31, 2003, the Company did not have
          any standby  letters of credit  outstanding.  As of December 31, 2003,
          the Company had  borrowed  $2,250,000,  the maximum  principal  amount
          under the new term loan,  and the total  principal and interest on the
          new term loan was $2,777,000.

      As  consideration for an April 2001 loan amendment,  the Company agreed to
          reduce the  exercise  price of the  outstanding  warrants  to purchase
          approximately 570,000 shares of common stock held by its senior lender
          to $0.25 per share.  The value of the reduction in exercise  price was
          $39,000, which was recorded as interest expense and additional paid in
          capital.  As of December 31, 2003,  100,000 of these  warrants  remain
          outstanding.

(8)   6% Convertible Subordinated Debentures

      As  of December 31, 2003 and 2002, the Company had outstanding $385,000 of
          its 6%  convertible  subordinated  debentures  due July 1,  2002  (the
          "Debentures").  The Company has not paid interest on these  Debentures
          since July 2000,  and its senior  lender  prohibits it from making any
          payments of principal and interest  (note 7). At December 31, 2003 and
          2002,  accrued  interest on the  debentures  was $81,000 and  $58,000,
          respectively. The trustee of the Debentures gave notice to the Company
          that the non-payment caused an event of default.

                                                                     (Continued)


                                      F-18
<PAGE>

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

(9)   Subordinated Notes

      As  of December 31, 2003 and 2002,  $6,144,000 of Subordinated  Notes were
          outstanding.  As of December 31,  2003,  $6,144,000  of principal  and
          $3,205,000  of accrued  interest  were due and payable.  However,  the
          Company did not have the resources to pay the $6,144,000 principal and
          $3,205,000 of interest due on the subordinated debt. In addition,  the
          senior lender had  precluded  the Company from making  payments on the
          subordinated debt (note 7).

(10)  Joint Venture

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

(11)  Stockholders' Equity

      At  December 31, 2003, the Company had  outstanding (a) warrants issued to
          its senior lender to purchase  100,000  shares of common stock,  which
          are  currently  exercisable  at $0.25 per share and  expire on June 6,
          2005,  (b) warrants  issued to a vendor to purchase  15,000  shares of
          common stock, which are currently exercisable at $1.8125 per share and
          expire in May 2005 (c) warrants  issued to the holders of subordinated
          notes to purchase 127,500 shares of Common Stock which are exercisable
          at $3.00 per share and expire on January 2, 2005.

(12)  Employee Benefit Plans

      The Company has deferred compensation  agreements with certain present and
          former officers and employees,  with benefits commencing at retirement
          equal to 50% of the employee's base salary, as defined. Payments under
          the  modified  agreements  will  be made  for a  period  ranging  from
          approximately  15 to  approximately  25  years.  In  2003,  under  the
          modified   requirements,   the  accrued   liability   was  reduced  by
          approximately  $137,000.  During 2002 and 2001,  the  Company  accrued
          approximately $122,000 and $166,000,  respectively, under the original
          agreements.

      The Company  maintains the Porta Systems Corp. 401(k) Savings Plan for the
          benefit  of  eligible  employees,  as  defined  in the  Savings  Plan.
          Participants contribute a specified percentage of their base salary up
          to a maximum of 15%. Porta will match a participant's  contribution by
          an amount equal to 25% of the first 6% contributed by the participant.
          A  participant  is 100% vested in the  balance to his credit.  For the
          years  ended   December  31,  2003,   2002  and  2001,  the  Company's
          contribution amounted to $37,000, $47,000 and $54,000, respectively.

                                                                     (Continued)


                                      F-19
<PAGE>

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

      The Company  maintains the Employee Stock Purchase Plan for the benefit of
          eligible  employees,  as defined in the Purchase  Plan,  which permits
          employees  to purchase the  Company's  common stock at discounts up to
          10%. The Company has reserved  1,000,000 shares of the Company's stock
          for  issuance  under the plan.  During  2002,  and 2001,  55,803,  and
          130,250  shares,  respectively,  were issued  pursuant to the Purchase
          Plan. No shares were issued in 2003 pursuant to the Plan.

