**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


**FORM
      10-Q**




x
      QUARTERLY REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
      EXCHANGE ACT OF 1934





For
      the
      quarterly period ended September 30, 2007





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


SECURITIES
      EXCHANGE ACT OF 1934





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 of
            
            (I.R.S.
                Employerincorporation
                or organization)
            
            Identification
                No.)





6851
      Jericho Turnpike, Suite 170, Syosset, New York


(Address
      of principal executive offices)





11791


(Zip
      Code)





516-364-9300


(Company’s
      telephone number, including area code)





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





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


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





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




Indicate
      the number of shares outstanding of each of the issuer’s classes of common stock
      as of the latest practicable date:





Common
      stock (par value $0.01) 10,075,561 shares as of October 26,
      2007.





**PART
      I.- FINANCIAL INFORMATION**


**Item
      1-** **Financial
      Statements**





PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Consolidated
      Balance Sheets


(In
      thousands, except shares and par value)





UnauditedSeptember
                30,
              2007
            
            December
                31,
              2006AssetsCurrent
                assetsCash
                and cash equivalents
            
            $
            396
            
            $
            2,102Accounts
                receivable - trade, less allowance for doubtful accounts of $23 in
                2007
                and $13 in 2006
            
            
            5,514
            
            
            5,417Inventories
            
            
            5,976
            
            
            4,591Prepaid
                expenses and other current assets
            
            
            480
            
            
            697Assets
                of discontinued operations
            
            
            —
            
            
            383Total
                current assets
            
            
            12,366
            
            
            13,190Property,
                plant and equipment, net
            
            
            1,601
            
            
            1,571Goodwill,
                net
            
            
            2,961
            
            
            2,961Other
                assets
            
            
            51
            
            
            51Long
                term assets of discontinued operations
            
            
            —
            
            
            11Total
                assets
            
            $
            16,979
            
            $
            17,784Liabilities
                and Stockholders’ DeficitCurrent
                liabilities:Senior
                debt, principal amount
            
            $
            23,373
            
            $
            23,513Subordinated
                notes, principal amount
            
            
            6,144
            
            
            6,1446%
                convertible subordinated debentures, principal amount
            
            
            385
            
            
            385Accounts
                payable
            
            
            5,472
            
            
            6,106Accrued
                expenses and other
            
            
            2,478
            
            
            2,136Accrued
                interest payable
            
            
            7,157
            
            
            6,127Liabilities
                of discontinued operations
            
            
            —
            
            
            425Total
                current liabilities
            
            
            45,009
            
            
            44,836Deferred
                compensation, net of current portion
            
            
            724
            
            
            771Total
                long-term liabilities
            
            
            724
            
            
            771Total
                liabilities
            
            
            45,733
            
            
            45,607Stockholders’
                deficit:Preferred
                stock, no par value; authorized 1,000,000 shares, none issued
            
            
            —
            
            
            —Common
                  stock, par value $.01; authorized 20,000,000 shares, issued 10,106,501
                  shares in 2007 and 10,106,501 in 2006
            
            
            101
            
            
            101Additional
                paid-in capital
            
            
            76,125
            
            
            76,125Accumulated
                deficit
            
            
            (98,765
            )
            
            (97,713
            )Accumulated
                other comprehensive loss:Foreign
                currency translation adjustment
            
            
            (4,277
            )
            
            (4,398
            )(26,816
            )
            
            (25,885
            )Treasury
                stock, at cost, 30,940 shares
            
            
            (1,938
            )
            
            (1,938
            )Total
                stockholders’ deficit
            
            
            (28,754
            )
            
            (27,823
            )Total
                liabilities and stockholders’ deficit
            
            $
            16,979
            
            $
            17,784





See
      accompanying notes to unaudited consolidated financial
      statements


Page
          1 of
          15





PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Unaudited
      Consolidated Statements of Operations and Comprehensive Income


(In
      thousands, except per share amounts)





Nine
                Months EndedSeptember
                30,
            
            September
                30,2007
            
            2006Sales
            
            $
            21,922
            
            $
            25,039Cost
                of sales
            
            
            15,139
            
            
            16,593Gross
                profit
            
            
            6,783
            
            
            8,446Selling,
                general and administrative expenses
            
            
            4,526
            
            
            4,090Research
                and development expenses
            
            
            1,201
            
            
            1,164Total
                expenses
            
            
            5,727
            
            
            5,254Operating
                income
            
            
            1,056
            
            
            3,192Interest
                expense, net
            
            
            (1,536
            )
            
            (848
            )Other
                income (expense), net
            
            
            7
            
            
            2Income
                (loss) from continuing operations before income taxes
            
            
            (
                473
            )
            
            2,346Income
                tax expense
            
            
            (58
            )
            
            (92
            )Income
                (loss) from continuing operations before discontinued
                operations
            
            
            (531
            )
            
            2,254Discontinued
                operations:Loss
                from discontinued operations (net of taxes of zero)
            
            
            (87
            )
            
            (245
            )Write
                off of net assets of discontinued operations
            
            
            (434
            )
            
            —Total
                loss from discontinued operations
            
            
            (521
            )
            
