**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 June 30, 2008





[
      ]
      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 0-8460





**** **PORTA
      SYSTEMS CORP.**


(Exact
      name of registrant as specified in its charter)




Delaware
              11-220398(State
                  or other jurisdiction of
                incorporation
                  or organization)
              (I.R.S.
                  Employer
                Identification
                  No.)




6851
      Jericho Turnpike, Suite 170, Syosset, New York 11791


(Address
      of principal executive offices)




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
        ______
 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  [ ] Accelerated filer  [ ] Non-accelerated
      filer  [ ] Small reporting company [x]





Indicate
      by a check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act). Yes __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 per share) 9,954,096 shares as of August 11,
      2008.









**PART
      I.- FINANCIAL INFORMATION**


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


PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Consolidated
      Balance Sheets


(In
      thousands, except shares and par value)




UnauditedJune
                  30,
              
              December
                  31,Assets
              
              
              
              2008
              
              2007Current
                  assetsCash
                  and cash equivalents
              
              
              
              
              $
              371
              
              $
              494Accounts
                  receivable - trade, less allowance for doubtful accountsof
                  $20 in 2008 and $50 in 2007
              
              
              
              
              
              6,087
              
              
              5,098Inventories
              
              
              
              
              
              6,387
              
              
              6,411Prepaid
                  expenses and other current assets
              
              
              
              
              
              627
              
              
              203Total
                  current assets
              
              
              
              
              
              13,472
              
              
              12,206Property,
                  plant and equipment, net
              
              
              
              
              
              1,582
              
              
              1,678Goodwill,
                  net
              
              
              
              
              
              2,961
              
              
              2,961Other
                  assets
              
              
              
              
              
              56
              
              
              54Total
                  assets
              
              
              
              
              $
              18,071
              
              $
              16,899Liabilities
                  and Stockholders’ DeficitCurrent
                  liabilities:Senior
                  debt, principal amount
              
              
              
              
              $
              24,973
              
              $
              24,373Subordinated
                  notes, principal amount
              
              
              
              
              
              6,144
              
              
              6,1446%
                  convertible subordinated debentures, principal amount
              
              
              
              
              
              385
              
              
              385Accounts
                  payable
              
              
              
              
              
              5,702
              
              
              5,523Accrued
                  expenses and other
              
              
              
              
              
              2,763
              
              
              2,555Accrued
                  interest payable
              
              
              
              
              
              9,023
              
              
              7,739Total
                  current liabilities
              
              
              
              
              
              48,990
              
              
              46,719Deferred
                  compensation and other long term liabilities
              
              
              
              
              
              676
              
              
              707Total
                  liabilities
              
              
              
              
              
              49,666
              
              
              47,426Stockholders’
                  deficit:Preferred
                  stock, no par value; authorized 1,000,000 shares, none
                  issued
              
              -
              
              
              -Common
                  stock, par value $.01; authorized 20,000,000 shares,
                  issued907,701
                  shares in 2008 and 2007
              
              
              
              
              
              9
              
              
              9Additional
                  paid-in capital
              
              
              
              
              
              76,217
              
              
              76,217Accumulated
                  deficit
              
              
              
              
              
              (101,403
              )
              
              (100,457
              )Accumulated
                  other comprehensive loss:Foreign
                  currency translation adjustment
              
              
              
              
              
              (4,480
              )
              
              (4,358
              )(29,657
              )
              
              (28,589
              )Treasury
                  stock, at cost, 2,785 shares
              
              
              
              
              
              (1,938
              )
              
              (
                  1,938
              )Total
                  stockholders’ deficit
              
              
              
              
              
              (31,595
              )
              
              (30,527
              )Total
                  liabilities and stockholders’ deficit
              
              
              
              
              $
              18,071
              
              $
              16,899
   See
        accompanying notes to unaudited consolidated financial
        statements
  Page
          1 of
          20







PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Unaudited
      Consolidated Statements of Operations and Comprehensive Income


(In
      thousands, except per share amounts)




Six
                  months endedJune
                  30**,**
                2008
              
              
              June
                  30,
                2007Sales
              
              $
              13,222
              
              $
              15,271Cost
                  of sales
              
              
              9,539
              
              
              10,576Gross
                  profit
              
              
              3,683
              
              
              4,695Selling,
                  general and administrative expenses
              
              
              2,626
              
              
              2,993Research
                  and development expenses
              
              
              794
              
              
              778Total
                  expenses
              
              
              3,420
              
              
              3,771Operating
                  income
              
              
              263
              
              
              924Interest
                  expense, net
              
              
              (1,180
              )
              
              (990
              )Other
                  income, net
              
              
              7
              
              
              -Loss
                  from continuing operations before income taxes
              
              
              (
                  910
              )
              
              (66
              )Income
                  tax expense
              
              
              (36
              )
              
              (39
              )Loss
                  from continuing operations before discontinued operations
              
              
              (946
              )
              
              (105
              )Discontinued
                  operations:Loss
                  from discontinued operations (net of taxes of zero)
              
              
              -
              
              
              (87
              )Write
                  off of net assets of discontinued operations
              
              
              -
              
              
              (434
              )Total
                  loss from discontinued operations
              
              
              -
              
              
              (521
              )Net
                  loss
              
              $
              (946
              )
              $
              (626
              )Other
                  comprehensive loss:Foreign
                  currency translation adjustments
              
              
              (122
              )
              
              (61
              )Comprehensive
                  loss
              
              $
              (1,068
              )
              $
              (687
              )Basic
                  loss per share of common stock:Continuing
                  operations
              
              $
              (1.05
              )
              $
              (0.12
              )Discontinued
                  operations
              
              
              -
              
              
              (0.57
              )$
              (1.05
              )
              $
              (0.69
              )Weighted
                  average shares outstanding
              
              
              905
              
              
              905Diluted
                  loss per share of common stock:Continuing
                  operations
              
              $
              (1.05
              )
              $
              (0.12
              )Discontinued
                  operations
              
              
              -
              
              
              (0.57
              )$
              (1.05
              )
              $
              (0.69
              )Weighted
                  average shares outstanding
              
              
              905
              
              
              905







See
      accompanying notes to unaudited consolidated financial statements.




