SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-Q


           [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended September 30, 1996

          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934


      For the transition period from.................to...................
                          Commission file number 1-8191


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

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


                   575 Underhill Boulevard, Syosset, New York
                    (Address of principal executive offices)

                                      11791
                                   (Zip Code)

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

     Indicate by check mark whether the Registrant (1) has filed all reports
     required to be filed by Section 13 of 15(d) of the Securities Exchange Act
     of 1934 during the preceding 12 months (or for such shorter period that the
     registrant was required to file such reports), and (2) has been subject to
     such filing requirements for the past 90 days.

      Yes ___X___      No ______

     Indicate the number of shares outstanding of each of the issuer's classes
     of common stock as of the latest practicable date:
     2,190,008 shares as of November 5, 1996

                               Page 1 of 17 pages


<PAGE>

PART I.- FINANCIAL INFORMATION
Item 1- Financial Statements

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
                           Consolidated Balance Sheets
                             (Dollars in thousands)

                                                   September 30,    December 31,
                                                       1996             1995    
                                                   -------------    ------------
                                     Assets        (Unaudited)
                                     ------        
Current assets:
     Cash and cash equivalents                         $ 1,715         $ 1,109
     Accounts receivable, net                           14,700          12,626
     Inventories                                         7,400           8,979
     Prepaid expenses                                      528             659
     Receivable from sale of 
       discontinued operations                            --             1,000
     Other receivable                                      862            --
                                                       -------         -------
                  Total current assets                  25,205          24,373
                                                       -------         -------
      Assets held for sale, net                           --             7,893
      Property, plant and equipment, net                 5,650           6,911
      Deferred computer software, net                    2,071           3,188
      Goodwill, net                                     11,480          11,793
      Other assets                                       4,341           6,433
                                                       -------         -------
                  Total assets                         $48,747         $60,591
                                                       =======         =======

                      Liabilities and Stockholders' Deficit
                      -------------------------------------

Current liabilities:

      Current portion Long-term debt                   $   500         $    --
      Convertible subordinated debentures                2,086           6,564
      Accounts payable                                   7,015           8,302
      Accrued expenses                                   8,598          10,502
      Accrued interest payable                             493           3,534
      Accrued commissions                                2,338           2,016
      Income taxes payable                                 780             780
      Customer advances                                    251             504
      Short-term loans                                     250             368
                                                       -------         -------
                  Total current liabilities             22,311          32,570
                                                       -------         -------

Long-term debt                                          17,328          26,645
Convertible subordinated debentures                         --          25,660
Zero coupon senior subordinated convertible notes       25,909              --
Notes payable net of current maturities                  3,084           3,084
Income taxes payable                                       811             811
Other long-term liabilities                                625             385
Minority interest                                          803             759
                                                       -------         -------
                  Total long-term liabilities           48,560          57,344
                                                       -------         -------

Stockholders' deficit:

      Preferred stock, no par value; authorized 
          1,000,000 shares, none issued                     --              --
      Common stock, par value $.01; authorized 
          40,000,000 and 20,000,000 shares,
          issued  2,190,009 and 1,492,361  
          shares at September 30, 1996 and December 31,
          1995, respectively                                22              15

       Additional paid-in capital                       36,537          33,308
       Foreign currency translation adjustment          (3,700)         (4,199)
       Accumulated deficit                             (52,610)        (56,074)
                                                       -------         ------- 
                                                       (19,751)        (26,950)
        Treasury stock, at cost                         (2,066)         (2,066)
        Receivable for employee stock purchases           (307)           (307)
                                                       -------         -------
                  Total stockholders' deficit          (22,124)        (29,323)
                                                       -------         -------
                  Total liabilities and 
                    stockholders' deficit              $48,747         $60,591
                                                       =======         =======

          See accompanying notes to consolidated financial statements.
                               Page 2 of 17 pages


<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
                 Unaudited Consolidated Statements of Operations
                      (In thousands, except per share data)

                                                          Nine Months Ended
                                                    September 30,  September 30,
                                                         1996           1995
                                                    -------------  -------------

Sales                                                  $41,476        $ 47,922
Cost of sales                                           27,087          37,269
                                                       -------        --------
     Gross profit                                       14,389          10,653
                                                       -------        --------
                                                     
Selling, general and administrative expenses             9,578          11,573
Research and development expenses                        2,681           3,853
                                                       -------        --------
         Total expenses                                 12,259          15,426
                                                       -------        --------
                                                     
         Operating income (loss)                         2,130          (4,773)
                                                     
Interest expense                                        (4,209)         (5,882)
Interest income                                             73              48
                                                     
Gain on sale of assets                                   2,264              --
Other income (expense)                                      62            (642)
                                                     