            (245
            )Net
                income (loss)
            
            $
            (1,052
            )
            $
            2,009Other
                comprehensive (loss):Foreign
                currency translation adjustments
            
            
            (121
            )
            
            (173
            )Comprehensive
                income (loss)
            
            $
            (1,173
            )
            $
            1,836Basic
                income (loss) per share of common stock:Continuing
                operations
            
            $
            (.05
            )
            $
            0.22Discontinued
                operations
            
            
            (.05
            )
            
            (0.02
            )$
            (.10
            )
            $
            0.20Weighted
                average shares outstanding
            
            
            10,076
            
            
            10,076Diluted
                income (loss) per share of common stock:Continuing
                operations
            
            $
            (.05
            )
            $
            0.22Discontinued
                operations
            
            
            (.05
            )
            
            (0.02
            )$
            (.10
            )
            $
            0.20Weighted
                average shares outstanding
            
            
            10,076
            
            
            10,104





See
      accompanying notes to unaudited consolidated financial
      statements.


Page
          2 of
          15





PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Unaudited
      Consolidated Statements of Operations and Comprehensive Income


(In
      thousands, except per share amounts)





Three
                Months EndedSeptember
                30,
            
            September
                30,2007
            
            2006Sales
            
            $
            6,651
            
            $
            9,018Cost
                of sales
            
            
            4,563
            
            
            6,036Gross
                profit
            
            
            2,088
            
            
            2,982Selling,
                general and administrative expenses
            
            
            1,533
            
            
            1,386Research
                and development expenses
            
            
            423
            
            
            408Total
                expenses
            
            
            1,956
            
            
            1,794Operating
                income
            
            
            132
            
            
            1,188Interest
                expense, net
            
            
            (547
            )
            
            (261
            )Other
                income, net
            
            
            9
            
            
            —Income
                (loss) from continuing operations before income taxes
            
            
            (406
            )
            
            927Income
                tax expense
            
            
            (19
            )
            
            (22
            )Income
                (loss) from continuing operations before discontinued
                operations
            
            
            (425
            )
            
            905Discontinued
                operations:Loss
                from discontinued operations (net of taxes of zero)
            
            
            —
            
            
            (87
            )Write
                off of net assets of discontinued operations
            
            
            —
            
            
            —Total
                loss from discontinued operations
            
            
            —
            
            
            (87
            )Net
                income (loss)
            
            $
            (425
            )
            $
            818Other
                comprehensive income (loss):Foreign
                currency translation adjustments
            
            
            (26
            )
            
            (47
            )Comprehensive
                income (loss)
            
            $
            (451
            )
            $
            771Basic
                income (loss) per share of common stock:Continuing
                operations
            
            $
            (.04
            )
            $
            0.09Discontinued
                operations
            
            
            (—
            )
            
            (0.01
            )$
            (.04
            )
            $
            0.08Weighted
                average shares outstanding
            
            
            10,076
            
            
            10,076Diluted
                income (loss) per share of common stockContinuing
                operations
            
            $
            (.04
            )
            $
            0.09Discontinued
                operations
            
            
            (—
            )
            
            (0.01
            )$
            (
                .04
            )
            $
            0.08Weighted
                average shares outstanding
            
            
            10,076
            
            
            10,103





See
      accompanying notes to unaudited consolidated financial statements.


Page
          3 of
          15


PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Unaudited
      Consolidated Statements of Cash Flows


(In
      thousands)





Nine
                Months EndedSeptember
                30,
            
            September
                30,2007
            
            2006Cash
                flows from operating activities of continuing operations:Net
                income (loss)
            
            $
            (1,052
            )
            $
            2,009Loss
                from discontinued operations
            
            
            521
            
            
            245Adjustments
                to reconcile net income (loss) to net cash provided by (used in)
                operating
                activities of continuing operations:Depreciation
                and amortization
            
            
            281
            
            
            193Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (18
            )
            
            (2,883
            )Inventories
            
            
            (1,346
            )
            
            625Prepaid
                expenses and other current assets
            
            
            209
            
            
            (349
            )Other
                assets
            
            
            —
            
            
            4Accounts
                payable, accrued expenses and other liabilities
            
            
            240
            
            
            2,879Net
                cash (used in) provided by continuing operations
            
            
            (1,165
            )
            
            2,723Net
                cash used in operations of discontinued operations
            
            
            (87
            )
            
            (1,406
            )Net
                cash (used in) provided by operating activities
            
            
            (1,252
            )
            
            1,317Cash
                flows from investing activities:Capital
                expenditures, net
            
            
            (304
            )
            
            (149
            )Net
                cash used in investing of discontinued operations
            
            
            —
            
            
            (184
            )Net
                cash used in investing activities
            
            
            (304
            )
            
            (333
            )Cash
                flows from financing activities:Increase
                in senior debt
            
            
            —
            
            
            154Repayments
                of senior debt
            
            
            (140
            )
            
            (1,013
            )Net
                cash used in financing activities
            
            
            (140
            )
            
            (859
            )Effect
                of exchange rate changes on cash
            
            
            (10
            )
            
            (24
            )Increase
                (decrease) in cash and cash equivalents
            
            
            (1,706
            )
            
            101Cash
                and cash equivalents - beginning of the year
            
            
            2,102
            
            
            1
                ,254Cash
                and cash equivalents - end of the period
            
            $
            396
            
            $
            1,355Supplemental
                cash flow disclosure:Cash
                paid for interest expense
            
            $
            568
            
            $
            159Cash
                paid for income taxes
            
            $
            —
            
            $
            74





See
      accompanying notes to unaudited consolidated financial
      statements.