Page
      2 of
      20







PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Unaudited
      Consolidated Statements of Operations and Comprehensive Income


(In
      thousands, except per share amounts)


Three
                    Months EndedJune
                      30**,**2008
                
                
                June
                    30,
                  2007Sales
                
                $
                6,677
                
                $
                7,069Cost
                    of sales
                
                
                4,831
                
                
                4,994Gross
                    profit
                
                
                1,846
                
                
                2,075Selling,
                    general and administrative expenses
                
                
                1,284
                
                
                1,412Research
                    and development expenses
                
                
                370
                
                
                405Total
                    expenses
                
                
                1,654
                
                
                1,817Operating
                    income
                
                
                192
                
                
                258Interest
                    expense, net
                
                
                (589
                )
                
                (550
                )Other
                    income, net
                
                
                1
                
                
                --Loss
                    from continuing operations before income taxes
                
                
                (396
                )
                
                (292
                )Income
                    tax expense
                
                
                (12
                )
                
                (12
                )Loss
                    from continuing operations before discontinued operations
                
                
                (408
                )
                
                (304
                )Discontinued
                    operations:Loss
                    from discontinued operations (net of taxes of zero)
                
                
                -
                
                
                (53
                )Write
                    off of net assets of discontinued operations
                
                
                -
                
                
                (434
                )Total
                    loss from discontinued operations
                
                
                -
                
                
                (487
                )Net
                    loss
                
                $
                (408
                )
                $
                (791
                )Other
                    comprehensive loss:Foreign
                    currency translation adjustments
                
                
                (38
                )
                
                (134
                )Comprehensive
                    loss
                
                $
                (446
                )
                $
                (925
                )Basic
                    loss per share of common stock:Continuing
                    operations
                
                $
                (0.45
                )
                $
                (0.33
                )Discontinued
                    operations
                
                
                -
                
                
                (0.54
                )$
                (0.45
                )
                $
                (0.87
                )Weighted
                    average shares outstanding
                
                
                905
                
                
                905Diluted
                    loss per share of common stockContinuing
                    operations
                
                $
                (0.45
                )
                $
                (0.33
                )Discontinued
                    operations
                
                
                --
                
                
                (0.54
                )$
                (0.45
                )
                $
                (0.87
                )Weighted
                    average shares outstanding
                
                
                905
                
                
                905


See
        accompanying notes to unaudited consolidated financial statements.
  Page
          3 of
          20







PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Unaudited
      Consolidated Statements of Cash Flows


(In
      thousands)




Six
                  months endedJune
                  30,
                2008
              
              
              June
                  30,
                2007Cash
                  flows from operating activities of continuing operations:Net
                  loss
              $
              (946
              )
              $
              (626
              )Loss
                  from discontinued operations
              
              -
              
              
              521Adjustments
                  to reconcile net loss to net cashused
                  in operating activities of continuing operations:Depreciation
                  and amortization
              
              186
              
              
              249Inventory
                  reserve
              
              (376
              )
              
              (345
              )Allowance
                  for bad debt
              
              (30
              )
              
              10Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              (884
              )
              
              (661
              )Inventories
              
              401
              
              
              (614
              )Prepaid
                  expenses and other current assets
              
              (393
              )
              
              87Other
                  assets
              
              (6
              )
              
              (3
              )Accounts
                  payable, accrued expenses and other liabilities
              
              1,543
              
              
              696Net
                  cash used in continuing operations
              
              (505
              )
              
              (686
              )Cash
                  flows from investing activities:Capital
                  expenditures, net
              
              (76
              )
              
              (236
              )Net
                  cash used in investing activities
              
              (76
              )
              
              (236
              )Cash
                  flows from financing activities:Borrowings
                  (repayments) of senior debt
              
              600
              
              
              (139
              )Net
                  cash used in financing activities
              
              600
              
              
              (139
              )Effect
                  of exchange rate changes on cash
              
              (142
              )
              
              (372
              )Decrease
                  in cash and cash equivalents
              
              (123
              )
              
              (1,433
              )Cash
                  and cash equivalents - beginning of the year
              
              494
              
              
              2,102Cash
                  and cash equivalents - end of the period
              $
              371
              
              $
              669Supplemental
                  cash flow disclosure:Cash
                  paid for interest expense
              $
              5
              
              $
              181Cash
                  paid for income taxes
              $
              4
              
              
              -




See
        accompanying notes to unaudited consolidated financial statements.
  Page 
4
of
          20







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, 2007.
      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, 2007 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 second quarter or the first six months of 2008
      are
      not necessarily indicative of results for the year. Certain reclassifications
      have been made to the prior consolidated financial statements to conform to
      the
      current year presentation.





On
      July
      31, 2008, the Company amended its certificate of incorporation to effect a
      one-for-11.11 reverse split pursuant to which each share of common stock was
      converted into 0.0900090009 shares of common stock. The financial statements
      give retroactive effect to the reverse split.





**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 $1,575,000 for 2008 and $1,952,000 for
      2007):




June
                  30, 2008
              
              
              December
                  31, 2007(In
                  thousands)Parts
                  and components
              
              $
              4,424,000
              
              $
              3,669,000Work-in-process
              
              
              716,000
              
              
              858,000Finished
                  goods
              
              
              1,247,000
              
              
              1,884,000$
              6,
                  387,000
              
              $
              6,411,000
 **Note
        3:    Senior and Subordinated Debt (See Note 9- Subsequent
        Event)**





On
      June
      30, 2008 and December 31, 2007, the Company’s senior debt consisted of principal
      in the amount of $24,973,000 and $24,373,000, respectively. Substantially all
      of
      the Company’s assets are pledged as collateral for the senior debt. The current
      agreement with the holder of the senior debt was to expire on September 1,
      2008
      and, accordingly, the senior debt has been classified as a current liability.
      In
      June 2008, the Company borrowed $600,000 from its senior debt holder to meet
      its
      current working capital needs. Our Senior debt holder terminated a prior note
      issued in October 2007 for $1,000,000 related to a working capital loan, and
      reissued a note (New Note) for the combined amount of $1,600,000. This note
      expires on December 31, 2008. The $1,600,000 is included in Senior Debt on
      the
      balance sheet. The Company does not accrue interest on the entire amount of
      the
      senior debt under the terms of its agreement with the senior debt holder.
      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. In addition, we accrue interest on the $1,600,000 note
      at a
      rate of LIBOR plus 10%, which was 13.11% at June 30, 2008. The holder of the
      senior debt prohibited the Company from making any payments on indebtedness
      to
      any subordinated creditors or from paying any dividends on common stock, but
      the
      Company is not prohibited from paying accounts payable in the ordinary course
      of
      business. The holder of the senior debt has no obligation to make any further
      loans to the Company.




