**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, 2005





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 an accelerated filer (as defined
      in
      Rule 12b-2 of the Act). Yes o No 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) 10,053,637 shares as of November 07, 2005













PART
      I.-
      FINANCIAL INFORMATION




**Item
              1.**
            **Financial
                Statements**





PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Consolidated
      Balance Sheets


(In
      thousands, except shares and par value)


September
                30,
            
            December
                31,2005
            
            2004Assets
            
            (Unaudited)Current
                assets:Cash
                and cash equivalents
            
            $
            2,066
            
            $
            2,040Accounts
                receivable - trade, less allowance for doubtful accounts of $256
                in 2005
                and $1,045 in 2004
            
            
            4,283
            
            
            3,076Inventories
            
            
            4,450
            
            
            4,576Prepaid
                expenses and other current assets
            
            
            1,055
            
            
            382Total
                current assets
            
            
            11,854
            
            
            10,074Property,
                plant and equipment, net
            
            
            1,412
            
            
            1,334Goodwill,
                net
            
            
            2,961
            
            
            2,961Other
                assets
            
            
            64
            
            
            69Total
                assets
            
            $
            16,291
            
            $
            14,438Liabilities
                and Stockholders’ DeficitCurrent
                liabilities:Senior
                debt, including accrued interest
            
            $
            25,260
            
            $
            25,674Subordinated
                notes
            
            
            6,144
            
            
            6,1446%
                convertible subordinated debentures
            
            
            385
            
            
            385Accounts
                payable
            
            
            4,087
            
            
            4,728Accrued
                expenses and other
            
            
            3,294
            
            
            2,760Other
                accrued interest payable
            
            
            4,943
            
            
            4,533Total
                current liabilities
            
            
            44,113
            
            
            44,224Deferred
                compensation
            
            
            839
            
            
            875Total
                long-term liabilities
            
            
            839
            
            
            875Total
                liabilities
            
            
            44,952
            
            
            45,099Stockholders’
                deficit:Preferred
                stock, no par value; authorized 1,000,000 shares, none
                issued
            
            
            ---
            
            
            ---Common
                stock, par value $.01; authorized 20,000,000 shares, issued 10,084,577
                shares in 2005 and 10,003,224 shares in 2004
            
            
            101
            
            
            100Additional
                paid-in capital
            
            
            76,124
            
            
            76,059Accumulated
                deficit
            
            
            (98,508
            )
            
            (100,705
            )Accumulated
                other comprehensive loss:Foreign
                currency translation adjustment
            
            
            (4,440
            )
            
            (4,177
            )(26,723
            )
            
            (28,723
            )Treasury
                stock, at cost, 30,940 shares
            
            
            (1,938
            )
            
            (
                1,938
            )Total
                stockholders’ deficit
            
            
            (28,661
            )
            
            (30,661
            )Total
                liabilities and stockholders’ deficit
            
            $
            16,291
            
            $
            14,438


See
      accompanying notes to unaudited consolidated financial statements.







Page
          2 of
          18





PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Unaudited
      Consolidated Statements of Operations and Comprehensive Income


(In
      thousands, except per share amounts)





Nine
                Months EndedSeptember
                30**,**
            
            September
                30,2005
            
            2004Sales
            
            $
            23,061
            
            $
            22,255Cost
                of sales
            
            
            14,142
            
            
            13,711Gross
                profit
            
            
            8,919
            
            
            8,544Selling,
                general and administrative expenses
            
            
            4,421
            
            
            3,876Research
                and development expenses
            
            
            1,241
            
            
            1,437Total
                expenses
            
            
            5,662
            
            
            5,313Operating
                income
            
            
            3,257
            
            
            3,231Interest
                expense, net of interest income
            
            
            (959
            )
            
            (989
            )Other
                income, net
            
            
            5
            
            
            8Income
                before income taxes
            
            
            2,303
            
            
            2,250Income
                tax expense
            
            
            (106
            )
            
            (44
            )Net
                income
            
            $
            2,197
            
            $
            2,206Other
                comprehensive loss:Foreign
                currency translation adjustments
            
            
            (263
            )
            
            (188
            )Comprehensive
                income
            
            $
            1,934
            
            $
            2,018Per
                share data:Basic
                per share amounts:Net
                income per share of common stock
            
            $
            0.22
            
            $
            0.22Weighted
                average shares outstanding
            
            
            10,021
            
            
            9,972Diluted
                per share amounts:Net
                income per share of common stock
            
            $
            0.22
            
            $
            0.22Weighted
                average shares outstanding
            
            
            10,054
            
            
            9,972


See
      accompanying notes to unaudited consolidated financial statements.







