**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**




x
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
                EXCHANGE ACT OF 1934




For
      the
      quarterly period ended September 30, 2008





o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
                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
            
            11-2203988(State
                or other jurisdiction of
            
            (I.R.S.
                Employerincorporation
                or organization)
            
            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
o





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


Large
      accelerated filer o       Accelerated filer o          
      Non-accelerated filer o          
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 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 per share) 9,954,096 shares as of November 11,
      2008.
















**PART
      I.- FINANCIAL INFORMATION**


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


PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Consolidated
      Balance Sheets


(In
      thousands, except share information)




UnauditedSeptember
                30,
            
            December
                31,Assets
            
            2008
            
            2007Current
                assetsCash
                and cash equivalents
            
            $
            372
            
            $
            494Accounts
                receivable - trade, less allowance for doubtful accounts of $20 in
                2008
                and $50 in 2007
            
            
            4,492
            
            
            5,098Inventories
            
            
            6,983
            
            
            6,411Prepaid
                expenses and other current assets
            
            
            426
            
            
            203Total
                current assets
            
            
            12,273
            
            
            12,206Property,
                plant and equipment, net
            
            
            1,532
            
            
            1,678Goodwill,
                net
            
            
            2,961
            
            
            2,961Other
                assets
            
            
            54
            
            
            54Total
                assets
            
            $
            16,820
            
            $
            16,899Liabilities
                and Stockholders’ DeficitCurrent
                liabilities:Senior
                debt including interest
            
            $
            3,926
            
            $
            25,026Subordinated
                notes including interest
            
            
            191
            
            
            13,0446%
                convertible subordinated debentures, principal amount
            
            
            385
            
            
            385Accounts
                payable
            
            
            5,360
            
            
            5,523Accrued
                expenses and other
            
            
            2,570
            
            
            2,555Accrued
                interest payable
            
            
            320
            
            
            186Total
                current liabilities
            
            
            12,752
            
            
            46,719Long
                term liabilities:Senior
                debt including interest
            
            
            15,374
            
            
            —Subordinated
                notes including interest
            
            
            2,815
            
            
            —Deferred
                compensation and other long term liabilities
            
            
            660
            
            
            707Total
                long term liabilities
            
            
            18,849
            
            
            707Total
                liabilities
            
            
            31,601
            
            
            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, issued 9,956,881
                shares in 2008 and 907,701 shares in 2007
            
            
            100
            
            
            9Additional
                paid-in capital
            
            
            76,244
            
            
            76,217Accumulated
                deficit
            
            
            (
                84,467
            )
            
            (100,457
            )Accumulated
                other comprehensive loss:Foreign
                currency translation adjustment
            
            
            (4,720
            )
            
            (4,358
            )(12,843
            )
            
            (28,589
            )Treasury
                stock, at cost, 2,785 shares
            
            
            (1,938
            )
            
            (
                1,938
            )Total
                stockholders’ deficit
            
            
            (14,781
            )
            
            (30,527
            )Total
                liabilities and stockholders’ deficit
            
            $
            16,820
            
            $
            16,899


See
      accompanying notes to unaudited consolidated financial
      statements


Page
          1 of 21




PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Unaudited
      Consolidated Statements of Operations and Comprehensive Income


(In
      thousands, except per share amounts)




Nine
                months endedSeptember
                30**,**
            
            September
                30,2008
            
            2007Sales
            
            $
            19,527
            
            $
            21,922Cost
                of sales
            
            
            14,779
            
            
            15,139Gross
                profit
            
            
            4,748
            
            
            6,783Selling,
                general and administrative expenses
            
            
            3,847
            
            
            4,526Research
                and development expenses
            
            
            1,136
            
            
            1,201Total
                expenses
            
            
            4,983
            
            
            5,727Operating
                income (loss)
            
            
            (235
            )
            
            1,056Interest
                expense, net
            
            
            (1,393
            )
            
            (1,536
            )Other
                income, net
            
            
            26
            
            
            7Loss
                from continuing operations before income taxes
            
            
            (1,602
            )
            
            (473
            )Income
                tax expense
            
            
            (53
            )
            
            (58
            )Loss
                from continuing operations before extraordinary gain and discontinued
                operations
            
            
            (1,655
            )
            
            (531
            )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
            )Extraordinary
                gain on troubled debt restructure (net of zero tax) (Note
                3)
            
            
            17,645
            
            
            —Net
                Income (Loss)
            
            $
            15,990
            
            $
            (1,052
            )Other
                comprehensive loss:Foreign
                currency translation adjustments
            
            
            (362
            )
            
            (121
            )Comprehensive
                Income (Loss)
            
            $
            15,628
            
            $
            (1,173
            )Basic
                income (loss) per share of common stock:Continuing
                operations
            
            $
            (0.57
            )
            $
            (0.59
            )Discontinued
                operations
            
            
            —
            
            
            (0.57
            )Extraordinary
                item
            
            
            6.05
            
            
            —$
            5.48
            
            $
            (1.16
            )Weighted
                average shares outstanding
            
            
            2,916
            
            
            905Diluted
                income (loss) per share of common stock:Continuing
                operations
            
            $
            (0.54
            )
            $
            (0.59
            )Discontinued
                operations
            
            
            —
            
            
            (0.57
            )Extraordinary
                item
            
            
            5.79
            
            
            —$
            5.25
            
            $
            (1.16
            )Weighted
                average shares outstanding
            
            
            3,043
            
            
            905


See
      accompanying notes to unaudited consolidated financial
      statements.