Page
        5 of
        20







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 debt.
      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 would seek protection under the Bankruptcy Code.





Subordinated
      Notes: (See Note 9- Subsequent Event)





As
      of
      June 30, 2008 and December 31, 2007, subordinated notes in the principal amount
      of $6,144,000 were outstanding. The interest rate on the subordinated notes
      increased to 15% as a result of our failure to pay the subordinated notes when
      due on July 3, 2001. As of June 30, 2008 and December 31, 2007, accrued interest
      of $7,362,000 and $6,900,000, respectively, was also due and payable and is
      included in other accrued interest payable. However, the Company does not have
      the resources to pay either the $6,144,000 principal or the $7,362,000 interest
      due on the subordinated notes. In addition, the holder of its senior debt has
      precluded the Company from making payments on the subordinated
      debt.





Convertible
      Subordinated Debentures: (See Note 9- Subsequent Event)





As
      of
      June 30, 2008 and December 31, 2007, the Company had outstanding $385,000
      principal amount of its convertible subordinated debentures due July 1, 2002
      (the “Debentures”). The interest rate on these debentures increased from the
      stated interest rate of 6% 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. At June 30, 2008 and December 31, 2007, accrued interest,
      including additional assessments due to the default, on the debentures was
      $309,000 and $291,000, respectively, and is included in other accrued interest
      payable. The trustee of the Debentures gave notice to the Company that the
      non-payment caused an event of default. The convertibility feature associated
      with the Debentures expired upon their stated maturity date, which was July
      1,
      2002. The holder of the senior debt has precluded the Company from making
      payments on the debentures.





Agreement
      to Restructure Senior Debt: (See Note 9- Subsequent Event)





On
      May 8,
      2008, the Company entered into an agreement with the holder of its senior debt
      which contemplates a restructure of our senior and subordinated debt and our
      obligations to certain other creditors. This agreement was amended and restated
      on June 20, 2008. Pursuant to this agreement:





·
            Our
                board of directors approved a one-for-11.11 reverse split of our
                common
                stock, subject to stockholder approval. Stockholder approval was
                obtained
                on July 31, 2008.





·
            With
                respect to the notes in the principal amount of $23,373,000, the
                senior
                debt holder agreed to exchange these notes in excess of $10,000,000
                for
                70% of the Company’s common stock. Any unpaid interest on the $10,000,000
                principal amount accrued through June 30, 2008, which is estimated
                at
                $1,250,000, is to be added to principal. The principal of the note
                is to
                be paid in installments through December 31, 2014, with the balance
                being
                due on March 15, 2015.·
            The
                maturity date of the $1,600,000 note will be extended from September
                1,
                2008 to December 31, 2008 on the same terms.





·
            The
                debt restructuring is subject to stockholder approval of the reverse
                split
                and the debt restructuring and the approval by the holders of the
                Company’s subordinated notes in the principal amount of $6,144,000, to
                exchange the principal and interest on the notes for notes in the
                principal amount of $1,750,000 and 14% of our outstanding common
                stock,
                after giving effect to the reverse split. These notes bear interest
                at 10%
                per annum, are amortized based on a 25-year amortization schedule,
                and
                mature 71⁄2 years after issuance. The Company has obtained the agreement of
                all of the holders of the subordinated notes to the terms of the
                debt restructuring.




Page 
6
of
        20







·
            The
                debt restructuring is also subject to agreements of other creditors
                accepting reduced amounts for money due to them. These creditors
                have
                agreed to the reductions.




·
            The
                agreement also provides that the Company will offer the holders of
                our
                debentures in the principal amount of $385,000 the right to exchange
                the
                principal and interest on their debentures for their proportionate
                share
                of notes in the aggregate principal amount of $100,000 plus 1% of
                the
                Company’s common stock after giving effect to the reverse split. These
                notes will have a maturity date which is 71⁄2 years from the date of
                issuance and the principal will be amortized based on a 25-year
                amortization schedule. The agreement permits us to make payments
                on the
                new notes being issued, but not on the outstanding
                debentures.





·
            The
                Company is to issue to its key employees 6% of its common stock,
                after
                giving effect to the reverse split.




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





For
      the
      six months ended June 30, 2008, 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. As part of the restructuring (see Note
      9- Subsequent Events) the board of directors approved the determination that
      the
      number of shares subject to outstanding options and the exercise prices, which
      range from $2.03 per share to $0.31 per share, would not be affected by the
      reverse split. 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 a diminimus non-cash compensation expense attributable
      to stock options granted during the quarter which is not reflected in the
      consolidated statements of operations. Stock compensation expense for all vested
      options to date is immaterial.





**Note
      5: Segment Data**





The
      Company develops, designs, manufactures and markets a range of standard and
      proprietary telecommunications equipment, as well as components used in military
      data transmission applications. The Company sells both domestically and
      internationally. Its core products, focused on ensuring communications for
      service providers worldwide, fall principally into two categories:





**Voice
      and Data Connection and Protection Equipment** **.** These
      products are used to connect copper wire lines, Automated Digital Subscriber
      Lines, wireless networks, fiber connection/protection lines, and security
      networks; and to protect equipment from voltage surges. The Company markets
      its
      connection and protection products to telephone operating companies, customer
      premise providers and installers and security providers and installers
      throughout the world.




Page
        7 of
        20








**Signal
      Processing Equipment** **.** **** Signal
      Processing products are sold principally for use in defense and aerospace
      applications, and support copper wire-based communications systems. Customers
      for signal processing equipment are major aircraft, naval ship and ground-based
      vehicle manufacturers, as well as their third party sub-tier
      partners.