Page
          3 of
          18





PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Unaudited
      Consolidated Statements of Operations and Comprehensive Income


(In
      thousands, except per share amounts)





Three
                Months EndedSeptember
                30**,**
            
            September
                30,2005
            
            2004Sales
            
            $
            7,021
            
            $
            7,883Cost
                of sales
            
            
            4,487
            
            
            4,836Gross
                profit
            
            
            2,534
            
            
            3,047Selling,
                general and administrative expenses
            
            
            1,655
            
            
            1,233Research
                and development expenses
            
            
            380
            
            
            416Total
                expenses
            
            
            2,035
            
            
            1,649Operating
                income
            
            
            499
            
            
            1,398Interest
                expense, net of interest income
            
            
            (313
            )
            
            (329
            )Other
                income, net
            
            
            4
            
            
            8Income
                before income taxes
            
            
            190
            
            
            1,077Income
                tax expense
            
            
            (83
            )
            
            (19
            )Net
                income
            
            $
            107
            
            $
            1,058Other
                comprehensive (loss) income:Foreign
                currency translation adjustments
            
            
            (155
            )
            
            2Comprehensive
                (loss) income:
            
            $
            (48
            )
            $
            1,060Per
                share data:Basic
                per share amounts:Net
                income per share of common stock
            
            $
            0.01
            
            $
            0.11Weighted
                average shares outstanding
            
            
            10,054
            
            
            9,972Diluted
                per share amounts:Net
                income per share of common stock
            
            $
            0.01
            
            $
            0.11Weighted
                average shares outstanding
            
            
            10,089
            
            
            9,972


See
      accompanying notes to unaudited consolidated financial statements.







Page
          4 of
          18





PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Unaudited
      Consolidated Statements of Cash Flows


(In
      thousands)





Nine
                Months EndedSeptember
                30,
            
            September
                30,2005
            
            2004Cash
                flows from operating activities:Net
                income
            
            $
            2,197
            
            $
            2,206Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            305
            
            
            294Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (1,207
            )
            
            (808
            )Inventories
            
            
            126
            
            
            (695
            )Prepaid
                expenses and other current assets
            
            
            (674
            )
            
            14Other
                assets
            
            
            4
            
            
            9Accounts
                payable, accrued expenses and other liabilities
            
            
            334
            
            
            (454
            )Net
                cash provided by operating activities
            
            
            1,085
            
            
            566Cash
                flows from investing activities:Capital
                expenditures, net
            
            
            (384
            )
            
            (148
            )Net
                cash used in investing activities
            
            
            (384
            )
            
            (148
            )Cash
                flows from financing activities:Increase
                in senior debt
            
            
            261
            
            
            266Repayments
                of senior debt
            
            
            (675
            )
            
            ---Net
                cash provided by (used in) financing activities
            
            
            (414
            )
            
            266Effect
                of exchange rate changes on cash
            
            
            (261
            )
            
            (190
            )Increase
                in cash and cash equivalents
            
            
            26
            
            
            494Cash
                and cash equivalents - beginning of the year
            
            
            2,040
            
            
            469Cash
                and cash equivalents - end of the period
            
            $
            2,066
            
            $
            963Supplemental
                cash flow disclosure:Cash
                paid for interest expense
            
            $
            680
            
            $
            65Cash
                paid for income taxes
            
            $
            98
            
            $
            53Common
                stock issued for accrued director fees
            
            $
            66
            
            $
            ---


See
      accompanying notes to unaudited consolidated financial statements.








Page
          5 of
          18





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, 2004.
      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, 2004 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 2005
      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:





September
                30, 2005
            
            December
                31, 2004(in
                thousands)Parts
                and components
            