Page
          2 of 21




PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Unaudited
      Consolidated Statements of Operations and Comprehensive Income


(In
      thousands, except per share amounts)




Three
                Months EndedSeptember
                30**,**
            
            September
                30,2008
            
            2007Sales
            
            $
            6,305
            
            $
            6,651Cost
                of sales
            
            
            5,239
            
            
            4,563Gross
                profit
            
            
            1,066
            
            
            2,088Selling,
                general and administrative expenses
            
            
            1,222
            
            
            1,533Research
                and development expenses
            
            
            341
            
            
            423Total
                expenses
            
            
            1,563
            
            
            1,956Operating
                (Loss) Income
            
            
            (497
            )
            
            132Interest
                expense, net
            
            
            (213
            )
            
            (547
            )Other
                income, net
            
            
            17
            
            
            9Loss
                before income taxes
            
            
            (693
            )
            
            (406
            )Income
                tax expense
            
            
            (16
            )
            
            (19
            )Loss
                from continuing operations before extraordinary item
            
            
            (709
            )
            
            (425
            )Extraordinary
                gain on troubled debt restructure (net of zero tax) (Note
                3)
            
            
            17,645
            
            
            —Net
                Income (Loss)
            
            $
            16,936
            
            $
            (425
            )Other
                comprehensive loss:Foreign
                currency translation adjustments
            
            
            (240
            )
            
            (26
            )Comprehensive
                Income (Loss)
            
            $
            16,696
            
            $
            (451
            )Basic
                income (loss) per share of common stock:Continuing
                operations
            
            $
            (0.10
            )
            $
            (0.47
            )Extraordinary
                item
            
            
            2.54
            
            
            —$
            2.44
            
            $
            (0.47
            )Weighted
                average shares outstanding
            
            
            6,937
            
            
            905Diluted
                income (loss) per share of common stockContinuing
                operations
            
            $
            (0.10
            )
            $
            (0.47
            )Extraordinary
                item
            
            
            2.53
            
            
            —$
            2.43
            
            $
            (0.47
            )Weighted
                average shares outstanding
            
            
            6,966
            
            
            905 See
      accompanying notes to unaudited consolidated financial statements.





Page
            3 of 21




PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Unaudited
      Consolidated Statements of Cash Flows


(In
      thousands)




Nine
                months endedSeptember
                30,
            
            September
                30,2008
            
            2007Cash
                flows from operating activities of continuing operations:Net
                income/ (loss)
            
            $
            15,990
            
            $
            (1,052
            )Adjustments
                to reconcile net income/ (loss) to net cash used in operating activities
                of continuing operations:Loss
                from discontinued operations
            
            
            —
            
            
            521Extraordinary
                gain on debt restructuring
            
            
            (16,287
            )Stock
                based compensation expense
            
            
            7Depreciation
                and amortization
            
            
            249
            
            
            281Inventory
                reserve
            
            
            (384
            )
            
            (405
            )Allowance
                for bad debt
            
            
            (30
            )
            
            10Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            360
            
            
            (28
            )Inventories
            
            
            (290
            )
            
            (941
            )Prepaid
                expenses and other current assets
            
            
            (195
            )
            
            209Other
                assets
            
            
            (3
            )
            
            —Accounts
                payable, accrued expenses and other liabilities
            
            
            309
            
            
            240Net
                cash used in continuing operations
            
            
            (274
            )
            
            (1,165
            )Net
                cash used in operations of discontinued operations
            
            
            —
            
            
            (87
            )Net
                cash used in operating activities
            
            
            (274
            )
            
            (1,252
            )Cash
                flows from investing activities:Capital
                expenditures, net
            
            
            (103
            )
            
            (304
            )Net
                cash used in investing activities
            
            
            (103
            )
            
            (304
            )Cash
                flows from financing activities:Borrowings
                of senior debt
            
            
            600
            
            
            —Repayment
                of debt
            
            
            (274
            )
            
            (140
            )Net
                cash provided by (used in) financing activities
            
            
            326
            
            
            (140
            )Effect
                of exchange rate changes on cash
            
            
            (71
            )
            
            (10
            )Decrease
                in cash and cash equivalents
            
            
            (122
            )
            
            (1,706
            )Cash
                and cash equivalents - beginning of the year
            
            
            494
            
            
            2,102Cash
                and cash equivalents - end of the period
            
            $
            372
            
            $
            396Supplemental
                cash flow disclosure:Cash
                paid for interest expense
            
            $
            5
            
            $
            568Cash
                paid for income taxes
            
            $
            4
            
            $
            —Non-Cash
                Financing and Investing:Non-cash
                exchange of common stock issued in debt restructure
            
            $
            100
            
            $
            —Interest
                accrued and forgiven in accordance with FAS 15‘Troubled
                Debt Restructure” during the period
            
            $
            (1,358
            )
            $
            —


See
      accompanying notes to unaudited consolidated financial
      statements.