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. The Company’s operations in this segment were discontinued as of
      June 30, 2007. The
      operation of this segment for the quarter ended June 30, 2007 is reflected
      as a
      loss from discontinued operations.





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, 2007, 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.




Six
                    Months ended
                
                
                Three
                    Months EndedJune
                    30,
                  2008
                
                
                June
                    30, 

                    2007
                
                
                June
                    30,
                  2008
                
                
                June
                    30,
                  2007**Sales:**Line
                
                $
                10,847,000
                
                $
                12,634,000
                
                $
                5,455,000
                
                $
                5,820,000Signal
                
                
                2,375,000
                
                
                2,637,000
                
                
                1,222,000
                
                
                1,249,000Total
                    of ContinuingOperations
                
                $
                13,222,000
                
                $
                15,271,000
                
                $
                6,677,000
                
                $
                7,069,000**Segment
                    profit:**Line
                
                $
                897,000
                
                $
                1,746,000
                
                $
                450,000
                
                $
                684,000Signal
                
                
                503,000
                
                
                698,000
                
                
                262,000
                
                
                279,000Total
                    of ContinuingOperations
                
                $
                1,400,000
                
                $
                2,444,000
                
                $
                712,000
                
                $
                963,000


The
      following table reconciles segment totals to consolidated totals:




Six
                    months ended
                
                Six
                    months endedJune
                    30,
                  2008
                
                June
                    30,
                  2007
                
                June
                    30,
                  2008
                
                June
                    30,
                  2007**Operating
                    income:**Total
                    segment incomefor
                    reportable segments
                
                $
                1,400,000
                
                $
                2,444,000
                
                $
                712,000
                
                $
                963,000Corporate
                    and unallocated
                
                
                (1,137,000
                )
                
                (1,520,000
                )
                
                (520,000
                )
                
                (705,000
                )Consolidated
                    totaloperating
                    income
                
                $
                263,000
                
                $
                924,000
                
                $
                192,000
                
                $
                258,000
  Page
          8 of
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**Note
      6:** **New
      Accounting Standards**




The
      terms
“FAS” and “FASB” used in these notes refer to Statements of Financial Accounting
      Standards issued by the United States Financial Accounting Standards
      Board.




In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements, an amendment of Accounting Research Bulletin
      No 51” (SFAS No. 160). SFAS No. 160 establishes accounting and reporting
      standards for ownership interests in subsidiaries held by parties other than
      the
      parent, changes in a parent’s ownership of a noncontrolling interest,
      calculation and disclosure of the consolidated net income attributable to the
      parent and the noncontrolling interest, changes in a parent’s ownership interest
      while the parent retains its controlling financial interest and fair value
      measurement of any retained noncontrolling equity investment. SFAS No. 160
      is effective for financial statements issued for fiscal years beginning after
      December 15, 2008, and interim periods within those fiscal years. Early adoption
      is prohibited. The Company must adopt these new requirements in its first
      quarter of fiscal 2009. Management does not expect SFAS No. 160 to have a
      material impact on the Company’s consolidated financial statements.





In
      December 2007, the FASB approved the issuance of SFAS No. 141 (revised 2007)
      “Business Combinations” (SFAS No. 141R). SFAS No. 141R establishes principles
      and requirements for how the acquirer in a business combination recognizes
      and
      measures in its financial statements the identifiable assets acquired, the
      liabilities assumed, and any controlling interest; recognizes and measures
      the
      goodwill acquired in the business combination or a gain from a bargain purchase;
      and determines what information to disclose to enable users of the financial
      statements to evaluate the nature and financial effects of the business
      combination. The provisions for SFAS No. 141R are effective for fiscal years
      beginning after December 15, 2008 and are applied prospectively to business
      combinations completed on or after that date. Early adoption is not permitted.
      SFAS No. 141R is effective for the Company beginning in the first quarter of
      fiscal 2009. Management does not expect SFAS No. 141R to have a material impact
      on the Company’s consolidated financial statements.





In
      June
      2007, the Emerging Issues Task Force (EITF) reached a consensus on Issue No.
      06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment
      Awards” (EITF No. 06-11). EITF No. 06-11 provides guidance regarding how an
      entity should recognize the tax benefit received as a result of dividends paid
      to holders of share-based compensation awards and charged to retained earnings
      according to SFAS No. 123(R), and will become effective in the first quarter
      of
      2009. Management does not expect EITF No. 06-11 to have a material impact on
      the
      Company’s consolidated financial statements.





In
      March
      2008, the FASB issued SFAS No. 161,
      “Disclosures about Derivative Instruments and Hedging Activities— An Amendment
      of FASB Statement No. 133” (SFAS No. 161). SFAS 161 requires enhanced
      qualitative disclosures about objectives and strategies for using derivatives,
      quantitative disclosures about fair value amounts of and gains and losses on
      derivative instruments, and disclosures about credit-risk-related contingent
      features in derivative agreements. SFAS 161 is effective for financial
      statements issued for fiscal years and interim periods beginning after November
      15, 2008. Management does not expect SFAS No. 161 to have a material impact
      on
      the Company’s consolidated financial statements.





**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.




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





**Six
                  months ended June 30,**
                **2007**Revenues
              
              $
              100,000Loss
                  from discontinued operations
              
              
              (87,000
              )Write
                  off of net assets of discontinued operations
              
              
              (434,000
              )Loss
                  from discontinued operations
              
              $
              (521,000
              )





**Three
                    Months Ended June 30,**
                  **2007**Revenues
              
              $
              28,000Loss
                  from discontinued operations
              
              
              (53,000
              )Write
                  off of net assets of discontinued operations
              
              
              (434,000
              )Loss
                  from discontinued operations
              
              $
              (487,000
              )




**Note
      8:** **Significant
      Customers**





British
      Telecommunications PLC and its systems integrators represent the Company’s
      largest customers and accounted for approximately $2,843,000, or 43% of sales,
      in the three months ended June 30, 2008, and $5,769,000, or 44% of sales, in
      the
      six months ended June 30, 2008 and approximately $3,064,000, or 43% and
      7,519,000, or 49% of sales, in comparable three and six months of 2007.