Page
          4 of
          15




PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





**Note
      1: Management’s Responsibility For Interim Financial Statements Including All** **Adjustments
      Necessary For Fair Presentation**





Management
      acknowledges its responsibility for the preparation of the accompanying interim
      consolidated financial statements which reflect all adjustments, consisting
      of
      normal recurring adjustments, considered necessary in its opinion for a fair
      statement of its consolidated financial position and the results of its
      operations for the interim period presented. These consolidated financial
      statements should be read in conjunction with the summary of significant
      accounting policies and notes to consolidated financial statements included
      in
      the Company’s Form 10-K annual report for the year ended December 31, 2006.
      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 within. The
      audit opinion included in the December 31, 2006 Form 10-K annual report
      contained an explanatory paragraph regarding the Company’s ability to continue
      as a going concern. The factors which resulted in the explanatory paragraph
      are
      continuing. Results for the third quarter or the first nine months of 2007
      are
      not necessarily indicative of results for the year.





**Note
      2: Inventories**





Inventories
      are stated at the lower of cost (on the average or first-in, first-out method)
      or market. The composition of inventories at the end of the respective periods
      is as follows (net of reserve of $1,953,000 for 2007 and $2,345,000 for
      2006):





September 30, 2007
            
            December 31, 2006(In
                thousands)Parts
                and components
            
            $
            3,535
            
            $
            3,637Work-in-process
            
            
            1,096
            
            
            543Finished
                goods
            
            
            1,345
            
            
            411$
            5,976
            
            $
            4,591





**Note
      3: Senior and Subordinated Debt**





On
      September 30, 2007, the Company’s liability to its senior debt holder was
      $23,373,000 plus accrued interest of $312,000. During the fourth quarter of
      2004, SHF IX LLC, an affiliate of Stonehill Financial, LLC, purchased the
      Company’s senior debt of approximately $25,000,000 from Wells Fargo Foothill,
      Inc. The Company has made payments through September 30, 2007 totaling
      $2,876,000 as required by amendments and extensions of the loan agreement,
      of
      which $659,000 was applied to interest and $2,217,000 was applied to principal.
      On February 7, 2007 Cheyne Special Situations Fund L.P (“Cheyne”) purchased the
      Company’s senior debt of approximately $23,400,000 from SHF IX, LLC and
      subsequently extended the maturity of the senior debt to February 1, 2008.
      Through September 30, 2007, the Company had made interest payments of
      approximately $493,000 to Cheyne. The Company can not give any assurance that
      the holder of its senior debt will extend the loan beyond February 1, 2008.
      Any
      adverse event, including declines in business, could have an effect on the
      decision of the senior debt holder to extend or demand payment on the notes.
      If
      the senior debt holder does not extend the maturity of the Company’s senior debt
      beyond February 1, 2008 or if the senior debt holder demands payment of all
      or a
      significant portion of the senior debt when due, the Company will not be able
      to
      continue in business, and it is likely that it will seek protection under the
      Bankruptcy Code. See Note 8 regarding additional loans to the Company,
      subsequent to September 30, 2007.


Page
          5 of
          15


As
      of
      September 30, 2007, the Company’s short-term debt also included $6,144,000
      principal amount of subordinated notes that became due on July 3, 2001 and
      $385,000 principal amount of 6% debentures which became due on July 2, 2002.
      The
      interest rate on the 6% debentures increased to 8.26% as a result of our failure
      to make interest payments on the debentures since July 1, 2000 and our failure
      to pay principal on July 2, 2002. The interest rate on the subordinated note
      increased to 15% as a result of our failure to pay the subordinated notes when
      due on July 3, 2001. Accrued interest on the subordinated notes and the 6%
      debentures was approximately $6,844,000, which represents interest through
      September 30, 2007. We are precluded by our senior debt holder from paying
      any
      principal or interest on the subordinated debt.





**Note
      4: Accounting for Stock Based Compensation**





For
      the
      nine months ended September 30, 2007, the Company issued nonqualified stock
      options to purchase 20,000 shares of common stock under its 1999 Plan that
      provides for the automatic grant to non-management directors. This Plan provides
      for the automatic grant to non-management directors of non-qualified options
      to
      purchase 5,000 shares on May 1 st of each
      year commencing May 1, 1999, based upon the average closing price of the last
      ten trading days of April of each year. Options under this Plan have a term
      of
      10 years. The Company uses the Black-Scholes valuation model and straight-line
      amortization of compensation expense over the requisite service period when
      granting stock options. All options previously granted are fully vested. Based
      on the Black-Scholes valuation model there is no non-cash compensation expense
      attributable to stock options granted during the quarters. Stock compensation
      expense for all vested options to date is diminutive.