            $
            2,922
            
            $
            2,650Work-in-process
            
            
            713
            
            
            654Finished
                goods
            
            
            815
            
            
            1,272$
            4,450
            
            $
            4,576





**Note
      3:  Senior and Subordinated Debt**





On
      September 30, 2005, the Company’s liability to the holder of its senior debt,
      including accrued interest of $625,000, was $25,260,000. During the fourth
      quarter of 2004, SHF IX LLC, an affiliate of Minnesota-based Stonehill
      Financial, LLC, purchased the Company’s senior debt of approximately $25,000,000
      from Wells Fargo Foothill, Inc. Under recent amendments, the loan became due
      and
      payable on September 30, 2005. On October 12, 2005, effective October 1, 2005,
      we entered into an agreement with the holder of the senior debt to extend the
      maturity of our senior debt to December 15, 2005. The agreement provides for
      payments of $75,000 on October 12, 2005 to the holder of the senior debt on
      account of its expenses, including legal expenses, relating to the extension
      agreement and related matters, $112,500 on October 31, 2005, which has been
      made, and a payment of $112,500 on November 30, 2005. As part of the extension,
      the holder of the senior debt agreed to continue the suspension of the accrual
      of interest on approximately $23 million on the senior debt.





As
      a
      condition to the extension, the Company agreed to take steps to effect a
      restructure of the senior debt in a manner which results in the payment of
      a
      significant portion of the senior debt and the issuance of secured debt and
      equity for the balance of the senior debt on specified terms. Any such
      restructure will require the Company to obtain financing from a new investor.
      Although the Company is seeking such an investor, the Company cannot give any
      assurance that it will be able to obtain an investor on terms that are
      acceptable to the senior debt holder. Pursuant to the agreement with the holder
      of the senior debt, the Company engaged an investment banker to assist it in
      exploring strategic alternatives. If the agreement is not extended beyond
      December 15, 2005, and if the holder of the senior debt demands payment of
      all
      or a significant portion of the loan when due, the Company will not be able
      to
      continue in business, and it is likely that the Company will seek protection
      under the Bankruptcy Code. In the event we are able to secure an investor to
      restructure the senior debt, is very likely that the Company's present
      common stock holders would suffer a very significant dilution of their
      common stock holdings. We have incurred costs associated with restructuring
      of
      senior debt of approximately $450,000, which have been deferred and included
      in
“ *Prepaid
      expenses and other current assets* ”.




Page
          6 of
          18





As
      of
      September 30, 2005, the Company’s short-term debt also included $6,144,000 of
      subordinated debt, which became due on July 3, 2001, and $385,000 of 6%
      debentures, which became due on July 2, 2002. Accrued interest on the
      subordinated notes was approximately $4,822,000, which represents interest
      from
      July 2000 through September 30, 2005, and accrued interest on the 6% debentures
      was $121,000 and is reflected in “ *Accrued
      expenses and other* ”
      in the
      accompanying Consolidated Balance Sheet. The Company is precluded by the holder
      of its senior debt from paying any principal or interest on the subordinated
      debt.





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





The
      Company applies the intrinsic value method as outlined in APB Opinion No. 25,
      “Accounting for Stock Issued to Employees,” and related interpretations in
      accounting for stock options. Under the intrinsic value method, no compensation
      expense is recognized if the exercise price of the Company’s employee stock
      options equals the market price of the underlying stock on the date of the
      grant. Accordingly, no compensation cost has been recognized. SFAS No. 123,
      “Accounting for Stock-based Compensation,” requires the Company to provide pro
      forma information regarding net income and net income 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 income and income per share of common stock as
      if
      the fair value method had been applied to all outstanding and unvested awards
      in
      each period presented.


Nine
                Months Ended
            
            Three
                Months EndedSeptember
                30
            
            September
                302005
            
            2004
            
            2005
            
            2004**(In
                thousands, except per share data)**Net
                income, as reported
            
            $
            2,197
            
            $
            2,206
            
            $
            107
            
            $
            1,058Deduct:
                Total stock-based employee compensation expense determined under
                fair
                value method for all awards
            
            
            (2
            )
            
            (1
            )
            
            0
            
            
            0Pro
                forma net income
            
            $
            2,195
            
            $
            2,205
            
            $
            107
            
            $
            1,058**Income
                per share of common stock:**Basic
                and diluted - as reported
            