Page
          4 of 21





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 third quarter or the first nine 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. Neither
      the par value nor the number of authorized shares was changed as a result of
      the
      reverse split. 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 $1,548,000 for 2008 and $1,952,000 for
      2007):




September
                30, 2008
            
            December
                31, 2007Parts
                and components
            
            $
            4,379,000
            
            $
            3,669,000Work-in-process
            
            
            939,000
            
            
            858,000Finished
                goods
            
            
            1,665,000
            
            
            1,884,000$
            6,
                983,000
            
            $
            6,411,000





**Note
              3:**
            **Debt
                Restructuring**




On
      July
      31, 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
      on
      the restructuring was measured by the excess of (i) the carrying amount of
      the
      liability settled over (ii) the fair value of the assets transferred to the
      creditor (the face amount increased by interest accreted to maturity and issue
      costs). The Company recognized a gain on the restructuring of debt of
      $17,645,000 net of costs associated with the restructuring.




Page
            5 of 21





Terms
      of
      restructuring:





·
            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 note bears interest at
                12.5% per annum amortized on a payment schedule over its 63⁄4-year term. As
                required under the Statement of Financial Accounting Standard No.
                15-Accounting by Debtors and Creditors for Troubled Debt Restructuring
                (“SFAS 15”), the amount of this note as shown on the balance sheet
                includes interest at the stated rate through the stated maturity
                date of
                the note. At September 30, 2008, the current portion of this senior
                note
                reflects principal of $1,000,000 and interest of $1,392,000, and
                the long
                term portion reflects principal of $10,601,000 and interest of $4,773,000.
                (See Note 6- Subsequent Event)




·
            A
                note in the principal amount of $1,600,000 (the “Working Capital Note”)
                due to our senior debt holder was extended to December 31, 2008.The
                interest through the repayment term of the loan of $207,000 has been
                added
                to the face value of the note on the balance sheet and is included
                with
                the current portion of our senior debt. The interest was calculated
                at 14%
                based on a September 30, 2008 LIBOR plus 10%. At September 30, 2008,
                the
                current portion of this senior note reflects principal of $1,453,000
                and
                interest of $81,000. (See Note 6- Subsequent
                Event)




·
            The
                holders of all of the Company’s subordinated notes converted the entire
                principal and interest on the notes, which amounted to approximately
                $13,583,000, 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
                bears
                interest at 10% annually payable quarterly in arrears. As required
                by SFAS
                15, the interest on these notes, through the stated term of the loan
                in
                the amount of $1,256,000 has been added to the amount of the note
                on the
                balance sheet.




·
            The
                holders of the Company’s convertible debentures due July 1, 2002 (the
                “Debentures”), in the principal amount of $385,000 plus accrued interest
                of $318,000, have been 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. As of September 30, 2008,
                no
                subordinated note holder has converted their debentures; as such,
                the
                original debt of $385,000 and accrued interest of $318,000 continues
                to be
                classified as current liabilities. The Company is restricted from
                making
                any payments on these debentures unless and to the extent that the
                notes
                are converted. The notes issued with respect to any debentures which
                are
                converted will be reflected on the Company’s balance sheet in accordance
                with SFAS 15.




·
            Certain
                other creditors have agreed to accept substantial discounts on their
                outstanding claims. The gain on restructuring of these payables and
                accrued expenses (net of zero tax) was
                $838,000.




·
            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 value of these shares is included
                in selling, general and administrative expenses as a non-cash expense
                of
                $7,000, reflecting the value of the
                shares.




Page
          6 of 21






·
            As
                part of the debt restructuring, the outstanding options to purchase
                an
                aggregate of 155,000 shares of common stock at exercise prices ranging
                from $0.03 to $2.03, which were held by the Company’s directors, were not
                adjusted as a result of the reverse
                split




·
            In
                addition, for services relating to the debt restructure, the Company
                will
                pay Advicorp, PLC, a fee of $200,000, payable in 25 equal monthly
                installments commencing January 2009 and grant to Advicorp warrants
                to
                purchase 201,093 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 which was $0.10. Advicorp, PLC is partially
                owned by one of the members of our board of directors. (See Note
                4-
                Accounting for Stock Based
                Compensation)




As
      a
      result of the issuance of more than fifty (50%) percent of the Company’s common
      stock to new stockholders, the Company’s ability to use its remaining net
      operating loss carry forwards will be severely curtailed in accordance with
      Section 382 of the Internal Revenue Code.





Senior
      Debt and Subordinated Notes:





In
      the
      third quarter 2008, the Company restructured $23,373,000 principal amount of
      12.5% Senior Notes, a working capital note of $1,600,000 and $6,144,000 of
      subordinated notes, as described in this Note 3 under “Terms of Restructuring.” (See
      Note
      6- Subsequent Event)




Payments
      were made during the third quarter of $273,000 on the Working Capital note
      held
      by our senior debt holder .
      This
      note is due on
      December 31, 2008.