**Note
      9:** **Subsequent
      events**





On
      July
      31, 2008, the shareholders approved a one-for-11.11 reverse split of the
      company’s common stock whereby each share of common stock became 0.0900090009
      share of common stock. Neither the par value nor the number of authorized shares
      was changed as a result of the reverse split.





On
      August
      1, 2008, the Company implemented a trouble debt restructure plan (as defined
      under Statement of Financial Accounting Standard No. 15-Accounting by Debtors
      and Creditors for Troubled Debt Restructuring). Under this standard, the gain
      shall be measured by the excess of (i) the carrying amount of the payable
      settled (the face amount increased by applicable accrued interest and issue
      costs) over (ii) the fair value of the assets transferred to the creditor.
      Pursuant to the restructuring plan:




·
            The
                holder of our senior debt converted notes in the principal amount
                of
                $23,373,000 into a note for $11,601,156 plus 7,038,236 shares of
                common
                stock, representing 70% of the common stock outstanding after giving
                effect to the reverse split and all of the issuances contemplated
                by the
                restructuring plan (the “Total Issuances”). The principal amount of the
                note represents the $10,000,000 principal amount of the note as
                contemplated by the June 20, 2008 agreement, plus interest in the
                amount
                of $1,601,156. The note will bear interest at 12.5% per annum and
                will be
                amortized on a payment schedule over its 63⁄4-year
                term.




·
            The
                note in the principal amount of $1,600,000 was extended to December
                31,
                2008.




·
            The
                holders of all of the Company’s subordinated notes converted the entire
                principal of and interest on the notes, which amounted to approximately
                $13,506,000, into notes in the principal amount of $1,750,000 and
                1,407,667 shares of common stock, representing 14% of the common
                stock
                outstanding after giving effect to the reverse split and the Total
                Issuances. The $1,750,000 notes will be repaid based upon a 25-year
                amortization schedule and will mature January 31, 2016. Such debt
                will
                bear interest at 10% annually payable quarterly in
                arrears.




Page 
10
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        20







·
            The
                holders of the Company’s convertible debentures of $385,000 plus accrued
                interest, will be offered the right to convert their debentures into
                a
                subordinated note in the principal amount equal to their proportionate
                share (based on the principal amount of debentures) of $100,000 and
                their
                proportionate shares of 100,546 shares of common stock, representing
                1% of
                the common stock outstanding after giving effect to the reverse split
                and
                the Total Issuances. These notes will have a 25-year amortization
                schedule
                and a 71⁄2-year maturity date. The $100,000 notes will bear interest at 10%
                annually payable quarterly in
                arrears.




**·**
            Certain
                other creditors have agreed to accept substantial discounts on their
                outstanding claims.




**·**
            The
                Company issued 603,277 shares of common stock, representing 6% of
                the
                common stock outstanding after giving effect to the reverse split
                and the
                Total Issuances, to key employees.




The
      restructuring will eliminate principal and interest on approximately $24,859,000
      of debt. The gain on the debt restructure that will be recorded in the third
      quarter is estimated at $17,000,000 net of related costs.




In
      addition, for services relating to the debt restructure, the Company agreed
      to
      pay Advicorp, PLC, which is partially owned by one of the members of our board
      of directors, a fee of $200,000, payable in 25 equal monthly installments
      commencing January 2009 and to grant Advicorp a warrant to purchase 201,072
      shares of common stock at an exercise price equal to the average closing price
      of the common stock on the five trading days commencing August 31, 2008.




As
      a
      result of the transfer of more than fifty (50%) percent of the Company’s common
      stock to new stockholders, the Company’s ability to use its remaining net
      operation loss carryfowards will be severely curtailed.




Page
      11 of
      20





**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:




Six
                  months ended June
                  30,
              
              Three
                  Months Ended June
                  30,2008
              
              2007
              
              2008
              
              2007Sales
              
              
              100
              %
              
              100
              %
              
              100
              %
              
              100
              %Cost
                  of sales
              
              
              72
              %
              
              69
              %
              
              72
              %
              
              70
              %Gross
                  profit
              
              
              28
              %
              
              31
              %
              
              28
              %
              
              30
              %Selling,
                  general and administrative expenses
              
              
              20
              %
              
              20
              %
              
              19
              %
              
              20
              %Research
                  and development expenses
              
              
              6
              %
              
              5
              %
              
              6
              %
              
              6
              %Operating
                  income
              
              
              2
              %
              
              6
              %
              
              3
              %
              
              4
              %Interest
                  expense - net
              
              
              (9
              %)
              
              (7
              %)
              
              (9
              %)
              
              (8
              %)Loss
                  from continuing operations
              
              
              (7
              %)
              
              (1
              %)
              
              (6
              %)
              
              (4
              %)Loss
                  from discontinued operations
              
              
              -
              %
              
              3
              %
              
              -
              %
              
              7
              %Net
                  loss income
              
              
              (7
              %)
              
              (4
              %)
              
              (6
              %)
              
              (11
              %)




The
      Company’s sales, from continuing operations, by product line for the periods
      ended June 30, 2008 and 2007 are as follows:




Six
                  months ended June 30,2008
              
              
              
              
              
              2007Line
              
              $
              10,847,000
              
              
              82
              %
              $
              12,634,000
              
              
              83
              %Signal
              
              
              2,375,000
              
              
              18
              %
              
              2,637,000
              
              
              17
              %$
              13,222,000
              
              
              100
              %
              $
              15,271,000
              
              
              100
              %




Three
                  Months Ended June 30,2008
              
              
              
              
              
              2007Line
              
              $
              5,455,000
              
              
              82
              %
              $
              5,820,000
              
              
              82
              %Signal
              
              
              1,222,000
              
              
              18
              %
              
              1,249,000
              
              
              18
              %$
              6,677,000
              
              
              100
              %
              $
              7,069,000
              
              
              100
              %


**Overview**





Our
      connection and protection equipment includes a variety of connector blocks,
      protector modules, building entrance terminals, category 5E and 6 cable
      connectors and protectors, frames used in telephone central switching offices,
      voice and data installations, multiple dwelling units and customer premises
      applications. The connector products are used by telephone companies and
      installers of voice and data transmission equipment to interconnect copper
      and
      fiber subscriber lines. The protector modules are used to protect from
      electrical surges the equipment and personnel of telephone companies, voice
      and
      data transmission providers and customer premises equipment providers. The
      need
      for protection products has increased as a result of the worldwide move to
      digital technology, wireless and broadband, which is extremely sensitive to
      damage by electrical overloads. Moreover, private  owners
      of
      telecommunications equipment now have the responsibility to protect their
      equipment, personnel and buildings from damage caused by electrical surges.