            $
            0.22
            
            $
            0.22
            
            $
            0.01
            
            $
            0.11Basic
                and diluted - pro forma
            
            $
            0.22
            
            $
            0.22
            
            $
            0.01
            
            $
            0.11


In
      December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-Based
      Payment.” Statement 123(R) will provide investors and other users of financial
      statements with more complete financial information by requiring that the
      compensation cost relating to share-based payment transactions be recognized
      in
      financial statements.  That cost will be measured based on the fair
      value
      of the equity or liability instruments issued.  Statement 123(R) covers
      a
      wide range of share-based compensation arrangements including stock options,
      restricted stock plans, performance-based awards, stock appreciation rights,
      and
      employee stock purchase plans.  Statement 123(R) replaces FASB Statement
      No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion
      No.
      25, Accounting for Stock Issued to Employees.  Statement 123, as originally
      issued in 1995, established as preferable a fair-value-based method of
      accounting for share-based payment transactions with employees.  However,
      that statement permitted entities the option of continuing to apply the guidance
      in Opinion 25, as long as the footnotes to financial statements disclosed what
      net income would have been had the preferable fair-value-based method been
      used.  SFAS 123(R) will be effective for fiscal years beginning after
      June
      15, 2005, which for the Company is the first quarter of 2006. Currently we
      recognize the expense of options or similar instruments issued to employees
      using the intrinsic value based method.  Beginning with the first quarter
      of 2006, we will be required to recognize the expense of options or similar
      instruments issued to employees using the fair-value-based method of accounting
      for stock-based payments. SFAS 123(R) permits companies to adopt its
      requirements using either a “modified prospective” method, or a “modified
      retrospective” method. Under the “modified prospective” method, compensation
      cost is recognized in the financial statements beginning with the effective
      date, based on the requirements of SFAS 123(R) for all share-based payments
      granted after that date, and based on the requirements of SFAS 123 for all
      unvested awards granted prior to the effective date of SFAS 123(R). Under the
      “modified retrospective” method, the requirements are the same as under the
“modified prospective” method, but companies may restate financial statements of
      previous periods based on proforma disclosures made in accordance with SFAS
      123.
      The Company is evaluating these methods.




Page
          7 of
          18





**Note
      5: Segment Data**





The
      Company has three 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; Signal Processing (“Signal”) whose products
      are used in data communication devices that employ high frequency transformer
      technology, and Operating Support Systems (“OSS”) whose products automate the
      testing, provisioning, maintenance and administration of communication networks
      and the management of support personnel and equipment.





Because
      of continuing losses in the OSS division, combined with difficulties in
      marketing OSS products in view of our financial condition, we limit our OSS
      activities to the performance of maintenance and warranty services. For the
      nine
      months ended September 30, 2005, OSS sales were $557,000, which was
      approximately 2.4% of the Company’s revenue, and the OSS operations generated a
      loss of approximately $702,000. For the nine months ended September 30, 2004,
      OSS sales were $1,635,000, which was approximately 7.3% of the Company’s revenue
      and the OSS operations generated a loss of approximately $1,271,000. For the
      three months ended September 30, 2005, OSS sales were $146,000, which was
      approximately 2.0% of the Company’s revenue, and the OSS operations generated a
      loss of approximately $166,000. For the three months ended September 30, 2004,
      OSS sales were $289,000, which was approximately 3.7% of the Company’s revenue
      and the OSS operations generated a loss of approximately $372,000. The Company
      anticipates that the OSS revenue will represent an increasingly smaller portion
      of its revenue. Therefore, the Company is currently evaluating whether the
      OSS
      operations will be reported as a separate segment in the future.




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, 2004 in the basis of measurement
      of
      segment revenues and profit or loss, and no significant change in the Company’s
      assets.


Nine
                Months Ended
            
            Three
                Months EndedSeptember
                30, 2005
            
            September
                30, 2004
            
            September
                30, 2005
            
            September
                30, 2004**Sales:**Line
            
            $
            17,868,000
            
            $
            16,453,000
            
            $
            5,588,000
            
            $
            6,054,000Signal
            
            
            4,517,000
            
            
            4,121,000
            
            
            1,263,000
            
            
            1,529,000OSS
            
            
            557,000
            
            
            1,635,000
            
            
            146,000
            
            
            289,000$
            22,942,000
            
            $
            22,209,000
            
            $
            6,997,000
            
            $
            7,872,000**Segment
                profit (loss):**Line
            
            $
            4,054,000
            
            $
            4,314,000
            
            $
            944,000
            
            $
            1,559,000Signal
            
            
            1,875,000
            
            
            1,696,000
            
            
            488,000
            
            
            660,000OSS
            
            
            (702,000
            )
            
            (1,271,000
            )
            
            (166,000
            )
            
            (372,000
            )$
            5,227,000
            
            $
            4,739,000
            
            $
            1,266,000
            
            $
            1,847,000


The
      following table reconciles segment totals to consolidated totals:


Nine
                Months Ended
            
            Three
                Months EndedSeptember
                30, 2005
            
            September
                30, 2004
            
            September
                30, 2005
            
            September
                30, 2004**Sales:**Total
                revenue for reportable segments
            