The
      holder of the senior debt has no obligation to make any further loans to the
      Company. Any adverse event, including declines in business, could cause a
      default on the debt and on the decision of the senior debt holder to extend
      or
      demand payment. 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.





Convertible
      Subordinated Debentures:





As
      of
      September 30, 2008 and December 31, 2007, the Company had outstanding $385,000
      principal amount of its Debentures. The interest rate on these debentures
      increased from the stated interest rate of 6% to 8.26% as a result of the
      Company’s failure both to make interest payments on the debentures since July 1,
      2000 and to pay principal on July 2, 2002, the stated maturity date. At
      September 30, 2008 and December 31, 2007, accrued interest, including additional
      assessments due to the default, on the debentures was $318,000 and $183,000,
      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 had precluded the Company from making payments on the debentures.
      See the discussion under “Terms of Restructuring” in this Note 3 with respect to
      the right which the Company granted to the holders of the Debentures to convert
      the Debentures into subordinated notes and equity.





Effect
      on
      interest expense of troubled debt restructure to the nine months ending
      September 30, 2008 income:





Initial
                Interest
              capitalized
                in troubled
              debt
                restructuring
            
            Interest
                portion of
              debt
                paid
            
            Balance
                of
              capitalized
                interest
            
            YTD
                income effect of
              capitalized
                interestSenior
                Debt
            
            $
            6,372,000
            
            $
            126,000
            
            $
            6,246,000
            
            $
            159,000Subordinated
                Debt
            
            
            1,256,000
            
            
            —
            
            
            1,256,000
            
            
            29,000Total
            
            $
            7,628,000
            
            $
            126,000
            
            $
            7,502,000
            
            $
            188,000





Page
          7 of 21






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





For
      the
      nine months ended September 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 debt restructuring (See Note 3), the board of directors determined that
      the number of shares subject to outstanding options and the exercise prices,
      which range from $2.03 per share to $0.03 per share, would not be affected
      by
      the reverse split. Options under this Plan have a term of 10 years from the
      original date of grant. 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.




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 (See
      Note 3) .
      The
      value of the stock compensation of approximately $7,000 was based on the
      Company’s common stock price on the date the stock was granted.




Warrants
      to purchase 201,072 shares of common stock were granted in the quarter at an
      exercise price equal to the average closing price of the common stock on the
      five trading days commencing August 31, 2008 which was $0.10. The warrants
      have
      an exercisable life of five years. Based
      on
      the Black-Scholes valuation model the value of the warrants was
      $12,100.  The
      volatility of the Company’s common stock was estimated by management based on
      the historical volatility of the Company’s common stock, the risk-free interest
      rate was based on the US Treasury Rates published by the U.S. Federal Reserve
      for periods applicable to the estimated life of the warrant, and the expected
      dividend yield was based on the current and expected dividend
      policy.




**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 focus on ensuring communications for service
      providers worldwide and 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.




**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.


Page
          8 of 21




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.




Nine
                Months ended
            
            Three
                Months EndedSeptember
                30,
            
            September
                30,
            
            September
                30,
            
            September
                30,2008
            
            2007
            
            2008
            
            2007**Sales:**Line
            
            $
            15,992,000
            
            $
            18,228,000
            
            $
            5,145,000
            
            $
            5,594,000Signal
            
            
            3,535,000
            
            
            3,694,000
            
            
            1,160,000
            
            
            1,057,000Total
                of Continuing Operations
            
            $
            19,527,000
            
            $
            21,922,000
            
            $
            6,305,000
            
            $
            6,651,000**Segment
                profit/(loss):**Line
            
            $
            637,000
            
            $
            2,383,000
            
            $
            (260,000
            )
            $
            637,000Signal
            
            
            724,000
            
            
            933,000
            
            
            220,000
            
            
            235,000Total
                of Continuing Operations
            
            $
            1,361,000
            
            $
            3,316,000
            
            $
            (40,000
            )
            $
            872,000





The
      following table reconciles segment totals to consolidated totals:





Nine
                Months Ended
            
            Three
                Months EndedSeptember
                30,
            
            September
                30,
            
            September
                30,
            
            September
                30,2008
            
            2007
            
            2008
            
            2007**Operating
                income:**Total
                segment income/(loss) for reportable segments
            
            $
            1,361,000
            
            $
            3,316,000
            
            $
            (40,000
            )
            $
            872,000Corporate
                and unallocated
            
            
            (1,596,000
            )
            
            (2,260,000
            )
            
            (457,000
            )
            
            (740,000
            )Consolidated
                total operating income/(loss)
            
            $
            (235,000
            )
            $
            1,056,000
            
            $
            (497,000
            )
            $
            132,000







Page
            9 of 21






**Note
              6:**
            **Subsequent
                Event**




In
      November 2008, the Company borrowed additional senior debt of $425,000 from
      Cheyne, our senior debt holder.  As of November 11, 2008, the Company had a
      principal outstanding balance of $1,311,000 (excluding accreted interest) on
      the
      Working Capital Note. The old Working Capital Note was replaced for a new
      Working Capital Note in the amount of $1,747,012 (including accrued interest).
      Interest on the additional $425,000 advance will be expensed as incurred at
      a
      rate equal to the six month Libor rate plus 10%. Principal and interest is
      payable January 2009 though June 2009 with each monthly payment being equal
      to
      25% of the gross receipts received from sales generated in the United
      Kingdom.  The remaining principal balance of the note and accrued interest
      is due on June 30, 2009.  The New Working Capital Note is collateralized by
      all of the assets of the Company which also secure the existing senior
      debt.