Page
        12 of
        20







We
      also
      have developed a range of security products for use in Closed Circuit TV (CCTV)
      installations. Our CCTV video balun products allow full motion color or
      monochrome video transmission via cost-effective UTP CAT 3 or better cable
      eliminating expensive and bulky coax cable. The Company’s CCTV surge protectors
      provide protection against voltage spikes and current surges that can disable
      and permanently damage expensive video equipment, including cameras and
      recorders, resulting in loss of important information and reduced
      security.





Our
      connection and protection products are used by international telephone service
      providers as well as many of the regional telecommunication service providers
      as
      well as independent telecommunication service providers in the United States,
      and by owners of private telecommunications equipment providing communications
      and data transmission facilities and equipment. These products are also
      purchased by equipment manufacturers for integration with their systems. In
      addition, our telecommunications connection products have been sold to telephone
      operating companies in various foreign countries. This equipment is compatible
      with existing telephone systems both within and outside the United States and
      can generally be used without modification, although we do custom-design
      modifications to accommodate the specific needs of our customers.





Our
      Signal Processing products include data bus components, cable assemblies and
      wideband transformers. Our data bus components provide network infrastructure
      that connects remote terminals used in military data transmission applications,
      where an extremely high level of reliability and performance is required. Our
      wideband video isolation transformers are used by the television and broadcast,
      medical imaging, in-flight entertainment and industrial process control
      industries to reduce ground noise, interference and improve picture quality.
      Our
      wideband products are also used by test and measurement engineers in the
      characterization of data transmission networks.





Both
      of
      our divisions generated net income from operations for the six months ended
      June
      30, 2008 and 2007. We
      recognize revenue from Line and Signal products when the product is
      shipped.





We
      are
      very dependent upon our continued sales to British Telecommunications and its
      systems integrators, who accounted for $5,769,000, or 44% of sales, in the
      six
      months ended June 30, 2008, $7,519,000, or 49% of sales, in the six months
      ended
      June 30, 2007, $2,843,000, or 43% of sales, in the three months ended June
      30,
      2008, and $3,064,000, or 43% of sales, in the three months ended June 30, 2007. Our
      sales
      to British Telecommunications and its systems integrators declined $1,750,000,
      or 23%, from the six months ended June 30, 2007 to the six months ended June
      30,
      2008 and declined $221,000, or 7%, from the three months ended June 30, 2007
      to
      the three months ended June 30, 2008. The decline was primarily due to decreased
      sales of connector products of approximately $3,950,000 for the six month ended
      June 30, 2008 and $1,200,000 for the three months ended June 30, 2008, partially
      offset by increased sales of protection modules of approximately $2,200,000
      and
      $1,000,000 in the six months and three months ended June 30, 2008, respectively.
      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. This decline in sales is a
      substantial part of the reason for the reduction of operating income from
      continuing operations of $263,000 for the six months ended June 30, 2008 as
      compared to income of $924,000 for the comparable period of 2007, and the
      primary reason for the decrease of profit on continuing operations in the second
      quarter 2008 vs. the second quarter 2007 offset by reduced expenditures in
      SG&A. 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 or that we will be able to improve our margins
      on these sales.




Page 
13
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        20







Reverse
      Split; Debt Restructuring





On
      July
      31, 2008, we amended our certificate of incorporation to effect a one-for-11.11
      reverse split pursuant to which each share of common stock became converted
      into
      0.0900090009 shares of common stock.





On
      August
      1, 2008, we implemented a trouble debt restructure plan (as defined under
      Statement of Financial Accounting Standard No. 15-Accounting by Debtors and
      Creditors for Troubled Debt Restructuring). Pursuant to the restructuring plan:





·
            The
                holder of our senior debt converted notes in the principal amount
                of
                $23,373,000 into a note for $11,601,156 plus 7,038,236 shares of
                common
                stock, representing 70% of the common stock outstanding after giving
                effect to the reverse split and all of the issuances contemplated
                by the
                restructuring plan (the “Total Issuances”). The principal amount of the
                note represents the $10,000,000 principal amount of the note as
                contemplated by the June 20, 2008 agreement, plus interest of $1,601,156.
                The note will bear interest at 12.5% per annum and will be amortized
                on a
                payment schedule over its 63⁄4-year term, with a final payment of $2,101,156
                due on March 31, 2015.




·
            The
                note in the principal amount of $1,600,000 was extended to December
                31,
                2008.




·
            The
                holders of all of the Company’s subordinated notes converted the entire
                principal of and interest on the notes, which amounted to approximately
                $13,506,000, into notes in the principal amount of $1,750,000 and
                1,407,647 shares of common stock, representing 14% of the common
                stock
                outstanding after giving effect to the reverse split and the Total
                Issuances. The $1,750,000 notes will be repaid based upon a 25-year
                amortization schedule and will mature January 31, 2016. Such debt
                will
                bear interest at 10% annually payable quarterly in
                arrears.




·
            The
                Company agreed to offer the holders of the Company’s convertible
                debentures in the principal amount of $385,000, plus accrued interest,
                the
                right to convert the principal of and accrued interest on their debentures
                into subordinated notes in the principal amount equal to their
                proportionate share (based on the principal amount of debentures)
                of
                $100,000 and their proportionate shares of 100,546 shares of common
                stock,
                representing 1% of the common stock outstanding after giving effect
                to the
                reverse split and the Total Issuances. These notes will have a 25-year
                amortization schedule and a 71⁄2 year maturity date. The $100,000 notes will
                bear interest at 10% annually payable quarterly in
                arrears.