            $
            22,942,000
            
            $
            22,209,000
            
            $
            6,997,000
            
            $
            7,872,000Other
                revenue
            
            
            119,000
            
            
            46,000
            
            
            24,000
            
            
            11,000Consolidated
                total revenue
            
            $
            23,061,000
            
            $
            22,255,000
            
            $
            7,021,000
            
            $
            7,883,000**Operating
                income (loss):**Total
                segment income for reportable segments
            
            $
            5,227,000
            
            $
            4,739,000
            
            $
            1,266,000
            
            $
            1,847,000Corporate
                and unallocated
            
            
            (1,970,000
            )
            
            (1,508,000
            )
            
            (767,000
            )
            
            (449,000
            )Consolidated
                total operating income
            
            $
            3,257,000
            
            $
            3,231,000
            
            $
            499,000
            
            $
            1,398,000







Page
          8 of
          18




**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
            
            Three
                Months EndedSeptember
                30,
            
            September
                30,2005
            
            2004
            
            2005
            
            2004Sales
            
            
            100
            %
            
            100
            %
            
            100
            %
            
            100
            %Cost
                of sales
            
            
            61
            %
            
            62
            %
            
            64
            %
            
            61
            %Gross
                profit
            
            
            39
            %
            
            38
            %
            
            36
            %
            
            39
            %Selling,
                general and administrative expenses
            
            
            19
            %
            
            18
            %
            
            24
            %
            
            16
            %Research
                and development expenses
            
            
            5
            %
            
            6
            %
            
            5
            %
            
            5
            %Operating
                income
            
            
            14
            %
            
            14
            %
            
            7
            %
            
            18
            %Interest
                expense - net
            
            
            (4
            %)
            
            (4
            %)
            
            (4
            %)
            
            (4
            %)Other
            
            
            0
            %
            
            0
            %
            
            1
            %
            
            (0
            %)Net
                income
            
            
            10
            %
            
            10
            %
            
            2
            %
            
            14
            %


The
      Company’s sales by product line for the periods ended September 30, 2005 and
      2004 are as follows:


Nine
                Months Ended September 30,$(000)2005
            
            2004Line
                connection/protection equipment
            
            $
            17,868
            
            
            77
            %
            $
            16,453
            
            
            74
            %Signal
                Processing
            
            
            4,517
            
            
            20
            %
            
            4,121
            
            
            19
            %OSS
                equipment and maintenance revenue
            
            
            557
            
            
            2
            %
            
            1,635
            
            
            7
            %Other
            
            
            119
            
            
            1
            %
            
            46
            
            
            0
            %$
            23,061
            
            
            100
            %
            $
            22,255
            
            
            100
            %





Three
                Months Ended September 30,$(000)2005
            
            2004Line
                connection/protection equipment
            
            $
            5,588
            
            
            80
            %
            $
            6,054
            
            
            77
            %Signal
                Processing
            
            
            1,263
            
            
            18
            %
            
            1,529
            
            
            19
            %OSS
                equipment and maintenance revenue
            
            
            146
            
            
            2
            %
            
            289
            
            
            4
            %Other
            
            
            24
            
            
            0
            %
            
            11
            
            
            0
            %$
            7,021
            
            
            100
            %
            $
            7,883
            
            
            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 Operating Support Systems (“OSS”), which
      are no longer a significant part of our business, automate the testing,
      provisioning, maintenance and administration of communication networks and
      the
      management of support personnel and equipment.




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          9 of
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Because
      of continuing losses in the OSS division, combined with difficulties in
      marketing OSS products in view of our financial condition, we limit our OSS
      activities to the performance of maintenance and warranty services. In addition,
      we are trying to sell our remaining OSS inventory although we did not generate
      any sales of OSS inventory in the nine months ended September 30, 2005 and
      sales
      of OSS inventory were minimal during 2004. We expect our OSS business to
      continue to decline in future years; we do not anticipate that we will enter
      into new maintenance contracts when our warranty obligations terminate or renew
      existing maintenance contracts when they expire. Therefore, the Company is
      currently evaluating whether it will report the OSS business as a separate
      segment in the future.





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 operated at a profit for the nine months ended
      September 30, 2005 and September 30, 2004. We market Signal equipment principally
      for use in defense and aerospace applications. The Signal division generated
      operating profit for the nine months ended September 30, 2005 and the comparable
      period of 2004. We recognize revenue from Line and Signal products when the
      product is shipped.