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




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





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





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




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





British
      Telecommunications PLC and its systems integrators together represent the
      Company’s largest customers and accounted for approximately $2,194,000, or 35%
      of sales, in the three months ended September 30, 2008, and $7,962,000, or
      41%
      of sales, in the nine months ended September 30, 2008, and approximately
      $2,791,000, or 42% and $10,310,000, or 47% of sales, in the comparable three
      and
      nine months of 2007.




Page
            10 of
            21






**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
                30,2008
            
            2007
            
            2008
            
            2007Sales
            
            
            100
            %
            
            100
            %
            
            100
            %
            
            100
            %Cost
                of sales
            
            
            76
            %
            
            69
            %
            
            83
            %
            
            69
            %Gross
                profit
            
            
            24
            %
            
            31
            %
            
            17
            %
            
            31
            %Selling,
                general and administrative expenses
            
            
            19
            %
            
            21
            %
            
            19
            %
            
            23
            %Research
                and development expenses
            
            
            6
            %
            
            5
            %
            
            6
            %
            
            6
            %Operating
                income/(loss)
            
            
            (1
            %)
            
            5
            %
            
            (8
            %)
            
            2
            %Interest
                expense - net
            
            
            (7
            %)
            
            (7
            %)
            
            (3
            %)
            
            (8
            %)Loss
                from continuing operations
            
            
            (8
            %)
            
            (2
            %)
            
            (11
            %)
            
            (6
            %)Loss
                from discontinued operations
            
            
            —
            %
            
            (3
            %)
            
            —
            %
            
            —
            %Extraordinary
                gain on Debt Restructure
            
            
            90
            %
            
            —
            %
            
            280
            %
            
            —
            %Net
                loss income
            
            
            82
            %
            
            (5
            %)
            
            269
            %
            
            (6
            %)




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





Nine
                months ended September 30,2008
            
            
            
            2007Line
            
            $
            15,992,000
            
            
            82%
            
            $
            18,228,000
            
            
            83%Signal
            
            
            3,535,000
            
            
            18%
            
            
            3,694,000
            
            
            17%$
            19,527,000
            
            
            100%
            
            $
            21,922,000
            
            
            100%





Three
                Months Ended September 30,2008
            
            
            
            2007Line
            
            $
            5,145,000
            
            
            82%
            
            $
            5,594,000
            
            
            84%Signal
            
            
            1,160,000
            
            
            18%
            
            
            1,057,000
            
            
            16%$
            6,305,000
            
            
            100%
            
            $
            6,651,000
            
            
            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
          11 of
          21





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 and by regional telecommunication service providers and 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 income from continuing operations prior to allocations
      of corporate expenses for the nine months ended September 30, 2008 and 2007.
      We
      had a net loss from operations on our Line segment of $260,000 for the third
      quarter of 2008 compared to a net operating income of $637,000 in the comparable
      period of 2007, due to a significant decline in sales to British
      Telecommunications as well as a decrease in the margin we generate from these
      sales. References to British Telecommunications include British
      Telecommunications and its systems integrators. Our Signal segment generated
      net
      income from operations of $220,000 in the third quarter of 2008 compared to
      $235,000 in the comparable period in 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, which
      accounted for $7,962,000, or 41% of sales, in the nine months ended September
      30, 2008, $10,310,000, or 47% of sales, in the nine months ended September
      30,
      2007, $2,194,000, or 35% of sales, in the three months ended September 30,
      2008,
      and $2,791,000, or 42% of sales, in the three months ended September 30, 2007. Our
      sales
      to British Telecommunications declined $2,348,000, or 23%, from the nine months
      ended September 30, 2007 to the nine months ended September 30, 2008 and
      declined $597,000, or 21%, from the three months ended September 30, 2007 to
      the
      three months ended September 30, 2008. The decline was primarily due to
      decreased sales of connector products of approximately $5,294,000 for the nine
      month ended September 30, 2008 and $1,337,000 for the three months ended
      September 30, 2008, partially offset by increased sales of protection modules
      of
      approximately $2,947,000 and $740,000 in the nine months and three months ended
      September 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 to British Telecommunications and the reduced gross margin
      on
      those sales constitute a substantial part of the reason for the operating loss
      of $235,000 for the nine months ended September 30, 2008 as compared to
      operating income of $1,056,000 for the comparable period of 2007, and the
      primary reason for the operating loss in the third quarter 2008 of $497,000
      as
      compared to the operating income in the third quarter 2007 of $132,000, offset
      by reduced expenditures in selling, general and administrative expenses. 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
          12 of
          21





The
      present economic climate has made credit more difficult to obtain and is
      resulting in decreases in purchases for capital goods, such as our products.
      As
      a result, the current economic slowdown may seriously affect our business to
      the
      extent that our existing customers reduce or defer their purchases. If we are
      not able to develop new business and if our existing customers reduce or defer
      the purchase of our products, we may be unable to continue in business and
      it
      may be necessary for us to seek protection under the Bankruptcy
      Code.