·
            In
                addition, other creditors accepted reduced payments for the money
                owed to
                them.




The
      restructuring will eliminate principal and interest on approximately $24,859,000
      of debt. The gain on the debt restructuring that will be recorded in the third
      quarter is estimated at $17,000,000 net of related costs.




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





Line
      equipment sales for the six months ended June 30, 2008, compared to the six
      months ended June 30, 2007, decreased by $1,787,000 (14%) from $12,634,000
      to
      $10,847,000. Sales for the three months ended June 30, 2008 decreased by
      $365,000 (6%) from $5,820,000 in 2007 to $5,455,000 in 2008. The decrease in
      sales for the six and the three months is the result of a significant decrease
      in sales of connector products to British Telecommunications and its systems
      integrators of approximately $1,750,000 for the six months ended June 30, 2008
      and $221,000 for the three months ended June 30, 2008. The decline was primarily
      due to decreased sales of connector products of approximately $3,950,000 and
      $1,200,000, in the six and three months ended June 30, 2008, partially offset
      by
      increased sales of protection modules of approximately $2,200,000 in the six
      month period and $1,000,000 in the three month period. A significant percentage
      of our revenues are derived from British Telecommunications and its installers.
      Any continuation of the significant reduction 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.




Page
        14 of
        20







Signal
      sales for the six months ended June 30, 2008 were $2,375,000, compared to
      $2,637,000 in the same period of 2007, a decrease of $262,000 (10%). Sales
      for
      the three months ended June 30, 2008 compared to 2007, decreased by $27,000
      (2%)
      from $1,249,000 to $1,222,000. The decline in Signal revenue for the six months
      was primarily due to our failure to receive orders from the military sector
      due
      to the delay in Congress’ approval of the U.S. military budget until late 2007.





Gross
      margin for the six months ended June 30, 2008 was 28% compared to 31% for the
      six months ended June 30,
      2007. Gross margin for the quarter ended June 30, 2008 was 28% compared to
      30%
      for the quarter ended June 30, 2007. The decrease for both periods is primarily
      related to excess capacity in our Mexico facility due to lower production levels
      as compared to the same quarter in 2007, principally resulting from the decrease
      in sales to British Telecommunications and its systems integrators and our
      inability to obtain orders from other customers to make up for this
      decrease.





Selling,
      general and administrative expenses decreased by $367,000 (12%) from $2,993,000
      to $2,626,000 for the six months ended June 30, 2008 compared to 2007. For
      the
      quarter ended June 30, 2008 selling, general and administrative expenses
      decreased by $128,000 (9%) from $1,412,000 in 2007 to $1,284,000 in
      2008 . Selling
      expenses decreased in the first six months primarily due to a reduction in
      the
      allowance for bad debt, when compared to the 2007 quarter. General and
      administrative costs decreased, for the six months of 2008 compared to 2007,
      primarily due to a reduction of costs relating to our debt restructuring. Costs
      associated with the debt restructuring will be offset against the gain on
      restructuring in the third quarter of 2008. Costs associated with the debt
      restructuring were approximately $128,000 and $183,000 for the three months
      and
      six months ended June 30, 2008, respectively.





For
      the
      six months ended June 30, 2008 compared to 2007, research and development
      expenses increased by $16,000 (2%) to $794,000 from $778,000. For the quarter
      ended June 30, 2008 compared to 2007, research and development expenses
      decreased by $35,000 (9%) to $370,000 from $405,000. The small increase for
      the
      six months and the decline in the second quarter is a direct result of targeted
      cost reductions significantly in the use of outside consultants and development
      of prototypes.




As
      a
      result of the foregoing, for the six months ended June 30, 2008, we had an
      operating income from continuing operations of $263,000 compared with $924,000
      in the same period of 2007. We had an operating income from continuing
      operations of $192,000 for the quarter ended June 30, 2008 as compared with
      $258,000 in the same period of 2007.





Interest
      expense, net, for the
      six
      months ended June 30, 2008 was $1,180,000, an increase of $190,000 from $990,000
      for the six months ended June 30, 2007. For the three months ended June 30,
      2008, the interest expense was $589,000 compared to $550,000 for the comparable
      period last year. These increases of $190,000 and $39,000 for the six
      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
      $24,973,000 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 extension of the maturity of our senior debt
      to September 1, 2008. In addition, we accrue interest on the $1,600,000 working
      capital loan at rate of LIBOR plus 10%, approximately 13.11% at June 30, 2008.
      This $1,600,000 loan is due on December 31, 2008




Page
        15 of
        20







Income
      tax expense for the quarter and six months ended June 30, 2008 relates to state
      and foreign taxes. No federal income tax expense has been provided due to losses
      incurred during the six month period.





As
      a
      result of the foregoing, we generated a net loss of $946,000, or $1.05 per
      share
      (basic and diluted), for the six months ended June 30, 2008, compared with
      net
      loss from continuing operations of $105,000, or $0.12 per share (basic and
      diluted) in 2007, and a net loss of $626,000, or $0.69 per share (basic and
      diluted) in 2007. The net loss for the three months ended June 30, 2008 was
      $408,000, or $0.45 per share (basic and diluted), compared with net loss from
      continuing operations of $304,000, or $0.33 per share (basic and diluted) in
      the
      comparable quarter of 2007 and a net loss of $791,000, or $0.87 per share (basic
      and diluted) in the comparable quarter of 2007. During both periods in 2008,
      there was no income or loss from discontinued operations.





**Liquidity
      and Capital Resources**





At
      June
      30, 2008, we had cash and cash equivalents of $371,000 compared with $494,000
      at
      December 31, 2007. The reduction in our cash position primarily reflects
      increases of $884,000 in accounts receivable and increase in prepaid and
      other current assets of $393,000, offset by the additional working capital
      loan
      of $600,000 from our senior debt holder and increased payables and accrued
      expenses of $259,000 and the effect of exchange rates changes of $142,000.
      These
      factors along with approximately $1,284,000 of accrued interest, were the
      primary contributors in the adverse affect to our working capital deficit of
      $1,005,000 which was $35,518,000 at June 30, 2008 as compared with a working
      capital deficit of $34,513,000 at December 31, 2007.