Our
      senior debt had matured on September 30, 2005. On October 12, 2005, effective
      October 1, 2005, we entered into an agreement with the holder of the senior
      debt
      to extend the maturity of our senior debt to December 15, 2005. The agreement
      provides for payments of $75,000 on October 12, 2005 to the holder of the senior
      debt on account of its expenses, including legal expenses, relating to the
      extension agreement and related matters, $112,500 on October 31, 2005, which
      has
      been made, and a payment of $112,500 on November 30, 2005. As part of the
      extension, the holder of the senior debt agreed to continue the suspension
      of
      the accrual of interest on approximately $23 million on the senior debt. As
      a
      condition to the extension, the Company agreed to take steps to effect a
      restructure of the senior debt in a manner which results in the payment of
      a
      significant portion of the senior debt and the issuance of secured debt and
      equity for the balance of the senior debt on specified terms. Any such
      restructure will require the Company to obtain financing from a new investor.
      Although the Company is seeking such an investor, the Company cannot give any
      assurance that it will be able to obtain an investor on terms that are
      acceptable to the holder of the senior debt. Pursuant to its agreement with
      the
      holder of the senior debt, the Company has also engaged an investment banker
      to
      assist it in exploring strategic alternatives. Although the holder of our senior
      debt has extended the maturity date from time to time as we approached or passed
      an expiration date, the holder may not extend the loan beyond December 15,
      2005.
      If the holder does grant an extension, it may be the final extension which
      the
      holder grants to us. Any extension may be contingent upon both our success
      in
      our negotiations with a potential investor to effect the restructuring of the
      senior debt and/or the status of our negotiations with respect to other
      strategic alternatives, and our making or agreeing to make significant payments
      on account of the senior debt, which may affect our ability to conduct our
      business. If payments required by the holder of the senior debt impair our
      ability to conduct our business, it is likely that we will seek protection
      under
      the Bankruptcy Code. If the holder of our senior debt does not extend the
      maturity date of our obligations and demands payment of all or a significant
      portion of our obligations due to the holder, we will not be able to continue
      in
      business, and it is likely that we will seek protection under the Bankruptcy
      Code. We cannot assure you that the holder of our senior debt will not demand
      payment of all or a significant portion of our obligations or that we will
      not
      seek protection under the Bankruptcy Code in anticipation of a decision by
      the
      holder to demand payment.  In the event we are able to secure an investor
      to restructure the senior debt, is very likely that the Company's present
      common stock holders would suffer a very significant dilution of their common
      stock holdings. We have incurred costs associated with restructuring of senior
      debt of approximately $450,000, which have been deferred and are included in *“Prepaid
      expenses and other current assets”.*




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          10 of
          18





Our
      ability to operate profitably in the future as well as our ability to attract
      an
      investor on terms satisfactory to the holder of our senior debt, is largely
      dependent upon our relationship with British Telecommunications, which, both
      directly and through one of its major suppliers, represented our largest
      customer, accounting for approximately 50% of our sales during the nine months
      ended September 30, 2005 and 51% of our sales during the three months ended
      September 30, 2005. Our drop in sales for the third quarter reflected a
      reduction in the price per unit of products sold to British Telecommunications.





**Results
      of Operations**





Our
      sales
      for the nine months ended September 30, 2005 compared to the nine months ended
      September 30, 2004 increased by $806,000 (4%) from $22,255,000 in 2004 to
      $23,061,000 in 2005. Sales for the quarter ended September 30, 2005 were
      $7,021,000, a decrease of $862,000 (11%) from the sales of $7,883,000 for the
      quarter ended September 30, 2004. The decreased sales in the third quarter
      of
      2005 versus 2004 was primarily the result of granted reduced selling prices
      of
      the products sold to British Telecommunications during the third quarter of
      2005.





Line
      equipment sales for the nine months ended September 30, 2005 compared to the
      nine months ended September 30, 2004 increased by $1,415,000 (9%) from
      $16,453,000 to $17,868,000. Sales for the three months ended September 30,
      2005
      decreased by $466,000 (8%) from $6,054,000 in 2004 to $5,588,000 in 2005. The
      increase in sales for the nine months primarily reflects increased sales volume
      to British Telecommunications during the first six months of 2005, and the
      decrease during the third quarter was the result of sales price reductions
      granted to British Telecommunications, as noted above.