In
      addition, the dollar has recently strengthened against a number of foreign
      currencies, including the British pound and the Mexican peso. Sales to customers
      in Great Britain and Mexico are made in the local currency. As a result, while
      our costs are incurred in dollars, as a result of the stronger dollar, the
      dollar value of our collections from these customers, primarily British
      Telecommunications, has decreased. Our operations were affected by the stronger
      dollar during the third quarter of 2008 and the effect may be greater during
      the
      fourth quarter.





Reverse
      Split and 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
      July
      31, 2008, we implemented a trouble debt restructure plan (as defined under
      SFAS
      15). 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 note bears interest at
                12.5% per annum amortized on a payment schedule over its 63⁄4-year term. As
                required under the Statement of Financial Accounting Standard No.
                15-Accounting by Debtors and Creditors for Troubled Debt Restructuring
                (“SFAS 15”), the amount of this note as shown on the balance sheet
                includes interest at the stated rate through the stated maturity
                date of
                the note. At September 30, 2008, the current portion of this senior
                note
                reflects
                principal of $1,000,000 and interest of $1,392,000, and the long
                term
                portion reflects principal of $10,601,000 and interest of $4,773,000.
                (See
                Note 6- Subsequent Event)




·
            A
                Working Capital Note in the principal amount of $1,600,000 due to
                our
                senior debt holder was extended to December 31, 2008.The
                interest through the repayment term of the loan of $207,000 has been
                added
                to the face value of the note on the balance sheet and is included
                with
                the current portion of our senior debt. The interest was calculated
                at 14%
                based on a September 30, 2008 LIBOR plus 10%. At September 30, 2008,
                the
                current portion of this senior note reflects principal of $1,453,000
                and
                interest of $81,000. (See Note 6- Subsequent Event)




·
            The
                holders of all of the Company’s subordinated notes converted the entire
                principal and interest on the notes, which amounted to approximately
                $13,583,000, 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
                bears
                interest at 10% annually payable quarterly in arrears. As required
                by SFAS
                15, the interest on these notes, through the stated term of the loan
                in
                the amount of $1,256,000 has been added to the amount of the note
                on the
                balance sheet.






Page
          13 of
          21






·
            The
                holders of the Company’s convertible debentures due July 1, 2002 (the
                “Debentures”), in the principal amount of $385,000 plus accrued interest
                of $318,000, have been 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. As of September 30, 2008,
                no
                subordinated note holder has converted their debentures; as such,
                the
                original debt of $385,000 and accrued interest continues to be classified
                as a current liability. The Company is restricted from making any
                payments
                on these debentures unless and to the extent that the notes are converted.
                The notes issued with respect to any debentures which are converted
                will
                be reflected on the Company’s balance sheet in accordance with SFAS
                15.




·
            Certain
                other creditors have agreed to accept substantial discounts on their
                outstanding claims. The gain on restructuring of these payables and
                accrued expenses (net of zero tax) was
                $838,000.




·
            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 value of these shares is included
                in selling, general and administrative expenses as a non-cash expense
                of
                $7,000, reflecting the value of the
                shares.




·
            For
                services relating to the debt restructure, the Company will pay Advicorp,
                PLC, a fee of $200,000, payable in 25 equal monthly installments
                commencing January 2009 and grant to Advicorp warrants to purchase
                201,093
                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 which was $0.10. A member of our board of directors is chief
                executive officer and a part owner of Advicorp, PLC.




·
            As
                part of the debt restructuring, the outstanding options to purchase
                an
                aggregate of 155,000 shares of common stock at exercise prices ranging
                from $0.03 to $2.03, which were held by the Company’s directors, were not
                adjusted as a result of the reverse split.




The
      restructuring eliminated principal and interest on approximately $25,076,000
      of
      debt and an extraordinary gain of $17,645,000 (net of related costs) was
      recognized in the third quarter of 2008.




As
      a
      result of the issuance of more than fifty (50%) percent of our common stock
      to
      new stockholders, our ability to use our remaining net operating loss
      carryforwards will be severely curtailed in accordance with Section 382 of
      the
      Internal Revenue Code.





**Results
      of Continuing Operations**





Line
      equipment sales for the nine months ended September 30, 2008, compared to the
      nine months ended September 30, 2007 ,
      decreased by $2,236,000 (12%) from $18,228,000 to $15,992,000. Sales for the
      three months ended September 30, 2008 decreased by $449,000 (8%) from $5,594,000
      in 2007 to $5,145,000 in 2008. The decrease in sales for the nine and the three
      months is the result of a significant decrease in sales of connector products
      to
      British Telecommunications of approximately $5,294,000 for the nine months
      ended
      September 30, 2008 and $1,337,000 for the three months ended September 30,
      2008 partially offset by increased sales of protection modules of approximately
      $2,947,000 in the nine month period and $740,000 in the three month period.
      We
      are dependent upon sales to British
      Telecommunications. Any continuation of the significant reduction in the level
      of business from British Telecommunications and any further decrease in the
      margin on products that we sell to British Telecommunications could continue
      to
      have a material adverse effect upon both our revenue and net
      income.