**Note
      5: Segment Data**





The
      Company has two reportable segments: Line Connection and Protection Equipment
      (“Line”) whose products interconnect copper telephone lines to switching
      equipment and provide fuse elements that protect telephone equipment and
      personnel from electrical surges, and Signal Processing (“Signal”) whose
      products are used in data communication devices that employ high frequency
      transformer technology.





The
      Company formerly had a third reportable segment - Operating Support Systems
      (“OSS”), which was engaged in the business of marketing, manufacturing and
      selling products that automated the testing, provisioning, maintenance and
      administration of communication networks and the management of support personnel
      and equipment. Due to continuing losses in the OSS division, combined
      with difficulties in marketing OSS products in view of the Company’s financial
      condition, the
      Company decided in December 2003 that it would discontinue this operating
      segment. As a result, the Company limited
      the OSS activities to the performance of contractual maintenance and warranty
      services through June 2007 (see Note 7). Accordingly, as of June 30, 2007,
      t he
      net
      assets of $434,000 of this operation were written off and the results of
      operations of the OSS division have been segregated and reported separately
      as
      discontinued operations on the consolidated financial statements in this
      Form 10-Q.





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.





There
      has
      been no significant change, from December 31, 2006, in the basis of measurement
      of segment revenues and profit or loss, and no significant change in the
      Company’s assets for the Line and Signal reporting segments.


Page
          6 of
          15





Nine
                Months Ended
            
            Three
                Months EndedSeptember
                30,
              2007
            
            September
                30,
              2006
            
            September
                30,
              2007
            
            September
                30,
              2006**Sales:**Line
            
            $
            18,228,000
            
            $
            21,308,000
            
            $
            5,594,000
            
            $
            7,694,000Signal
            
            
            3,694,000
            
            
            3,731,000
            
            
            1,057,000
            
            
            1,324,000Total
                of Continuing Operations
            
            $
            21,922,000
            
            $
            25,039,000
            
            $
            6,651,000
            
            $
            9,018,000**Segment
                profit:**Line
            
            $
            2,383,000
            
            $
            3,956,000
            
            $
            637,000
            
            $
            1,341,000Signal
            
            
            933,000
            
            
            1,067,000
            
            
            235,000
            
            
            462,000Total
                of Continuing Operations
            
            $
            3,316,000
            
            $
            5,023,000
            
            $
            872,000
            
            $
            1,803,000




The
      following table reconciles segment totals to consolidated totals:





Operating
                income (loss):Total
                segment income for reportable segments
            
            $
            3,316,000
            
            $
            5,023,000
            
            $
            872,000
            
            $
            1,803,000Corporate
                and unallocated
            
            
            (2,260,000
            )
            
            (1,831,000
            )
            
            (740,000
            )
            
            (615,000
            )Consolidated
                total operating income
            
            $
            1,056,000
            
            $
            3,192,000
            
            $
            132,000
            
            $
            1,188,000





**Note
      6:** **New
      accounting pronouncements**




In
      June
      2006, the FASB issued Interpretation No. 48 (“FIN 48”), Accounting for
      Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109. The
      objective of this interpretation prescribes a recognition threshold and
      measurement attribute for the financial statement recognition and measurement
      of
      a tax position taken or expected to be taken in a tax return. FIN 48 is
      effective for the fiscal years beginning after December 15, 2006. The adoption
      of this statement did not have an effect on our financial position or results
      of
      operations.





In
      September 2006, FASB issued SFAS No. 157, “Fair Value Measurements,”
which provides enhanced guidance for using fair value to measure assets and
      liabilities. SFAS No. 157 establishes a common definition of fair value,
      provides a framework for measuring fair value under U.S. GAAP and expands
      disclosures requirements about fair value measurements. SFAS No. 157 is
      effective for financial statements issued in fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years. The
      adoption of this statement is not expected to have a material effect on our
      financial position or results of operations.





In
      February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
      Financial Assets and Financial Liabilities" or SFAS 159. SFAS 159 provides
      companies with an option to report selected financial assets and liabilities
      at
      fair value. SFAS 159 is effective for fiscal years beginning after November
      15,
      2007. We are currently evaluating the impact of implementation of SFAS No.
      159
      on our consolidated financial statements.


Page
          7 of
          15


**Note
      7:** **Discontinued
      operations**




In
      December, 2003, the Company decided to wind down its OSS business. This decision
      was made because of continuing losses combined
      with difficulties in marketing OSS products in view of the Company’s financial
      condition. As of June 30, 2007, the Company discontinued operating this
      business. Accordingly, as of June 30, 2007, the OSS net assets of $434,000
      were
      written off and the operations of the segment are reported in the Consolidated
      Financial Statements as a discontinued operation.