Signal
      sales for the nine months ended September 30, 2005 were $4,517,000, compared
      to
      $4,121,000 in the same period of 2004, an increase of $396,000 (10%). Sales
      for
      the three months ended September 30, 2005 compared to 2004, decreased by
      $266,000 (17%) from $1,529,000 to $1,263,000. These increases resulted from
      our
      ability to ship orders from backlog on a more timely basis, the result of a
      better cash flow from operations than in the comparable period of 2004.The
      decrease in the sales for the third quarter of 2005 vs. the comparable quarter
      of 2004 was primarily from a sluggish rate of new orders during the quarter.




OSS
      sales
      for the nine months ended September 30, 2005 were $557,000, compared with
      $1,635,000 in the same period of 2004, a decrease of $1,078,000 (66%). OSS
      sales
      for the three months ended September 30, 2005 were $146,000 compared to $289,000
      in the same period of 2004, a decrease of $143,000 (49%). The decrease in sales
      for the nine and three months resulted from the reduction in the scope of our
      OSS operations and marketing efforts as stated above under
“Overview.”





Gross
      margin for the nine months ended September 30, 2005 was 39% compared to 38%
      for
      the nine months ended September 30, 2004. Gross margin for the quarter ended
      September 30, 2005 was 36% compared to 39% for the quarter ended September
      30,
      2004. This increase for the nine months is the result of better absorption
      of
      manufacturing overhead created by the increase in revenue from our Line business
      and reduced OSS costs, both of which enabled us to operate more efficiently
      than
      in the comparable periods of 2004. The decrease in gross margin in the third
      quarter ended September 30, 2005 versus the comparable quarter of 2004 was
      from
      granted reduced selling prices to British Telecommunications which were not
      offset by decreases in cost.




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          11 of
          18





Selling,
      general and administrative expenses increased by $545,000 (14%) from $3,876,000
      to $4,421,000 for the nine months ended September 30, 2005 compared to 2004.
      These increases for directly related to two accruals in the third quarter:
      (1) a
      rent accrual of $715,000 resulting from proposed settlement on our remaining
      facility lease obligation of our United Kingdom subsidiary, for which we are
      the
      guarantor, and (2) an accrual of $100,000 related to warranty expenses
      associated with the OSS division. These expenses were partially offset by
      reduced OSS sales expenses as our marketing activities for OSS were sharply
      reduced during 2004 and into the first half of 2005. The settlement of our
      United Kingdom lease facility relieved us of significant rent obligations during
      the remaining approximately 14 years of the lease. For the quarter ended
      September 30, 2005 selling, general and administrative expenses increased by
      $422,000 (34%) from 2004. The increase was directly related to $215,000 of
      the
      $715,000 rental accrual and the $100,000 of the OSS warranty expense accrual
      described above, and various other expenses.





Research
      and development expenses decreased by $196,000 and $36,000 for the nine and
      three months ended September 30, 2005, respectively, from the comparable periods
      in 2004. During the nine months of 2004, a significant portion of our research
      and development related to OSS, and the elimination of this activity resulted
      in
      an overall decrease, despite an increase in research and development for our
      Line business .





As
      a
      result of the above, for the nine months ended September 30, 2005, we had an
      operating income of $3,257,000 compared with $3,231,000 in the same period
      of
      2004. We had an operating income of $499,000 for the quarter ended September
      30,
      2005 as compared with $1,398,000 in the same period of 2004.





We
      continue to accrue interest at the rate of 12% on obligations to the holder
      of
      $2,225,000 of our senior debt, which represents interest on senior debt that
      we
      incurred subsequent to March 2002. In
      addition, there is outstanding an old term loan, in the principal amount of
      approximately $23,000,000, that accrues no interest commencing March 1, 2002,
      until such time as the holder of the debt, in its sole discretion, notifies
      us
      that interest, at a rate of 12%, or a default rate of 14%, shall be payable.
      As
      part of the October 2005 extension of the senior debt, the holder of the senior
      debt agreed to continue to not require us to pay interest on this amount through
      December 15, 2005.





Income
      tax expense for the nine months ended September 30, 2005 was $106,000 compared
      to $44,000 for the same period of 2004. The primary reason for the increase
      in
      2005 was due to a provision of $75,000 related to federal income taxes.
      For
      the quarter ended September 30, 2005 income tax expense increased by $65,000
      primarily from the provision for federal income taxes. The federal income tax
      accrual resulted from the application of the alternative minimum tax. Income
      taxes provided are lower than the federal statutory rate due to the availability
      of net operating loss carryforwards, net of the application of the alternative
      minimum tax provisions.