Page
          14 of
          21





Signal
      sales for the nine months ended September 30, 2008 were $3,535,000, compared
      to
      $3,694,000 in the same period of 2007, a decrease of $159,000 (4%). Sales for
      the three months ended September 30, 2008 compared to 2007, increased by
      $103,000 (10%) from $1,057,000 to $1,160,000.





Gross
      margin for the nine months ended September 30, 2008 was 24% compared to 31%
      for
      the nine months ended September 30, 2007. Gross margin for the quarter ended
      September 30, 2008 was 17% compared to 31% for the quarter ended September
      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 our inability to obtain and produce orders from other
      customers to make up for this decrease due to working capital constrictions.
      Gross margins were adversely affected by the effects of the stronger dollar
      against the British pound and the Mexican peso.





Selling,
      general and administrative expenses decreased by $679,000 (15%) from $4,526,000
      to $3,847,000 for the nine months ended September 30, 2008 compared to 2007.
      For
      the quarter ended September 30, 2008 selling, general and administrative
      expenses decreased by $311,000 (20%) from $1,533,000 in 2007 to $1,222,000
      in
      2008 . General
      and administrative costs decreased, for the nine months of 2008 compared to
      2007, primarily due to a reduction of costs relating to our debt restructuring,
      reduced commissions and overall cost cutting initiatives. Costs associated
      with
      the debt restructuring for 2008 were offset against the gain on restructuring.
      Costs associated with the debt restructuring were approximately $360,000 and
      $542,000 for the three months and nine months ended September 30, 2008,
      respectively.




For
      the
      nine months ended September 30, 2008 compared to 2007, research and development
      expenses decreased by $65,000 (5%) to $1,136,000 from $1,201,000. For the
      quarter ended September 30, 2008 compared to 2007, research and development
      expenses decreased by $82,000 (19%) to $341,000 from $423,000. The decrease
      for
      the three and nine months ended September 30, 2008 are a direct result of
      targeted cost reductions significantly in the use of outside consultants and
      development of prototypes.




Interest
      expense, net, for the nine months ended September 30, 2008 was $1,393,000,
      a
      decrease of $143,000 (9%) from $1,536,000 for the nine months ended September
      30, 2007. For the three months ended September 30, 2008, the interest expense
      was $213,000 compared to $547,000 a decrease of $334,000 (61%) for the
      comparable period last year. Interest on our debt prior to the restructuring
      on
      July 31, 2008 was not accrued 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. Subsequent to the restructuring, interest on the senior and
      subordinated debt through the term of the instrument has been added to the
      value
      of the debt on the balance sheet and thereby will no longer flow through our
      income statement. The decreases of $143,000 and $334,000 for the nine months
      and
      three months, respectively, are primarily related to the restructuring of our
      senior and subordinated debt.




Income
      tax expense for the quarter and nine months ended September 30, 2008 relates
      to
      state and foreign taxes. Taxes on income resulting from the restructuring will
      be offset against our net operating loss carryforward. As
      a
      result of the issuance of more than 50% of our common stock to new stockholders,
      our ability to use its remaining net operating loss carryforward will be
      severely curtailed in accordance with IRS code 382. No
      federal income tax expense has been provided on income subsequent to the
      restructuring based on the loss for the period ending September 30,
      2008.




As
      a
      result of the foregoing, for the nine months ended September 30, 2008, we had
      a
      loss from continuing operations of $1,655,000 compared with $531,000 in the
      same
      period of 2007. We had an operating loss from continuing operations of $709,000
      for the quarter ended September 30, 2008 as compared with $425,000 in the same
      period of 2007.




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The
      troubled debt restructuring eliminated principal and interest on approximately
      $25,076,000 of debt and resulted in an extraordinary gain of $17,645,000 (net
      of
      related costs) which was recognized in the third quarter of 2008.




As
      a
      result of the foregoing, we incurred as net loss before extraordinary income
      of
      $1,655,000 or ($0.57) and ($.054) per share, basic and diluted, respectively,
      for the nine months ended September 30, 2008 compared with a net loss of
      $1,052,000, or ($1.16) per share (basic and diluted) in the same period of
      2007.
      The effect of the extraordinary gain on the nine months ended September 30,
      2008
      was $6.05 and $5.79 per share, basic and diluted, respectively. During the
      nine
      months ended September 30, 2007 there was a loss from discontinued operation
      of
      $521,000 or $0.57 per share (basic and diluted); there was no loss from
      discontinued operations in the same period of 2008. The Company incurred a
      net
      loss before extraordinary income of $709,000 or $0.10 per share (basic and
      diluted), for the three months ended September 30, 2008 compared with a net
      loss
      of $425,000, or $0.47 per share (basic and diluted) in the same period of 2007.
      The Company recognized an extraordinary gain of $17,645,000 or $2.54 per share
      (basic) and $2.53 per share (diluted), during the third quarter of 2008.