       Income (loss) before income taxes,            
         minority interest, discontinued               
         operations and extraordinary item                 320         (11,249)
                                                     
Income tax expense                                         (28)            (70)
                                                     
Minority interest                                          (44)           (199)
                                                       -------        --------
       Income (loss) from continuing operations            248         (11,518)
                                                     
Loss on disposal of discontinued operations                 --          (3,500)
                                                     
       Income (loss) before extraordinary item             248         (15,018)
                                                     
Extraordinary gain                                       3,922           1,871
                                                       -------        --------
                                                     
Net income (loss)                                      $ 4,170        $(13,147)
                                                       =======        ========
                                                     
Per share data:                                      
                                                     
        Income (loss) from continuing operations       $  0.05        $  (7.90)
                                                       =======        ========
                                                     
        Income (loss) before extraordinary item        $  0.05        $ (10.27)
        Extraordinary item                                0.85            1.28
                                                       -------        --------
           Net income (loss)                           $  0.90        $  (8.99)
                                                       =======        ========
                                                     
        Weighted average shares outstanding              4,618           1,461
                                                       =======        ========

     See accompanying notes to unaudited consolidated financial statements.
                               Page 3 of 17 pages


<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
                 Unaudited Consolidated Statements of Operations
                      (In thousands, except per share data)

                                                         Three Months Ended
                                                   September 30,  September 30,
                                                       1996            1995
                                                   -------------  -------------

Sales                                                  $14,613         $14,744
Cost of sales                                            9,343          11,422
                                                       -------         -------
     Gross profit                                        5,270           3,322
                                                       -------         -------
                                                                      
Selling, general and administrative expenses             3,391           2,839
Research and development expenses                          877           1,419
                                                       -------         -------
         Total expenses                                  4,268           4,258
                                                       -------         -------
                                                                      
         Operating income (loss)                         1,002            (936)
                                                                      
Interest expense                                          (983)         (2,072)
Interest income                                             31              15
                                                                      
Other income (expense)                                      44             (93)
                                                       -------         -------
                                                                      
       Income (loss) before income taxes,                             
         minority interest and extraordinary item           94         (3,086)
                                                                      
Income tax benefit (expense)                               (22)            (53)
Minority interest                                         (277)            (42)
                                                       -------         -------
                                                                      
       Loss from continuing operations                    (205)         (3,181)
                                                                      
Extraordinary gain                                         532              --
                                                       -------         -------
                                                                      
Net income (loss)                                      $   327         $(3,181)
                                                       =======         =======
                                                                      
Per share data:                                                       
                                                                      
        Loss from continuing operations                $ (0.04)        $ (2.18)
                                                       =======         ======= 
Loss before extraordinary item                         $ (0.04)        $ (2.18)
Extraordinary item                                        0.10              --
                                                       -------         -------
         Net income (loss)                             $  0.06         $ (2.18)
                                                       =======         ======= 
                                                                      
         Weighted average shares outstanding             5,225           1,461
                                                       =======         ======= 
                                                                   

     See accompanying notes to unaudited consolidated financial statements.
                               Page 4 of 17 pages


<PAGE>

                      PORTA SYSTEMS CORP. AND SUBSIDIARIES
                Unauditied Consolidated Statements of Cash Flows
                                 (In thousands)

                                                         Nine  Months Ended
                                                   September 30,   September 30,
                                                      1996             1995
                                                   ------------    -------------
Cash flows from operating activities:
     Net income (loss)                                 $ 4,170        $(13,147)
     Adjustments to reconcile net income 
          (loss) to net cash used in 
          operating activities:
         Loss on disposal of discontinued operations        --           3,500
         Gain on sale of assets                         (2,264)            --
         Extraordinary gain                             (3,922)         (1,871)
         Non-cash financing expenses                     2,089           1,031
         Realized gain on litigation settlement           (174)             --
         Depreciation and amortization                   3,177           3,735
         Amortization of discount on convertible 
         subordinated debentures                            94             544
         Minority interest                                  44             199
       Changes in assets and liabilities:
         Accounts receivable                            (2,074)         (1,980)
         Inventories                                     1,579           3,278
         Prepaid expenses                                  131            (314)
         Deferred computer software                        (38)           (510)
         Other assets                                     (184)           (409)
         Accounts payable                               (1,287)            564
         Accrued expenses                               (1,904)          1,827
         Other liabilities                                 495             (81)
                                                       -------        -------- 
              Net cash used in operating activities        (68)         (3,634)
                                                       -------        -------- 