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

(13)  Incentive Plans

      During 1999, the Company  established an Employee Stock Bonus Plan whereby
          stock may be given to  employees  who are not officers or directors to
          recognize  their  contributions.  A maximum of 95,750 shares of common
          stock is reserved for issuance  pursuant to the Bonus Plan.  No shares
          of common  stock were issued  pursuant to the Bonus Plan during  2003,
          2002 and 2001.

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

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

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

                                                                     (Continued)


                                      F-20
<PAGE>

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

      The weighted-average  fair values of options granted were $0.02, $0.05 and
          $0.23  per  share  for  options   granted  in  2003,  2002  and  2001,
          respectively.

      The fair  value of each  option  grant is  estimated  on the date of grant
          using  the  Black-Scholes  option-pricing  model  with  the  following
          assumptions for 2003, 2002 and 2001:

                                 2003               2002              2001
                                 ----               ----              ----
      Dividends:             $0.00 per share   $0.00 per share   $0.00 per share
      Volatility:            50%               100%              100%
      Risk-free interest:    4.22%-5.48%       4.22%-5.48%       4.22%-5.48%
      Expected term:         5 - 9.6 years     5 - 9.6years      5 - 9.6years

      A summary of the status of the Company's stock option plans as of December
      31, 2003,  2002,  and 2001,  and changes  during the years ending on those
      dates is presented below:

<TABLE>
<CAPTION>

                                     2003                         2002                       2001
                           ------------------------   -------------------------    -----------------------
                           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                 601,530       $2.43         801,705       $3.96          949,713      $2.55

Granted                    15,000        0.02          15,000        0.07           55,000       0.29
Exercised                      --                          --                           --
Forfeited                 (64,000)       3.21        (215,175)       2.11         (203,008)      2.58
                          -------                     -------                      -------
Outstanding end of year   552,530       $2.27         601,530       $2.43          801,705      $3.96
                          =======                     =======                      =======
Options exercisable
  at year-end             542,530                     567,647                      698,105
                          =======                     =======                      =======
</TABLE>

      The following table summarizes information about stock options outstanding
         under the stock option plans at December 31, 2003:

<TABLE>
<CAPTION>

                                       Options Outstanding                                Options Exercisable
                       -------------------------------------------------------    -------------------------------
                                        Weighted-average
    Range of           Outstanding      Remaining             Weighted-average    Exercisable    Weighted-Average
    Exercise Prices    at 12/31/03      Contractual Life      Exercise Price      at 12/31/03    Exercise Price

    <S>                  <C>               <C>                     <C>              <C>               <C>
    <$1.00               50,000            7.8 years               $0.15            48,000            $0.15
    $1.00 - 1.99        215,780            3.4 years               $1.51           215,780            $1.51
    $2.00 - 2.99         11,500            5.5 years               $2.26            11,500            $2.26
    $3.00 - 3.85        275,250             .4 years               $3.27           267,250            $3.26
                        -------                                                    -------
                        552,530                                                    542,530
                        =======                                                    =======
</TABLE>

                                                                     (Continued)


                                      F-21
<PAGE>

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

(14) Income Taxes

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

<TABLE>
<CAPTION>

                                         2003                       2002                        2001
                                ---------------------      ---------------------       -----------------------
                                 Current     Deferred      Current      Deferred       Current        Deferred
                                 -------     --------      -------      --------       -------        --------
         <S>                   <C>                  <C>      <C>                 <C>      <C>                  <C>
         Federal               $      --            --           --              --            --              --
         State and foreign      (272,000)           --       11,000              --      (203,000)             --
                               ----------   ----------     --------     -----------    -----------    -----------
                      Total    $(272,000)           --       11,000              --       203,000              --
                               ==========   ==========     ========     ===========    ==========     ===========
</TABLE>