**Liquidity
      and Capital Resources**





At
      September 30, 2008, we had cash and cash equivalents of $372,000 compared with
      $494,000 at December 31, 2007. The reduction in our cash position primarily
      reflects increases of $290,000 in inventory, an increase in prepaid and other
      current assets of $198,000, and increased capital expenditures of $103,000,
      offset by a decrease in accounts receivable of $360,000 and the additional
      working capital loan (net of repayment including accreted interest) of $326,000
      from our senior debt holder. The substantial positive effect to our working
      capital deficit from $34,513,000 at December 31, 2007 to $479,000 at September
      30, 2008 was due to the restructuring of the debt during the third quarter
      of
      2008.





As
      a
      result of the debt restructuring, we eliminated principal and interest on
      approximately $25,076,000 of debt and will provide for amortization of the
      remaining debt on terms that we believe we will be able to meet. The gain
      on the debt restructure was approximately $17,645,000 net of related
      costs .
      However, our ability to make these debt payments is dependent upon our ability
      to operate profitable and to generate positive cash flow from operations, and
      we
      cannot be assured that we will be able to do so. If we continue to incur
      losses from our operations, we may be unable to make the payments to the holders
      of our senior and subordinated debt and may necessitate our seeking protection
      under the Bankruptcy Code.





During
      the nine months ended September 30, 2008 our only investing activities were
      capital expenditures of $103,000 compared with $304,000 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. This note was deemed to be part of the debt
      restructuring and as such, interest was accreted based on the anticipated
      payment stream. An interest rate anticipated over the payout of the debt was
      computed at an amount equal to the six-month rate of LIBOR anticipated over
      the
      payment period. The interest computed is shown as part of Senior debt on the
      balance sheet. This loan is due on December 31, 2008. We made payments of
      $274,000 on this debt during the third quarter 2008. (See Note 6- Subsequent
      Event)





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, prior to the debt restructuring,
      had advanced us $1,000,000 in October 2007 and $600,000 in June 2008. Because
      of
      our urgent cash requirements, in November 2008, Cheyne advanced us $425,000,
      which is due in June 2009 (See
      Note
      6- Subsequent Event) .
      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 as well as our ability to make the
      payments that are due to Cheyne. 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, 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, our ability to sell our products
      in
      a period of a contracting economy with a worldwide reduction in credit
      availability, 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 and Mexican operations are
      denominated in British pounds or Mexican Peso. The
      dollar has recently strengthened against a number of foreign currencies,
      including the British pound and the Mexican peso. Sales to customers in Great
      Britain and Mexico are made in the local currency. As a result, while our costs
      are incurred in dollars and pesos, as a result of the stronger dollar, the
      dollar value of our collections from these customers, primarily British
      Telecommunications, has decreased. Our operations were affected by the stronger
      dollar during the third quarter of 2008 and the effect may be greater during
      the
      fourth quarter. We
      do not
      engage in any hedging or other currency transactions.






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**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.




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 third 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 continuing to investigate new integrated ERP systems 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




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          21




*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.




**PART
      II - OTHER INFORMATION**





**Item
              1A.**
            **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 nine months ended September 30, 2008, we sustained declines in
      revenue from our largest customer, British Telecommunications, from the
      comparable three and nine 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.





The
      recent strengthening of the dollar against certain foreign currencies,
      particularly the British pound and, to a lesser extent, the Mexican peso, has
      affected our revenue, gross margins and the results of our operations. Our
      revenue is received in the local currency. As the dollar strengthens, the
      revenue we receive which is denominated in a currency other the US dollar,
      translates into fewer dollars.




Our
      business may be affected by the general economic slowdown and decreased
      availability of credit, which may result in our inability to develop new
      business and decisions on the part of our customers to cancel or defer
      purchasers of our equipment.




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.




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**Item
              5.**
            **Other
                information**





In
      November 2008, the Company borrowed additional senior debt of $425,000 from
      Cheyne, our senior debt holder.  As of November 11, 2008, the Company had a
      principal outstanding balance of $1,311,000 (excluding accreted interest) on
      the
      Working Capital Note. The old Working Capital Note was replaced for a new
      Working Capital Note in the amount of $1,747,012 (including accrued interest).
      Interest on the additional $425,000 advance will be expensed as incurred at
      a
      rate equal to the six month Libor rate plus 10%. Principal and interest is
      payable January 2009 though June 2009 with each monthly payment being equal
      to
      25% of the gross receipts received from sales generated in the United
      Kingdom.  The remaining principal balance of the note and accrued interest
      is due on June 30, 2009.  The New Working Capital Note is collateralized by
      all of the assets of the Company which also secure the existing senior
      debt.




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





4.1
                Promissory
                    note dated as of November 11, 2008, issued to Cheyne Special
                    Situations
                    Fund L.P.


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




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








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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: 
      November 14, 2008




By: /s/Edward
      B. Kornfeld


Edward
      B.
      Kornfeld


Chief
      Executive Officer and Chief Financial Officer








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