     Cash flows from investing activities:
         Proceeds from disposal of assets 
            held for sale, net                           6,793              --
         Proceeds from sale of assets                    3,456              --
         Capital expenditures                             (246)           (702)
                                                       -------        -------- 
              Net cash provided by (used in) 
                investing activities                    10,003            (702)
                                                       -------        -------- 

     Cash flows from financing activities:
         Proceeds from long-term debt                    1,340           5,338
         Repayments of long-term debt                  (10,157)         (2,500)
         (Repayments of) proceeds from notes 
           payable and short term loans                   (118)            469
                                                       -------        -------- 
              Net cash (used in) provided 
                by financing activities                 (8,935)          3,307
                                                       -------        -------- 

     Effect of exchange rates on cash                     (394)            133
                                                       -------        -------- 

     Increase (decrease) in cash 
       and cash equivalents                                606            (896)

     Cash and equivalents - beginning of the year        1,109           2,332
                                                       -------        -------- 

     Cash and equivalents - end of the period          $ 1,715        $  1,436
                                                       =======        ========

     Supplemental cash flow disclosures:
         Cash paid for interest expense                $ 2,022        $  2,365
                                                       =======        ========

         Cash paid for income taxes                    $    66        $     41
                                                       =======        ========


     See accompanying notes to unaudited consolidated financial statements.
                               Page 5 of 17 pages


<PAGE>

              NOTES TO UNAUDITIED 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 periods 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  annual  report to  stockholders  for the year ended
December 31, 1995. Results for the first nine months of 1996 are not necessarily
indicative of results for the year.

Note 2: Computation of Per Share Earnings

     All share and per share information presented in the Consolidated Financial
Statements and the Form 10-Q for the nine months ended  September 30, 1996 gives
retroactive effect to the Reverse Split described in Note 10.
<TABLE>
<CAPTION>

                                                         Nine months ended     Three months ended
                                                         September 30, 1996    September 30, 1996
                                                         ------------------    ------------------
                                                         (In thousands, except per share amounts)

<S>                                                           <C>                   <C>   
Net income                                                    $4,170                $  327
                                                              ======                ======

Weighted average shares outstanding                            1,985                 2,107

Shares of common stock contingently issuable in
   connection with the potential conversion of the
   zero coupon senior subordinated convertible notes           2,633                 3,118
                                                              ------                ------

Weighted average shares outstanding-Primary                    4,618                 5,225
                                                              ======                ======

Earnings per share                                            $ 0.90                $ 0.06
                                                              ======                ======
</TABLE>

Note 3: Discontinued Operations

     The  Company's  receivable  from the sale of  discontinued  operations  was
represented  by  shares  of  common  stock  of the  entity  which  now  owns the
discontinued  operations.  During the quarter  ended June 30, 1996,  the Company
sold the  shares of this  common  stock for  $3,456,000  and  recorded a gain of
$2,264,000.  The gain  represented  an adjustment in the estimated  value of the
shares  previously  received  and  accordingly  was  reflected  as  an  item  in
continuing  operations.  The  receivable  had  previously  been  written down to
$1,000,000  as a result of the Israeli  receivership  proceedings  involving the
purchaser  of the  discontinued  operation.  As part of an  agreement  with  the
Company's  primary  lender,  the net proceeds from the sale of the  discontinued
operations  were  applied to reduce  the  outstanding  principal  balance of the
Company's term loan.

                               Page 6 of 17 pages


<PAGE>

Note 4: Assets Held For Sale

     On March 13, 1996,  the Company sold certain  assets and the buyer  assumed
certain  liabilities and severance  obligations related to the operations of the
Company's fiber optics management and component business for $7,893,000, subject
to certain  adjustments.  As of December  31,  1995,  in  conjunction  with this
transaction,  the Company accrued approximately $700,000 for certain obligations
in connection  with the closing of its fiber optics  facility in Ireland.  These
obligations  were  settled in the second  quarter of 1996,  and along with other
adjustments related to the sale of the fiber business, for a positive adjustment
of  approximately  $358,000.  The  difference  was  recorded as a  reduction  of
selling,  general and administrative  expenses in the accompanying  statement of
operations.

     The  Company  received  $6,793,000  at  closing  of the  sale of the  fiber
business and the  remainder was placed into two escrow funds to be released over
the next year, subject to certain conditions, including a final valuation of the
net assets transferred.  As of September 30, 1996, the remainder,  $862,000, has
remained in escrow and is reported as an "Other  receivable" in the accompanying
consolidated  balance sheet. The proceeds were primarily used to repay long-term
debt.  As a  result  of the  transaction,  the  Company  recorded  a  charge  to
operations  in 1995 of  $862,000  to  write  down  the  net  assets  sold to net
realizable value. Net sales of the fiber optics business  approximated  $452,000
and  $5,577,000  for  the  nine  months  ended  September  30,  1996  and  1995,
respectively.