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

                                              2003        2002          2001
                                              ----        ----          ----
         United States                   $(2,989,000)  (3,726,000)  (11,578,000)
         Foreign                            (640,000)    (376,000)   (3,399,000)
                                         -----------   ----------   -----------
         Loss before provision
            (benefit) for income taxes   $(3,629,000)  (4,102,000)  (14,977,000)
                                         ===========   ==========   ===========

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

<TABLE>
<CAPTION>

                                                                                 2003            2002          2001
                                                                                 ----            ----          ----
           <S>                                                               <C>              <C>            <C>
          Tax benefit at statutory rate                                      $(1,234,000)    (1,395,000)    (5,092,000)
          Increase (decrease) in income tax benefit resulting from:
             Increase in valuation allowance                                   1,379,000      1,094,000      3,057,000
             State and foreign taxes, less applicable federal benefits          (114,000)       (98,000)      (211,000)
             Non-deductible goodwill impairment                                       --        272,000      1,973,000
             Other expenses not deductible for tax purposes                        8,000         13,000        333,000
             Foreign income taxed at rates
                 different from U.S. statutory rate                              (16,000)       (78,000)       (19,000)
             Estimated NOL adjustments, including Section 382 limitation -            --             --
             Reversal and adjustments of prior year's accrual                   (275,000)       203,000       (262,000)
             Other                                                               (20,000)            --         18,000
                                                                             -----------    -----------    -----------
                                                                             $  (272,000)        11,000        203,000
                                                                             ===========    ===========    ===========
</TABLE>

      Porta has unused United States tax net operating  loss (NOL) carryforwards
          of  approximately  $52,357,000  expiring at various dates between 2009
          and 2023. Due to the 1997 change in ownership  which resulted from the
          conversion of Porta's Zero coupon  subordinated  convertible  notes to
          common  stock,  Porta's usage of its NOL will be limited in accordance
          with  Internal   Revenue  Code  section  382.   Porta's   carryforward
          utilization  of the NOL is limited to $1,767,000 per year with respect
          to  approximately  $23.9 million of the NOL,  representing the portion
          that arose prior to the change in control.  The  carryforward  amounts
          are  subject  to review by the  Internal  Revenue  Service  (IRS).  In
          addition,   Porta  has  foreign  NOL  carryforwards  of  approximately
          $6,734,000 with indefinite expiration dates.

                                                                     (Continued)


                                      F-22
<PAGE>

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

      The components of the deferred tax assets,  the net balance of which total
          zero after the valuation  allowance,  as of December 31, 2003 and 2002
          are as follows:

                                                        2003            2002
                                                        ----            ----
          Deferred tax assets:
             Inventory                             $  1,018,000       1,313,000
             Allowance for doubtful accounts
                receivable                              420,000         757,000
             Benefits of tax loss carryforwards      22,447,000      20,690,000
             Benefit plans                              468,000         591,000
             Accrued commissions                        109,000         218,000
             Other                                    1,579,000       1,093,000
             Depreciation                               358,000         358,000
                                                   ------------    ------------
                                                     26,399,000      25,020,000
             Valuation allowance                    (26,399,000)    (25,020,000)
                                                   ------------    ------------
                                                   $         --    $         --

      Because of Porta's losses in 2003 and 2002, a valuation  allowance for the
          entire  deferred tax asset was provided due to the  uncertainty  as to
          future realization.

      The income tax  returns of Porta and its  subsidiary  operating  in Puerto
          Rico were  examined  by the IRS for the tax year  ended  December  31,
          1989.  As a result of this  examination,  the IRS increased the Puerto
          Rico   subsidiary's   taxable  income   resulting  from   intercompany
          transactions,  with a corresponding  increase in Porta's net operating
          losses. The settlement amounted to approximately  $953,000.  Porta was
          in a structured  settlement with the IRS, which was reviewed annually,
          whereby monthly payments to be made to liquidate the settlement. As of
          December  31,  2002,  Porta  had not  made all the  required  payments
          through that date under the settlement and had been in  correspondence
          with the IRS to  obtain an offer in  compromise.  As of  December  31,
          2002, $274,000 remained  outstanding.  In January 2003, Porta accepted
          an  offer  to pay  $30,000  in  full  settlement  of  this  liability;
          accordingly  the  related  tax  and  accrued  interest  liability  was
          reversed in 2003.