Results
      of operations for OSS have been segregated from continuing operations and are
      reflected as discontinued operations approximately as follows:





**Nine Months Ended September 30,****2007**
            ****
            **2006**Revenues
            
            $
            100,000
            
            $
            276,000Loss
                from discontinued operations
            
            
            (87,000
            )
            
            (245,000
            )Write
                off of net assets of discontinued operations
            
            
            (434,000
            )
            
            —Loss
                from discontinued operations
            
            $
            (521,000
            )
            $
            (245,000
            )




**Three Months Ended September 30,****2007**
            
            **2006**Revenues
            
            $
            —
            
            $
            80,000Loss
                from discontinued operations
            
            
            —
            
            
            (87,000
            )Write
                off of net assets of discontinued operations
            
            
            —
            
            
            —Loss
                from discontinued operations
            
            $
            —
            
            $
            (87,000
            )





**Note
      8:** **Subsequent
      events**





On
      October 23, 2007 the Company borrowed $1,000,000 (“the New Note”) from Cheyne ,
      our senior debt holder. Interest accrues at an amount equal to the six month
      Libor rate plus 10%. Principal and accrued interest is payable December 1,
      2007
      and January 1, 2008, based on average excess cash availability over $250,000.
      The principal balance of the note and accrued interest is due on February 1,
      2008 **.** The
      new
      note is collateralized by all of the assets which are secured to the existing
      senior debt holder.


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          15





**Item
      2.** **Management’s
      Discussion and Analysis of Financial Condition and Results
      of** **Operations**




The
      Company’s consolidated statements of operations for the periods indicated below,
      shown as a percentage of sales, are as follows:




Nine
                Months Ended
              September
                30,
            
            Three
                Months Ended
              September
                30,2007
            
            2006
            
            2007
            
            2006Sales
            
            
            100
            %
            
            100
            %
            
            100
            %
            
            100
            %Cost
                of sales
            
            
            69
            %
            
            66
            %
            
            69
            %
            
            67
            %Gross
                profit
            
            
            31
            %
            
            34
            %
            
            31
            %
            
            33
            %Selling,
                general and administrative expenses
            
            
            21
            %
            
            17
            %
            
            23
            %
            
            16
            %Research
                and development expenses
            
            
            5
            %
            
            5
            %
            
            6
            %
            
            4
            %Operating
                income
            
            
            5
            %
            
            12
            %
            
            2
            %
            
            13
            %Interest
                expense - net
            
            
            (7
            )%
            
            (3
            )%
            
            (8
            )%
            
            (3
            )%Income
                (loss) from continuing operations
            
            
            (2
            )%
            
            9
            %
            
            (6
            )%
            
            10
            %Loss
                from discontinued operations
            
            
            (3
            )%
            
            (1
            )%
            
            (0
            )%
            
            (1
            )%Net
                (loss) income
            
            
            (5
            )%
            
            8
            %
            
            (6
            )%
            
            9
            %




The
      Company’s sales, from continuing operations, by product line for the periods
      ended September 30, 2007 and 2006 are as follows:





Nine
                Months Ended September 30,$(000)2007
            
            2006Line
            
            $
            18,228
            
            
            83
            %
            $
            21,308
            
            
            85
            %Signal
            
            
            3,694
            
            
            17
            %
            
            3,731
            
            
            15
            %21,922
            
            
            100
            %
            $
            25,039
            
            
            100
            %




Three
                Months Ended September 30,$(000)2007
            
            
            2006Line
            
            $
            5,594
            
            
            84
            %
            $
            7,694
            
            
            85
            %Signal
            
            
            1,057
            
            
            16
            %
            
            1,324
            
            
            15
            %$
            6,651
            
            
            100
            %
            $
            9,018
            
            
            100
            %





**Overview**





We
      operate in the telecommunications industry, and our customer base consists
      largely of government-owned and privately-owned telecommunications companies.
      Our line connection and protection equipment (“Line”) interconnects copper
      telephone lines to switching equipment and provides fuse elements that protect
      telephone equipment and personnel from electrical surges. Our signal processing
      (“Signal”) equipment is used in data communication devices that employ high
      frequency transformer technology.




Our
      Line
      equipment is designed to connect copper-wired telecommunications networks and
      to
      protect telecommunications equipment from voltage surges. We market this
      equipment primarily to telephone operating companies outside the United States
      and through distribution to designers, engineers and installers in the United
      States. Our Line division generated net income from operations for the three
      and
      nine months ended September 30, 2007 and the comparable periods of 2006. We
      market Signal equipment principally
      for use in defense and aerospace applications. The Signal division generated
      net
      income from operations for the three and nine months ended June 30, 2007 and
      2006. We recognize revenue from Line and Signal products when the product is
      shipped.


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          9 of
          15





On
      September 30, 2007, our liability to our senior debt holder was $23,373,000
      plus
      accrued interest of $312,000. On
      February 7, 2007, Cheyne purchased our senior debt of $23,400,000 from SHF
      IX,
      LLC and subsequently extended the maturity of our senior debt to February 1,
      2008. In October 2007, Cheyne lent us an additional $1,000,000 which is due
      on
      February 1, 2008. We cannot give any assurance that our senior debt holder
      will
      extend the maturity date beyond February 1, 2008. Any adverse event, including
      declines in business, could have an effect on the decision of our senior debt
      holder to extend or demand payment on the notes. If our senior debt holder
      does
      not extend the maturity of our senior debt beyond February 1, 2008 or if our
      senior debt holder demands payment of all or a significant portion of the senior
      debt when due, we will not be able to continue in business, and it is likely
      that we will seek protection under the Bankruptcy Code.