Note 5: Inventories

     Inventories  at September 30, 1996 have been computed using a standard cost
system.  The composition of inventories at the end of the respective  periods is
as follows:

                                    September 30, 1996        December 31,1995
                                    ------------------        ----------------
                                                   (in thousands)

         Parts and components          $   4,683                   $   5,370
         Work-in-process                   1,065                         849
         Finished goods                    1,652                       2,760
                                       ---------                   ---------
                                       $   7,400                   $   8,979
                                       =========                   =========
                                                         
Note 6: Long-Term Contracts

     At September 30, 1996, accounts receivable included  approximately $900,000
in excess costs and related  profits over amounts  billed  relating to long-term
contracts  under  which  the  Company  provides  specialized  products  to major
international  customers.  Substantially  all such  amounts  are  expected to be
billed during the remainder of 1996.

Note 7: 6% Convertible Subordinated Debentures

     On November 30, 1995, the Company offered the holders of its 6% Convertible
Subordinated  Debentures  due July 1, 2002 (the  Debentures) an exchange of each
$1,000 face amount of such debt and the  elimination of the  associated  accrued
interest  payable  for 19.4  shares of the  Company's  common  stock and $767.22
principal  amount of zero  coupon  senior  subordinated  convertible  notes (the
Notes) due  January 2, 1998 (the  Exchange  Offer).  The Notes are  non-interest
bearing, unsecured and have no sinking fund requirements.


                               Page 7 of 17 pages


<PAGE>

Note 7: 6% Convertible Subordinated Debentures (continued)

     Each Note is convertible  into common stock at a conversion  price of $7.90
per share until November 1, 1996 and $6.55 per share thereafter. Accordingly, in
addition to a maximum of 699,855 of common shares  issuable from the exchange of
the  Debentures,  the  maximum  number of shares of common  stock  that could be
issued upon  conversion,  if all  Debentures  are  exchanged,  is  approximately
4,225,600.  The Notes are  redeemable  at the  option of the  Company  at 86.71%
through  November  1,  1996  increasing  periodically  to 100% of the  principal
balance on November 1, 1997.

     Through September 30, 1996, the Company exchanged approximately $33,770,000
principal amount of the Debentures,  net of unamortized  discount of $3,552,000,
for 655,000  shares of the  Company's  common  stock and  $25,909,000  principal
amount of Notes pursuant to the Exchange Offer.

     The  exchange  of the  Debentures  for the Notes and common  stock has been
accounted for as a troubled debt  restructuring  in accordance with Statement of
Financial  Accounting Standards No. 15 (SFAS No. 15). Since the future principal
and interest  payments  under the Notes is less than the  carrying  value of the
Debentures,  the Notes were recorded for the amount of the future cash payments,
and not discounted.  Accordingly,  the Company recorded an extraordinary gain on
restructuring  of $532,000 during the quarter and $3,922,000 for the nine months
ended  September  30, 1996.  Additionally,  in  accordance  with SFAS No. 15, no
future interest expense will be recorded on the Notes.

     As  of  September  30,  1996,   $2,086,000  of  the   Debentures   remained
outstanding,  net of original  issue  discounts  amortized to principal over the
term of the debt using the effective interest rate method, of $219,000. The face
amount of the outstanding Debentures was $2,305,000.

     Interest on the Debentures is payable on July 1 of each year. The aggregate
accrued  interest  payable on the  remaining  Debentures  (including  amounts in
arrears) was  approximately  $311,000 as of September  30, 1996.  The Company is
presently in default under the interest  payment  provisions of the  Debentures.
Accordingly, such debt has been classified as current at September 30, 1996.

Note 8: Long-Term Debt

     At September 30, 1996,  the Company's  long-term  debt  consisted of senior
debt under its credit facility with Foothill  Capital  Corporation in the amount
of $17,828,000 of which $500,000 has been  reclassified as current in accordance
with the terms of the credit  facility.  During the quarter ended  September 30,
1996 the Company repaid  $198,000 of outstanding  principal from the disposal of
the sale of certain other assets.

     Financial  debt  covenants  include an  interest  coverage  ratio  measured
quarterly  commencing with the quarter ending June 30, 1996,  limitations on the
incurrence  of   indebtedness,   limitations   on  capital   expenditures,   and
prohibitions on declarations of any cash or stock dividends or the repurchase of
the Company's stock. As of September 30, 1996, the Company is in compliance with
the above covenants.