      No  provision was made for U.S. income taxes on the undistributed earnings
          of Porta's foreign  subsidiaries  as it is  management's  intention to
          utilize  those  earnings in the foreign  operations  for an indefinite
          period of time or repatriate  such earnings only when tax effective to
          do so. At December  31,  2003,  undistributed  earnings of the foreign
          subsidiaries   amounted  to  approximately   $1,472,000.   It  is  not
          practicable to determine the amount of income or withholding  tax that
          would be payable upon the remittance of those earnings.

                                                                     (Continued)


                                      F-23
<PAGE>

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

(15)  Leases

      At  December 31, 2003, Porta and its subsidiaries leased manufacturing and
          administrative facilities, equipment and automobiles under a number of
          operating  leases.  Porta is required to pay  increases in real estate
          taxes on the  facilities  in  addition  to minimum  rents.  Total rent
          expense for 2003, 2002, and 2001 amounted to  approximately  $537,000,
          $499,000  and  $793,000,  respectively.  Minimum  rental  commitments,
          exclusive  of  future  escalation  charges,  for each of the next five
          years are as follows:

                       2004                      $  628,000
                       2005                         583,000
                       2006                         585,000
                       2007                         553,000
                       2008                         307,000
                       Thereafter                 2,996,000
                                                 ----------
                                                 $5,652,000

(16)  Major Customers

        Porta's five largest  customers  accounted for sales of  $8,507,000,  or
          approximately 43% of sales, for 2003, $9,784,000, or approximately 46%
          of sales, for 2002 and $13,444,000, or approximately 48% of sales, for
          2001.  Fujitsu  Telecommunications  Europe  LTD  was  Porta's  largest
          customer   for  2003,   accounting   for  sales  of   $3,150,000,   or
          approximately  16%.  Philippine  Long  Distance  Telephone was Porta's
          largest   customer  for  2002  and  2001,   accounting  for  sales  of
          $2,725,000,  or  approximately  13%, and $3,485,000,  or approximately
          12%,  respectively.  A significant amount of sales of our products for
          use by British  Telecommunications  were sold to Fujitsu as purchasing
          agent for British  Telecommunications.  As a result, most of the sales
          to    Fujitsu    Telecommunications    were   for   use   by   British
          Telecommunications.  Direct sales to British  Telecommunications  were
          $1,480,000, or 8% of sales, for 2003, $2,306,000, or 11% of sales, for
          2002 and  $3,339,000,  or 12% of sales,  for 2001. No other  customers
          account for 10% or more of the Company's sales in 2003, 2002 or 2001.

(17)  Fair Values of Financial Instruments

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

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

                                                                     (Continued)


                                      F-24
<PAGE>

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

(18) Net Loss Per Share

      Options to purchase  552,530,  601,530 and 806,705  shares of common stock
          for 2003,  2002 and 2001,  respectively,  with exercise prices ranging
          from $0.02 to $3.85,  $0.07 to $3.85 and $0.22 to $5.00 for 2003, 2002
          and 2001,  respectively,  were  outstanding  but not  included  in the
          computation of diluted net loss per share because the exercise  prices
          were greater than the average market price of common stock during such
          years, and the effect of doing so would be anti-dilutive due to losses
          incurred.

      Warrants to purchase 242,500, 242,500 and 1,776,152 shares of common stock
          for 2003,  2002 and 2001,  respectively,  with exercise prices ranging
          from $0.25 to $3.00,  $0.25 to $1.81 and $0.25 to $3.00 for 2003, 2002
          and 2001,  respectively,  were  outstanding  but not  included  in the
          computation of diluted net loss per share because the exercise  prices
          were greater than the average market price of common stock during such
          years, and the effect of doing so would be anti-dilutive due to losses
          incurred.