We
      are
      very dependent upon a small number of customers, particularly British
      Telecommunications. Total
      sales to British Telecommunications, consisting of direct sales and sales to
      systems integrators for British Telecommunications (including Fujitsu) were
      $10,200,000 (47 % of sales) for the nine months ended September 30, 2007,
      $20,000,000 (62%) for the year end 2006, $13,900,000 (50%) for the year 2005
      and
      $13,600,000 (50%) for the year 2004. To the extent that British
      Telecommunications reduces its purchases from, or purchases products at a price
      which results in a reduced gross margin, our ability to operate profitably
      will
      be impaired. During the nine months ended September 30, 2007, British
      Telecommunication changed its equipment purchase practices, with a result that
      our sales to British Telecommunications and its systems integrators declined
      from $15,500,000 for the nine months ended September 30, 2006 to $10,200,000
      for
      the nine months ended September 30, 2007. This decline in sales is the principal
      reason for our loss from continuing operation of $531,000 as compared to income
      of $2,254,000 for the comparable period of 2006. We may not be able to replace
      this business from other customers and we cannot give any assurance that British
      Telecommunications will increase its purchases from us in the
      future.





We
      are
      engaged in discussions with Cheyne and the holders of our subordinated debt
      and
      other creditors regarding the restructuring of our debt. Any such restructuring,
      if approved by our lenders and our stockholders, would result in both a
      reduction of senior,subordinated debt and other debt and a significant increase
      in the number of our outstanding shares of common stock. If we are unable to
      increase our sales to a level where we can operate profitably or if we are
      unable to obtain stockholder approval, we may not be able to effect a debt
      restructuring, in which event it is likely that we will seek protection under
      the Bankruptcy Code.





**Results
      of Continuing Operations** ****





The
      below
      narratives discuss the activities of our continuing operations.





Line
      equipment sales for the nine months ended September 30, 2007, compared to the
      nine months ended September 30, 2006, decreased by $3,080,000 (14%) from
      $21,308,000 to $18,228,000. Sales for the three months ended September 30,
      2007
      decreased by $2,100,000 (27%) from $7,694,000 in 2006 to $5,594,000 in 2007.
      The
      decrease in sales for the nine and the three months is the result of a
      significant decline in orders from British Telecommunications that was partially
      offset by higher demand for connection and protection product from North America
      customers. The increased demand of connection and protection product was
      $1,908,000 and $541,000 for the nine and three months ending September 30,
      2007,
      respectively. A
      significant percentage of our revenues are derived from British
      Telecommunications and its installers. Any continuation of the significant
      reductions in the level of business from British Telecommunications and its
      installers could continue to have a material adverse effect upon both our
      revenue and net income. Thus far this year we have experienced a significant
      drop off of orders from British Telecommunications’ installers, although direct
      sales to British Telecommunications remain significant.





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          10 of
          15




Signal
        sales for the nine months ended September 30, 2007 were $3,694,000, compared
        to
        $3,731,000 in the same period of 2006, a decrease of $37,000 (1%). Sales
        for the
        three months ended September 30, 2007 compared to 2006, decreased by $267,000
        (20%) from $1,324,000 to $1,057,000. The decline in Signal revenue for the
        third
        quarter of 2007 was $267,000 (20%) primarily due to the deferral of anticipated
        orders from the military sector resulting from Congress' failure to approve
        the
        U.S. military budget.
  Gross
        margin for the nine months ended September 30, 2007 was 31% compared to 34%
        for
        the nine months ended September
        30, 2006. Gross margin for the quarter ended September 30, 2007 was 31% compared
        to 33% for the quarter ended September 30, 2006. The decrease for the quarter
        and nine months is primarily related to a change in product mix sold to British
        Telecommunications from the higher gross profit DSL products to the lower
        margin
        local loop unbundling products and less absorption of manufacturing overhead
        due
        to the lower level of revenue. Our
        Signal segment gross margin slightly increased during the quarter and nine
        months due to sales mix.





Selling,
      general and administrative expenses increased by $436,000 (11%) from $4,090,000
      to $4,526,000 for the nine months ended September 30, 2007 compared to 2006.
      For
      the quarter ended September 30, 2007 selling, general and administrative
      expenses increased by $147,000 (11%) from $1,386,000 in 2006 to $1,533,000
      in
      2007 . The
      selling expense increase for the nine months ended September 30, 2007 relates
      primarily to increased commission expenses. Selling expenses decreased in the
      third quarter primarily due to less advertising expenses, somewhat offset by
      higher commission, when compared to the 2006 quarter. General and administrative
      costs increased, for the nine months and the quarter, primarily due to increased
      expenses related to our debt restructuring efforts.





For
      the
      nine months ended September 30, 2007 compared to 2006, research and development
      expenses increased by $37,000 (3%) to $1,201,000 from $1,164,000. For the
      quarter ended September 30, 2007 compared to 2006, research and development
      expenses increased by $15,000 (4%) to $423,000 from $408,000. The increase
      for
      the nine months and the quarter resulted primarily from increased spending
      by
      our line division to enhance our existing line products and develop new
      products.