                               Page 8 of 17 pages


<PAGE>

Note 9: Legal Matters

     In July 1996,  an action was commenced in the Supreme Court of the State of
New York,  New York County by certain  stockholders  and warrant  holders of the
Company who acquired their  securities in connection with the acquisition by the
Company of Aster Corporation  against the Company and certain present and former
directors.  The  complaint  alleges  breach of contract  against the Company and
breach of fiduciary  against the directors  arising out of an alleged failure to
register  certain  restricted  shares and warrants owned by the plaintiffs.  The
complaint  seeks damages of $392,000;  however,  counsel for the plaintiff  have
advised the Company that  additional  plaintiffs  may be added and, as a result,
the amount of  damages  claimed  may be  substantially  greater  than the amount
presently claimed.  The Company believes that the defendants have valid defenses
to the claims.

Note 10: Capital

     On June 6, 1996, the  stockholders of the Company approved (a) an amendment
to the  Company's  certificate  of  incorporation  to  increase  the  number  of
authorized shares of Common Stock from 20,000,000 to 40,000,000 shares and (b) a
one-for-five  reverse split (the "Reverse Split") of the Company's common stock.
As a result of the Reverse Split,  each share of common stock outstanding at the
effective  time of the  Reverse  Split,  without  any  action on the part of the
holder thereof,  became  one-fifth  share of common stock.  The par value of the
common stock was not effected by the Reverse Split.

     The Company has  reclassified  approximately  $84,000  from common stock to
additional  paid-in capital.  All share and per share data have been restated to
give effect to the Reverse Split.


                               Page 9 of 17 pages


<PAGE>

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:
<TABLE>
<CAPTION>

                                                         Nine Months Ended         Three Months Ended
                                                             September 30,            September 30,
                                                         -----------------         ------------------
                                                        1996          1995          1996        1995
                                                        ----          ----          ----        ----
<S>                                                     <C>           <C>           <C>         <C> 
Sales                                                   100%          100%          100%        100%
Cost of Sales                                            65%           78%           64%         77%
Gross Profit                                             35%           22%           36%         23%
Selling, general and administrative expenses             23%           24%           24%         19%
Research and development expenses                         7%            8%            6%         10%
     Operating income(loss)                               5%          (10%)           6%         (6%)
Interest expense - net                                   (9%)         (12%)          (7%)       (14%)
Other income (expense)                                    5%           (1%)           0%         (1%)
Minority interest                                         0%           (0%)          (2%)        (0%)
Provision for discontinued operations                     0%           (7%)           0%          0%
Extraordinary item                                        9%            4%            4%         (0%)
Net income (loss)                                        10%          (27%)           1%        (22%)
</TABLE>                                                        
                                                                             
     The  Company's  sales by product line for the periods  ended  September 30,
1996 and 1995 are as follows:

                                                       Nine Months Ended
                                                         September 30,
                                                       -----------------
                                                  1996                 1995
                                                  ----                 ----
                                                    (Dollars in thousands)

Line connection/protection equipment*        $ 18,710   45%     $ 23,051    48%
OSS equipment                                  17,077   41%       20,995    44%
Signal Processing                               5,495   13%        3,519     7%
Other                                             194    1%          357     1%
                                             --------------     ---------------
                                             $ 41,476 1 00%     $ 47,922   100%
                                             ==============     ===============


                                                       Three Months Ended
                                                          September 30,
                                                       -----------------
                                                  1996                 1995
                                                  ----                 ----
                                                      (Dollars in thousands)

Line connection/protection equipment*        $  6,004   41%     $  6,946    47%
OSS equipment                                   6,445   44%        6,599    45%
Signal Processing                               2,118   15%        1,108     7%
Other                                              46    0%           91     1%
                                             --------------     ---------------
                                             $ 14,613  100%     $ 14,744   100%
                                             ==============     ===============

*Includes  sales of fiber optics products of $452 and $0 for the nine months and
three months ended  September 30, 1996 and $5,577 and $1,893 for the nine months
and three months ended September 30, 1995, respectively.


                               Page 10 of 17 pages


<PAGE>

Financial Condition

     The  Company's  working  capital  changed from a deficit of  $8,197,000  at
December 31, 1995 to a positive  $2,894,000 at September 30, 1996. The reduction
is primarily the result of the sale of the fiber optics  business which provided
the  Company  with  funds to reduce  certain  of its  current  liabilities,  the
conversion of approximately  94% of the 6% convertible  subordinated  debentures
which reduced approximately  $2,591,000 of accrued interest expense and the sale
of stock issued in respect of the sale of discontinued operations which was used
to reduce its obligations to its senior lender.