During
      the three and six months of 2008, we were unable to pay interest or principal
      to
      our senior and subordinated debt holders.





During
      the six months ended June 30, 2008 our only investing activities were capital
      expenditures of $76,000 compared with $236,000 for the same period in 2007.
      In June 2008, we borrowed an additional $600,000 from our senior debt holder,
      increasing our current borrowings from the senior debt holder to $1,600,000,
      to
      meet our current working capital needs. The principal and interest payments
      on
      the $1,600,000 note are payable commencing with the calendar month of August
      2008, at twenty five percent (25%) of receipts on sales generated in the United
      Kingdom. Payments shall be allocated first to accrued interest and then to
      principal. Interest shall accrue and be payable on the outstanding principal
      balance of the New Note at an amount equal to the six-month rate of LIBOR.
      Any
      interest due on a payment date which remains unpaid shall be added to principal
      and shall bear interest at the same rate as provided in the New Note. This
      loan
      is due on December 31, 2008. We made payments of principal of $139,000 on the
      senior debt in the six months of 2007.





On
      July
      31, 2008, our stockholders approved a one-for-11.11 reverse split of our common
      stock. On August 1, 2008, we implemented a trouble debt restructuring plan
      described in the Overview under “Reverse Split; Debt
      Restructuring.”





As
      a
      result of the debt restructuring we eliminated principal and interest on
      approximately $24,859,000 of debt and will provide for amortization of the
      remaining debt on terms that we believe we will be able to be meet. The gain
      on
      the debt restructure is estimated at $17,000,000 net of related
      costs .




Although
      the debt restructuring reduced our working capital deficiency, it did not
      provide us with any additional cash for our operations. Our only source of
      funds
      other than normal operations is Cheyne, which advanced us $1,000,000 in October
      2007 and $600,000 in June of 2008. 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 may continue to affect our ability to generate business from
      new customers. We cannot give any assurance that Cheyne will provide us with
      any
      additional funding if the need arises. If we are not able to generate sufficient
      revenue to enable us to meet our obligations or obtain financing from Cheyne
      we
      would not be able to continue in business, and it would be likely that we would
      seek protection under the Bankruptcy Code.




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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 bankruptcy
      reorganization .





**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, 2007 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**





Evaluation
      of disclosure controls and procedures




Disclosure
      controls and procedures are controls and procedures that are designed to ensure
      that information required to be disclosed by us in reports that we file or
      submit under the Exchange Act is recorded, processed, summarized and timely
      reported as provided in SEC rules and forms. We periodically review the design
      and effectiveness of our disclosure controls and procedures, including
      compliance with various laws and regulations that apply to our operations.
      We
      make modifications to improve the design and effectiveness of our disclosure
      controls and procedures, and may take other corrective action, if our reviews
      identify a need for such modifications or actions. In designing and evaluating
      the disclosure controls and procedures, we recognize that any controls and
      procedures, no matter how well designed and operated, can provide only
      reasonable assurance of achieving the desired control objectives.




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We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in our reports under the Exchange Act
      is
      recorded, processed, summarized and reported within the time periods specified
      in the SEC’s rules and forms, and that such information is accumulated and
      communicated to management, including our chief executive officer, who is also
      our chief financial officer, as appropriate to allow timely decisions regarding
      required disclosure. Our management, with participation of our chief executive
      and financial officer, has conducted an evaluation of the effectiveness of
      the
      Company’s disclosure controls and procedures (as defined in the Securities
      Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the
      period covered by this Quarterly Report on Form 10-Q.





As
      previously disclosed in our Annual Report on Form 10-K for the fiscal year
      ended
      December 31, 2007, we determined that, as of the end of the fiscal year 2007,
      there was a material weakness affecting our internal control over financial
      reporting in respect to information technology (as described below) and, as
      a
      result of the material weaknesses, our disclosure controls and procedures were
      not effective. We are continuing to evaluate a change in the information system
      platform for our financial and operational systems which will remediate the
      material weaknesses. The selection and implementation of a new system is
      expected to be completed over the next few years as a result of current cash
      constrains. Consequently, based on the evaluation described above, our
      management, including our chief executive and financial officer, has concluded
      that, as of the end of the second quarter of fiscal year 2008, our disclosure
      controls and procedures were ineffective.





Internal
      Control over Financial Reporting





As
      previously reported in form 10-K for the year ended December 31, 2007,
      management identified significant deficiencies that when aggregated may give
      rise to a material weakness specifically relating to a) program change
      management in the Company’s PROCOMM system, b) lack of integrated modules with
      the general ledger and c) excessive manual adjustments to the inventory module
      are required.





*Management’s
      Plan of Remediation*





Management
      is evaluating a new integrated ERP system that will include complete general
      ledger and reporting which will eliminate the need for manual updates and
      significantly reduce the need for journal entries in the financial reporting
      process. Specific remediation actions used in 2008 to address our material
      weakness in internal control over financial reporting in respect to information
      technology include the following:





In-depth
      review of all perpetual inventory reports


Analyzing
      of production reporting in respect to ending inventory


Re-computation
      of reports on a test basis





*Changes
      in Internal Control over Financial Reporting*





There
      have been no changes in our internal control over financial reporting during
      the
      most recently completed fiscal quarter that have materially affected, or are
      reasonably likely to materially affect, our internal control over financial
      reporting.





The
      certification of our chief executive and chief financial officer, which is
      included as Exhibit 31.1 to this quarterly report on Form 10-Q, includes,
      in paragraph 4 of such certification, information concerning our disclosure
      controls and procedures and internal control over financial reporting. Such
      certification should be read in conjunction with the information contained
      in
      this Item 4 - Controls and Procedures for a more complete understanding of
      the
      matters covered by such certification.




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**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, 2007, 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.





During
      the three and six months ended June 30, 2008, we sustained declines in revenue
      from our largest customer, British Telecommunications, from the comparable
      three
      and six month periods of 2007, 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 toSection
                906 of the Sarbanes-Oxley Act of
                2002.




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**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:
              August 14, 2008
            By:
            /s/
              Edward B. KornfeldEdward B. KornfeldChief
              Executive Officerand Chief Financial
              Officer




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