As
      a
      result of the foregoing, for the nine months ended September 30, 2007, we had
      an
      operating income from continuing operations of $1,056,000 compared with
      $3,192,000 in the same period of 2006. We had an operating income from
      continuing operations of $132,000 for the quarter ended September 30, 2007
      as
      compared with $1,188,000 in the same period of 2006.





Interest
      expense, net, for the nine months ended September 30, 2007 was $1,536,000,
      an
      increase of $688,000 from $848,000 for the nine months ended September 30,
      2006.
      For the three months ended September 30, 2007 the interest expense was $547,000
      compared to $261,000 for the comparable period last year. These increases of
      $688,000 and $286,000 for the nine months and three months, respectively, are
      primarily related to interest on our senior debt under the terms of our
      extension agreement with the senior debt holder. We do not accrue interest
      on
      the entire amount of the senior debt of $23,373,000 under the terms of our
      agreement with the holder of our senior debt. Interest has accrued from February
      7, 2007 on $10,000,000 of the senior debt at 12.5% as a result of the terms
      of
      the February 7, 2007 extension of the maturity of our senior debt.




Income
      tax expense for the quarter and nine months ended September 30, 2007 relates
      to
      state and foreign taxes. No federal income tax expense has been provided due
      to
      losses incurred during the nine month period





As
      a
      result of the foregoing, we generated a net loss from continuing operations
      of
      ($531,000), or ($.05) per share (basic and diluted), for the nine months ended
      September 30, 2007, compared with net income from continuing operations of
      $2,254,000, or $.22 per share (basic and diluted) in 2006. The net loss for
      the
      three months ended September 30, 2007, from continuing operations, was
      ($425,000), or ($.04) per share (basic and diluted), compared with net income
      of
      from continuing operations $905,000, or $.09 per share (basic and diluted)in
      the
      comparable quarter of 2006.


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          11 of
          15





**Liquidity
      and Capital Resources**





At
      September 30, 2007, we had cash and cash equivalents of $396,000 compared with
      $2,102,000 at December 31, 2006. The reduction in our cash position primarily
      reflects increases of $97,000 in accounts receivable and $1,385,000 in
      inventory, a decrease of $634,000 in accounts payable and payments of $633,000
      with respect to our senior debt, of which $140,000 was principal and $493,000
      was interest. These factors were also reflected in our working capital deficit
      at September 30, 2007 of $32,643,000, as compared with a working capital deficit
      of $31,646,000 at December 31, 2006, an increase of $997,000 in our working
      capital deficit.





During
      the first nine months of 2007, we paid $633,000 to our senior debt holder of
      which approximately $140,000 was applied to principal and $493,000 was applied
      to interest.





As
      of
      September 30, 2007, our senior debt includes $23,373,000 of principal and
      $312,000 of accrued interest, which matures on February 1, 2008; and $6,529,000
      of principal and $6,844,000 of accrued interest on our subordinated notes and
      6%
      debentures that became due on July 3, 2001 and July 2, 2002, respectively.
      We
      are prohibited by our senior debt holder from paying principal or interest
      on
      any of the subordinated debt. At September 30, 2007, we did not have sufficient
      resources to repay either the senior lender or the subordinated lenders and
      it
      is unlikely that we can generate such cash from our operations. Subsequent
      to
      the quarter ended September 30, 2007 the Company borrowed $1,000,000 from Cheyne
      Special Situation Fund, our senior debt holder in order to meet current working
      capital requirements. This loan, along with the existing senior debt, matures
      on
      February 1, 2008.





As
      of
      June 30, 2007, the Company discontinued operating the OSS division. Accordingly,
      as of June 30, 2007, the OSS net assets of $434,000 were written off and the
      operations of the OSS segment are reported in the Consolidated Financial
      Statements as a discontinued operation.





We
      are
      seeking to address our working capital and liquidity problems by seeking a
      restructuring of our senior and subordinated debts as well as significant
      amounts of unsecured debt due to third parties. Although the debt restructuring,
      if implemented, will improve our working capital, it will not provide us with
      any additional cash for our operations. Our only source of funds is Cheyne,
      which advanced us $1,000,000 in October 2007. However, our continuing losses
      and
      the uncertainty of any significant increase in business from British
      Telecommunications will increase the difficulties in obtaining financings from
      other sources, and we cannot give any assurance that Cheyne will provide us
      with
      any additional funding if the need arises. Any restructuring of our Company
      will
      result in very significant dilution to the holders of our common stock and
      will
      require the approval of the holders of our common stock and subordinated debt.
      If we do not restructure our debt and the senior lender does not extend the
      maturity of our senior debt beyond February 1, 2008, or if our senior debt
      holder demands payment of all or a significant portion of the senior debt when
      due, whether on February 1, 2008 or upon the expiration of a subsequent
      extension, we will not be able to continue in business, and it is likely that
      we
      will seek protection under the Bankruptcy Code.