As
      a
      result of the foregoing, we generated net income of $2,197,000, $.22 per share
      (basic and diluted), for the nine months ended September 30, 2005, compared
      with
      $2,206,000, $0.22 per share (basic and diluted), in 2004. The net income for
      the
      three months ended September 30, 2005 was $107,000, $.01 per share (basic and
      diluted), compared with $1,058,000, $0.11 per share (basic and diluted) in
      2004.




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          12 of
          18





**Liquidity
      and Capital Resources**





At
      September 30, 2005, we had cash and cash equivalents of $2,066,000 compared
      with
      $2,040,000 at December 31, 2004. Our working capital deficit at September 30,
      2005 was $32,259,000 compared to a working capital deficit of $34,150,000 at
      December 31, 2004, a reduction of $1,891,000 in our working capital deficit.
      This decrease in the working capital deficiency reflects our improved operating
      results for the nine months ended September 30, 2005. Cash of $1,085,000 was
      provided by our operations during the nine months of 2005. During the nine
      months of 2005, we commenced making payments to the holder of our senior debt,
      with payment of $150,000 in the first quarter, $225,000 in the second quarter
      and $300,000 in the third quarter of 2005, all of which was applied to accrued
      interest. In addition, we reimbursed the senior debt holder $219,000 for
      expenses incurred in respect of the senior debt.





As
      of
      September 30, 2005, our debt includes $25,260,000 of senior debt, which, as
      a
      result of the October 2005 extension, matures on December 15, 2005, $6,144,000
      of subordinated debt that became due on July 3, 2001, and $385,000 of 6%
      debentures that became due on July 2, 2002. We were unable to pay the interest
      payment on the subordinated notes of approximately $4,822,000 that represents
      interest from July 2000 through September 2005, or the interest on the
      subordinated debentures of approximately $121,000. We have been notified by
      the
      trustee of 6% debentures that the non-payment of the principal and interest
      caused an event of default. At September 30, 2005, we did not have sufficient
      resources to pay either the senior lender or the subordinated lenders; it is
      unlikely that we can generate such cash from our operations, and our senior
      lender has precluded us from making any payments on the subordinated
      debt.





We have
      sought to
      address our need for liquidity by exploring alternatives, including the possible
      sale of one or more of our divisions. During 2004, 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. We
      continue our efforts to reduce costs while we seek additional business from
      new
      and existing customers. Further, the dependence of our copper business on
      several significant customers, principally British Telecommunications, is a
      major factor which may impair our ability to sell the copper division or our
      business as a whole, or may affect the terms on which we would be able to sell
      the business.





As
      noted
      above, as part of the extension agreement with the holder of the senior debt,
      we
      are required to seek an investor to enable us to restructure the senior debt
      in
      a manner which provides a significant payment on account of the senior debt
      and
      the issuance to the holder of the senior debt of senior secured debt and equity
      in respect of the unpaid portion of the senior debt. We may not be able to
      negotiate an agreement with any investor to provide us with funds to enable
      us
      to restructure the senior debt on terms that are acceptable to the holder of
      the
      senior debt. If we are not able to restructure the senior debt or sell our
      business in a manner and on terms that are acceptable to the holder of the
      senior debt or if we have not made satisfactory progress on either a restructure
      or a sale, the holder of the senior debt may decline to give a further extension
      or may seek to foreclose on its debt. In such event, it is likely that we would
      seek protection under the Bankruptcy Code. In the event we are able to secure
      an
      investor to restructure the senior debt, it is very likely that the Company’s
      present common stockholders would suffer very significant dilution of
      their
      common stock holdings.




Page
          13 of
          18





**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 the Company’s 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, 2004 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.





**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**





**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.





**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
              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
      and the status of our senior debt.





**Item
              6.**
            **Exhibits**





Exhibits


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


31.2
                  Certificate
                      of 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
                  toSection
                  906 of the Sarbanes-Oxley Act of
                  2002







Page
          14 of
          18




**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 14, 2005
            By:
            /s/ William
              V. CarneyWilliam
                V. Carney
              Chairman of the Board and Chief Executive
                Officer




Dated: 
                November 14, 2005
              By:
              /s/ Edward
                B. KornfeldEdward
                  B. Kornfeld
                President, Chief Operating Officer and Chief
                  Financial
                  Officer
 
 
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