(19)  Legal Matters

      In  June 2002, BMS Corp.  commenced an arbitration  proceeding against the
          Company in New York City seeking damages of  approximately  $3,000,000
          and alleging  that Porta  breached its agreement to market and sell an
          update to an OSS  product  which BMS was to develop  for the  Company.
          Porta believes that it has defenses to the claims by BMS and has filed
          a  counterclaim  to recover the $350,000  the Company  advanced to BMS
          under the contract. The arbitrator has held three days of hearings and
          hearings  are  scheduled  to resume in April  2004.  If BMS  obtains a
          significant  judgment against the Company in this proceeding and seeks
          to enforce the judgment, the Company's ability to continue in business
          would be impaired.

     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 of the  Company's  stockholders  and
         warrant  holders who acquired their  securities in connection  with the
         Company's  acquisition  of Aster  Corporation.  The  complaint  alleges
         breach of contract  against Porta and breach of fiduciary  duty against
         the Company's  directors  arising out of an alleged failure to register
         certain  restricted  shares and warrants owned by the  plaintiffs.  The
         complaint seeks damages of $413,000; however, counsel for the plaintiff
         has advised  Porta that  additional  plaintiffs  may be added and, as a
         result, the amount of damages claimed may be substantially greater than
         the amount presently claimed. Porta believes that it has valid defenses
         to the claims.  There has been no  significant  activity in this matter
         subsequent to December 31, 1999, and the case has been administratively
         dismissed for failure to prosecute.

                                                                     (Continued)


                                      F-25
<PAGE>

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

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

(20)  Cash Flow Information

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

                                           2003           2002           2001
                                           ----           ----           ----
          Cash paid for interest           $  6             10            933
                                           ====           ====           ====
          Cash paid for income taxes       $ 11              2            131
                                           ====           ====           ====

      (2) Non-cash transactions:

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

(21)  Segment and Geographic Data

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

                                                                     (Continued)


                                      F-26
<PAGE>

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

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

                                              2003         2002        2001
                                              ----         ----        ----
          Revenue:

                Line                      $11,334,000    9,598,000   12,756,000
                OSS                         3,249,000    6,414,000    8,874,000
                Signal                      4,253,000    4,523,000    5,737,000
                                          -----------   ----------   ----------
                                          $18,836,000   20,535,000   27,367,000
                                          ===========   ==========   ==========

          Segment profit (loss):

                Line                      $ 1,634,000     (565,000)   1,275,000
                OSS                        (3,072,000)     226,000   10,518,000)
                Signal                      1,393,000      286,000    1,449,000
                                          -----------   ----------   ----------
                                          $   (45,000)     (53,000)  (7,794,000)
                                          ===========   ==========   ==========

          Depreciation and amortization:

                Line                      $   253,000      245,000      374,000
                OSS                           136,000      350,000    1,262,000
                Signal                         22,000       25,000      166,000
                                          -----------   ----------   ----------
                                          $   411,000      620,000    1,802,000
                                          ===========   ==========   ==========

          Total identifiable assets:

                Line                      $ 4,099,000    3,975,000    5,990,000
                OSS                         2,932,000    4,538,000    4,268,000
                Signal                      4,293,000    4,319,000    5,557,000
                                          -----------   ----------   ----------
                                          $11,324,000   12,832,000   15,815,000
                                          ===========   ==========   ==========

          Capital expenditures:

                Line                      $    46,000       37,000      132,000
                OSS                                 0       58,000       55,000
                Signal                          4,000        9,000            0
                                          -----------   ----------   ----------
                                          $    50,000      104,000      187,000
                                          ===========   ==========   ==========

                                                                     (Continued)


                                      F-27
<PAGE>

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

      The following table reconciles segment totals to consolidated totals:

<TABLE>
<CAPTION>
                                                                 2003            2002           2001
                                                                 ----            ----           ----
          <S>                                               <C>               <C>             <C>
          Revenue:
             Total revenue for reportable segments          $ 18,836,000      20,535,000      27,367,000
             Other revenue                                       754,000         882,000         695,000
                                                            ------------    ------------    ------------
          Consolidated total revenue                        $ 19,590,000      21,417,000      28,062,000
                                                            ============    ============    ============
          Operating loss:
             Total segment  loss for reportable segments    $     45,000)        (53,000)     (7,794,000)
             Corporate and unallocated                        (2,307,000)     (2,828,000)     (3,659,000)
                                                            ------------    ------------    ------------
          Consolidated total operating loss                 $ (2,352,000)     (2,881,000)    (11,453,000)
                                                            ============    ============    ============
          Depreciation and amortization:
             Total for reportable segments                  $    411,000         620,000       1,802,000
             Corporate and unallocated                            72,000          93,000         107,000
                                                            ------------    ------------    ------------
          Consolidated total deprecation and amortization   $    483,000         713,000       1,909,000
                                                            ============    ============    ============
          Total assets:
             Total for reportable segments                  $ 11,324,000      12,832,000      15,815,000
             Corporate and unallocated                         1,031,000       1,396,000       2,018,000
                                                            ------------    ------------    ------------
          Consolidated total assets                         $ 12,355,000      14,228,000      17,833,000
                                                            ============    ============    ============
          Capital expenditures:
             Total for reportable segments                  $     50,000         104,000         187,000
             Corporate and unallocated                            22,000          20,000           9,000
                                                            ------------    ------------    ------------
          Consolidated total capital expenditures           $     72,000         124,000         196,000
                                                            ============    ============    ============
</TABLE>

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

                                             2003          2002         2001
                                             ----          ----         ----
          Revenue:
                United States            $ 8,610,000     9,877,000    12,999,000
                United Kingdom             7,523,000     6,388,000     8,060,000
                Asia/Pacific                 428,000     2,725,000     4,552,000
                Other Europe               1,228,000     1,600,000     1,761,000
                Latin America                238,000       258,000       288,000
                Other North America        1,037,000       565,000       357,000
                Other                            526         4,000        45,000
                                         -----------   -----------   -----------

          Consolidated total revenue     $19,590,000    21,417,000    28,062,000
                                         ===========   ===========   ===========

          Consolidated long-lived assets:
                United States            $ 3,859,000     4,274,000     5,301,000
                United Kingdom               255,000       364,000       583,000
                Other North America          393,000       455,000       523,000
                Asia/Pacific                       0             0             0
                Latin America                  5,000         7,000         8,000
                Other                              0         3,000         2,000
                                         -----------   -----------   -----------
                                           4,512,000     5,103,000     6,417,000
             Current and other assets      7,843,000     9,125,000    11,416,000
                                         -----------   -----------   -----------
          Consolidated total assets      $12,355,000    14,228,000    17,833,000
                                         ===========   ===========   ===========

                                                                     (Continued)


                                      F-28
<PAGE>

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

(22)  Quarterly Information (Unaudited)

      The following presents certain unaudited quarterly financial data:

<TABLE>
<CAPTION>
                                                                 Quarter Ended
                                     -------------------------------------------------------------------------
                                     March 31, 2003   June 30, 2003    September 30, 2003    December 31, 2003
                                     --------------   -------------    ------------------    -----------------
      <S>                            <C>               <C>                 <C>                  <C>
      Net sales                      $ 4,374,000       $ 3,964,000         $5,787,000           $5,465,000
      Gross profit                       993,000         1,068,000          2,059,000            1,324,000
      Net  loss                       (1,426,000)       (1,041,000)          (214,000)            (676,000)
      Basic and diluted
        net loss per share:               $(0.14)           $(0.10)            $(0.02)              $(0.07)
</TABLE>

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

      The net loss for the quarter  ended  December 31, 2003  reflects a benefit
          associated with a modification of deferred compensation  agreements of
          approximately  $214,000. In addition,  the Company recorded additional
          estimated  costs to  complete  long - term  contracts  in  progress of
          $600,000.

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


                                      F-29