     During the quarter  ended June 30, 1996,  the Company  received  $3,456,000
from the sale of  common  stock  issued in  respect  of the  obligations  of the
purchaser  of  discontinued  operations.  A gain of  $2,264,000,  net of related
expenses,  was recorded.  The  receivable  had  previously  been written down to
$1,000,000  as a result of the Israeli  receivership  proceedings  involving the
purchaser of the discontinued operation. The net proceeds were applied to reduce
the  outstanding  principal  balance of the  Company's  long-term  loan with its
senior lender.

     In March 1996,  the Company's  loan and security  agreement with its senior
secured lender, Foothill Capital Corporation ("Foothill"), was amended. Pursuant
to the amendment,  the Company's obligations were extended from November 1996 to
November  1998 and  defaults  at  December  31, 1995 and through the date of the
amendment,  were waived by Foothill.  As a result the Company's  indebtedness to
Foothill  has  been  classified  as  a  long-term  liability.  As  part  of  the
consideration  to Foothill for the amendment,  the Company is obligated to pay a
monthly facility fee of $50,000 commencing November 30, 1996.

     The Company's  obligations to Foothill are secured by substantially  all of
the assets of the Company and its  subsidiaries.  The  agreement  with  Foothill
requires  the  Company to  continue  to meet  certain  financial  covenants.  At
September 30, 1996,  the Company is in compliance  with its covenants  under the
agreement.

     On November 30, 1995, the Company offered the holders of its 6% Convertible
Subordinated  Debentures  due July 1, 2002 (the  Debentures) an exchange of such
debt for common stock and zero coupon senior subordinated convertible notes (the
Notes) due January 2, 1998.  The  exchange  ratio is 19.4 shares of common stock
and $767.22 of  principal of Notes in exchange  for $1,000  principal  amount of
Debentures. Accrued interest on the Debentures would also be eliminated.

     As of September 30, 1996, approximately $33,770,000 principal amount of the
Debentures,  net of unamortized  discount of $3,552,000  have been exchanged for
655,000 shares of the Company's common stock and $25,909,000 principal amount of
Notes pursuant to the Exchange  Offer.  The unsecured Notes do not bear interest
and there are no sinking fund requirements.

     As of September 30, 1996, the Company had remaining outstanding  $2,086,000
of Debentures,  net of original issue discounts  amortized to principal over the
term of the debt using the effective interest rate method, of $219,000. The face
amount of the outstanding Debentures was $2,305,000.


                               Page 11 of 17 pages


<PAGE>

Financial Condition (continued)

     Interest on the  Debentures is payable on July 1 of each year. The interest
accrued as of September 30, 1996 amounted to $311,000.  As of September 30, 1996
the  Company  is in  default  under  the  interest  payment  provisions  of  the
Debentures for July 1, 1996 and 1995. Accordingly, such debt has been classified
as a current liability at September 30, 1996.

     The  Company has no past or ongoing  interest  obligation  with  respect to
either the new zero coupon notes or the  Debentures  which were  exchanged.  The
aggregate  annual  interest  obligation  on the  Debentures  which have not been
exchanged at September 30, 1996 is approximately $138,000.

     On March 12, 1996,  the Company sold certain  assets and the buyer  assumed
certain  liabilities and severance  obligations related to the operations of the
Company's  fiber optics  management  and  component  business.  Accordingly,  at
December 31, 1995, the net assets of the fiber optics business were reflected as
"assets held for sale, net" at net realizable  value,  based on the terms of the
sale. The net assets of the fiber optics business were sold for a total purchase
price of  approximately  $8,000,000  of  which  $1,100,000  was held in  escrow,
subject to certain conditions,  plus the assumption of approximately  $1,400,000
in liabilities. The proceeds were applied to reduce the Company's obligations to
Foothill in accordance with the March 1996 amendment to the Foothill  agreement.
As of September  30, 1996 certain  claims have been resolved and funds have been
disbursed from the escrow account to reduce the balance to $862,000.

     The sale of the fiber optics business  benefited the Company by allowing it
to close two  facilities,  with a resultant  decrease in personnel  and overhead
costs.  The sale also enabled the Company to amend and extend its agreement with
Foothill, as described above, and make a significant payment to Foothill,  which
reduces its ongoing interest costs.

Results of Operations

     The Company's  sales for the nine months ended  September 30, 1996 compared
to the nine months ended September 30, 1995 decreased  $6,446,000  (13%) and the
sales for the quarter  ended  September  30,  1996  decreased  by $131,000  (1%)
compared to the quarter  ended  September 30, 1995.  The primary  reason for the
decrease  for the nine months was the sale of the fiber optics  business  during
the first quarter of 1996 (see note 4).

     OSS revenue  decreased  by  $3,918,000  and $154,000 for the nine and three
months ended September 30, 1996, respectively.  This reduced volume for the nine
months  reflects  lower levels of sales of our Korea joint venture  partner,  as
well as reduced sales to British Telecommunications plc.