We
      have
      in the past, and may in the future, consider the sale of one or more of our
      divisions. However, all of our past discussions terminated without any agreement
      and we cannot give any assurance that we would be able to effect any sale of
      our
      business or that such a sale would not be part of a bankruptcy
      reorganization.


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          15


**Forward
      Looking Statements**





Statements
      contained in this Form 10-Q include forward-looking statements that are subject
      to risks and uncertainties. In particular, statements in this Form 10-Q that
      state our intentions, beliefs, expectations, strategies, predictions or any
      other statements relating to our future activities or other future events or
      conditions are “forward-looking statements.” Forward-looking statements are
      subject to risks, uncertainties and other factors, including, but not limited
      to, those identified under “Risk Factors,” in our Form 10-K for the year ended
      December 31, 2006 and in the Form 10-Q and those described in “Management's
      Discussion and Analysis of Financial Conditions and Results of Operations” in
      our Form 10-K and this Form 10-Q, and those described in any other filings
      by us
      with the Securities and Exchange Commission, as well as general economic
      conditions and economic conditions affecting the telecommunications industry,
      any one or more of which could cause actual results to differ materially from
      those stated in such statements. S uch
      statements could be affected by risks and uncertainties related to our financial
      conditions, our relationship with the holder of our senior and subordinated
      debt, including the willingness or unwillingness of the holder of the senior
      debt to extend the maturity date of the senior debt and the amount and timing
      of
      any payments which the holder of the senior debt may require, our ability to
      sell any or all of our divisions or effect a restructure of our business and
      our
      debt and equity structure on terms acceptable to the holder of the senior debt,
      our relationship with British Telecommunications including its continued
      requirements for our products, factors which affect the telecommunications
      industry, market and customer acceptance, our access to current technology,
      competition, domestic and foreign government regulations and requirements and
      pricing, as well as general industry and market conditions and growth rates,
      and
      general economic conditions. Any forward-looking statements speak only as of
      the
      date on which they are made, and we do not undertake any obligation to update
      any forward-looking statement to reflect events or circumstances after the
      date
      of this Form 10-Q.





**Item
      3.**  **Quantitative
      and Qualitative Disclosure About Market Risk.**





We
      conduct certain operations outside the United States. A substantial portion
      of
      our revenue and expenses from our United Kingdom operations are denominated
      in
      Sterling. Any Sterling-denominated receipts are promptly converted into United
      States dollars. We do not engage in any hedging or other currency
      transactions.





**Item
      4.** **** **Controls
      and Procedures**





Management’s
      assessment identified the following weaknesses at December 31, 2006 in our
      internal control over financial reporting and, subsequent to December 31, 2006,
      we took the following steps to address those weaknesses. Accordingly, as of
      the
      end of the period covered by this report, our Chief Executive Officer and Chief
      Financial Officer evaluated the effectiveness of our disclosure controls and
      procedures. Based on his evaluation, the Chief Executive Officer and Chief
      Financial Officer has concluded that our disclosure controls and procedures
      are
      effective.





**Internal
      Control over Financial Reporting**





There
      has
      been no change in our internal control over financial reporting that occurred
      during the fiscal quarter covered by this quarterly report that has materially
      affected, or is reasonably likely to materially affect, our internal control
      over financial reporting.





**PART
      II - OTHER INFORMATION**





**Item
      1 A.** **Risk
      Factors** ****





**** In
      addition to the other information set forth in this report, you should carefully
      consider the factors discussed in Part 1, “Item 1A. Risk Factors” in our Annual
      Report on Form 10-K for the year ended December 31, 2006, which could materially
      affect our business, financial condition or future results. The risks described
      in our Annual Report on Form 10-K and in this Form 10-Q are not the only risks
      facing our Company.


Page
          13 of
          15





During
      the quarter and nine months ended September 30, 2007, we sustained declines
      in
      revenue from our largest customer, British Telecommunications, from the
      comparable three and nine month periods of 2006, and, based on a change in
      the
      product mix, our gross margin declined on our sales to British
      Telecommunications. Due to our reliance on significant business from British
      Telecommunications, our revenue and net income could be impaired by any material
      reduction of sales to British Telecommunications or any material reduction
      in
      the gross margin on sales to British Telecommunications





Additional
      risks and uncertainties not currently known to us or that we currently deem
      to
      be immaterial also may materially adversely affect our business, financial
      condition and/or operating results.





**Item
      3. Defaults Upon Senior Securities.**





See
      Note
      3 of Notes to Unaudited Consolidated Financial Statements and “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations —
Liquidity and Capital Resources” for information concerning defaults on our
      subordinated debt.





**Item
      6. Exhibits**





31.1
            Certificate
                of Chief Executive Officer and Chief Financial Officer pursuant to
                Section
                302 of the Sarbanes-Oxley Act of 2002.32.1
            Certificate
                of Chief Executive Officer and Chief Financial Officer pursuant to
                Section
                906 of the Sarbanes-Oxley Act of
                2002.


Page
          14 of
          15





**SIGNATURES**





Pursuant
      to the requirements 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:
                November 13, 2007
            By
            /s/Edward
                B. KornfeldEdward
                B. KornfeldChief
                Executive Officerand
                Chief Financial Officer




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