     The line  connection/protection  equipment  sales for the nine months ended
September 30  decreased  by  approximately  $4,341,000  from 1995 to 1996.  This
decline  reflected the sale of the fiber optics division in March 1996. Sales of
fiber optics  products  were $452,000 and  $5,577,000  for the nine months ended
September 30, 1996 and 1995, respectively.

     Line connection/protection equipment revenue for the September 1996 quarter
decreased  approximately  $942,000  as a result of a change in the  product  mix
within this category from the same quarter last year. Copper products  increased
approximately $951,000 from last year's quarter. There were no fiber optic sales
for the quarter  ended  September 30, 1996 compared to $1,893,000 of fiber sales
for the quarter ended September 30, 1995 (see Note 4).


                               Page 12 of 17 pages


<PAGE>

Results of Operations (continued)

     Signal  processing  revenue for the quarter and nine months ended September
30, 1996 increased by $1,010,000  and  $1,976,000,  respectively.  This increase
reflects higher sales volumes than for the comparable periods of 1995.

     Cost of sales for the nine months and the quarter ended September 30, 1996,
as a percentage of sales  compared to the same periods of 1995,  decreased  from
78% to 65% and from 77% to 64%,  respectively.  This improvement in gross margin
is attributed to the Company's  continuing efforts to reduce direct and indirect
labor and overhead manufacturing costs which began late in the second quarter of
1995, and to a lesser extent, the effect of the sale of the fiber optic business
as of March 1996.

     Selling,  general and administration expenses decreased by $1,995,000 (17%)
from  $11,573,000  to  $9,578,000  for the nine months ended  September 30, 1996
compared to 1995.  This decrease is due to the Company's  continuing  efforts to
reduce costs and  expenses.  For the quarter  ended  September 30, 1996 and 1995
selling,  general and  administration  expenses increased by $552,000 (19%). The
primary reason for this increase is the write off of additional expenses related
to the sale of the fiber optics business during 1996 (see Note 4).

     Research and  development  expenses  decreased by  $1,172,000  (30%) and by
$542,000  (38%) for the nine and three months ended  September 30, 1996 from the
comparable  periods  in 1995,  respectively.  This  reduced  cost  reflects  the
Company's  efforts to streamline  its  operations by focusing on those  projects
with the highest  potential for success and to a lesser extent,  the elimination
of those expenses related to fiber activities.

     As a result of the above,  for the nine  months  ended  September  30, 1996
compared to 1995,  the  Company had  operating  income of  $2,130,000  versus an
operating loss of $4,773,000. The Company had operating income of $1,002,000 for
the quarter  ended  September  30,  1996 as compared to a loss of $936,000  from
operations  for the quarter ended  September 30, 1995.  The Company's  operating
improvement  for the nine months and the quarter ended  September 30, 1996, when
compared to the comparable periods ended September 30, 1995, were the results of
its continuing  efforts to bring its costs and expenses in line with its current
level of sales and the sale of the fiber optics business.

     Interest  expense  decreased  for the nine  months  ended  September  30 by
$1,673,000  from $5,882,000 in 1995 to $4,209,000 in 1996. For the quarter ended
September 30, interest  expense  decreased by $1,089,000 from $2,072,000 in 1995
to $983,000  in 1996.  This change is  attributable  primarily  to a decrease in
interest  expense  related  to the  exchange  of the  Company's  Debentures  and
repayment of principal to the  Company's  senior lender from the proceeds of the
sale of the fiber business and the sale of common stock issued in respect of the
sale  of  discontinued  operations  (see  Notes 3 and 4).  These  reductions  of
interest expense are offset by an increase in interest  expense  associated with
increased borrowing costs.

     During the nine month period ended September 30, 1996, the Company recorded
a  $3,922,000  gain from the early  extingushment  of  approximately  94% of its
Debentures.  Of this gain,  $532,000 was recognized in the third quarter of 1996
as an additional 8% of the  Debentures  were  exchanged (See Note 8). During the
nine month  period ended June 30, 1995,  the Company  recorded an  extraordinary
gain of $1,871,000 arising from the Company's  repurchase from its senior lender
and retirement of $3,900,000 of its Debentures for approximately $2,500,000.


                               Page 13 of 17 pages


<PAGE>

Results of Operations (continued)

     During the quarter  ended June 30, 1996,  the Company  received  $3,456,000
from the sale of  common  stock  issued in  respect  of the  obligations  of the
purchaser of the discontinued  operations resulting in a gain of $2,264,000 (see
Note 3).  During  the  quarter  ended  June 30,  1995,  the  Company  recorded a
$3,500,000 loss from the sale of discontinued operations.  At that time the best
estimate  for  recovery  was  $1,000,000  as a  result  of the  liquidation  and
receivership of the purchaser of such operations.

     As the  result  of the  foregoing  the  Company  generated  net  income  of
$4,170,000,  $0.90  per share  for the nine  months  ended  September  30,  1996
compared with a net loss of  $13,147,000,  $8.99 per share,  for the nine months
ended September 30, 1995 and net income for the quarter ended September 30, 1996
of $327,000,  $0.06 per share and a net loss for the quarter ended September 30,
1995 of $3,181,000,  $2.18 per share.  The  calculation of the weighted  average
shares,  for the period and  quarter  ended  September  30,  1996,  assumes  the
conversion of the Notes which are considered to be a common stock equivalent.


                               Page 14 of 17 pages


<PAGE>

PART II- OTHER INFORMATION

Item 1. Legal Proceedings.

     In July 1996,  an action was commenced in the Supreme Court of the State of
New York,  New York County by certain  stockholders  and warrant  holders of the
Company who acquired their  securities in connection with the acquisition by the
Company of Aster Corporation  against the Company and certain present and former
directors.  The  complaint  alleges  breach of contract  against the Company and
breach of fiduciary  against the directors  arising out of an alleged failure to
register  certain  restricted  shares and warrants owned by the plaintiffs.  The
complaint  seeks damages of $392,000;  however,  counsel for the plaintiff  have
advised the Company that  additional  plaintiffs  may be added and, as a result,
the amount of  damages  claimed  may be  substantially  greater  than the amount
presently claimed.  The Company believes that the defendants have valid defenses
to the claims.

Item 2. Changes in Securities.

     On November 30, 1995, the Company offered the holders of its 6% Convertible
Subordinated  Debentures  due July 1, 2002 (the  Debentures) an exchange of such
debt for common stock and zero coupon senior subordinated convertible notes (the
Notes) due January 2, 1998.  The  exchange  ratio is 19.4 shares of common stock
and $767.22 of  principal of Notes in exchange  for $1,000  principal  amount of
Debentures. Accrued interest on the Debentures would also be eliminated.

     Through September 30, 1996, the Company exchanged approximately $33,770,000
principal  amount of the Debentures,  net of unamortized  discount of $3,552,000
for 655,000  shares of the  Company's  common  stock and  $25,909,000  principal
amount of Notes pursuant to the Exchange Offer.

Item 3. Defaults Upon Senior Securities.

     As of  September  30,  1996 the  Company is in default  under the  interest
payment  provisions of its 6%  Convertible  Subordinated  Debentures due July 1,
2002. See Note 7 to the unaudited quarterly financial statements.


                               Page 15 of 17 pages


<PAGE>

Item 5. Other Information.

     (a) In June 1996,  the Company was advised  that it is the  position of the
staff  of  the  Securities  and  Exchange   Commission   (the  "SEC")  that  the
independence  of the  Company's  prior  auditors,  KPMG  Peat  Marwick  LLP,  is
adversely  impacted by certain  relationships  involving  the  auditors and KPMG
BayMark  Strategies  LLC and Mr. Edward R. Olson,  the Company's  former interim
president and chief operating officer.  On or about July 9, 1996, the SEC issued
an order directing a private investigation of the Company. The SEC has indicated
the investigation  relates to the position of the SEC staff described above. The
Company  has been  cooperating  with the  SEC's  private  investigation  and has
produced  certain  documents to the SEC. In addition,  in  September  1996,  the
Company  has  engaged  the firm of BDO  Seidman  LLP as its  independent  public
accountants  for the  audit  of its  financial  statements  for the  year  ended
December 31, 1995. The audit by BDO Seidman LLP resulted in an amended Form 10-K
which was filed on November 5, 1996 and  reflected no change from the  financial
statements previously filed.

     (b) On August 2, 1996, the  one-for-five  reverse split of the common stock
became  effective.  As a result of the reverse split, each share of common stock
outstanding on such date  automatically  became  converted into  two-tenths of a
share of common stock.  The par value of the common stock was not affected.  See
Note 10 to Consolidate Financial Statements.

Item 6. Exhibits and Reports on Form 8-K.

     A current report on form 8-K (Item 4), dated September 13, 1996, was filed.


                               Page 16 of 17 pages


<PAGE>

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 6, 1996              By /s/William V. Carney
                                                --------------------
                                                   William V. Carney
                                                   Chairman of the Board

         Dated November 6, 1996              By /s/Edward B. Kornfeld
                                                ---------------------
                                                   Edward B. Kornfeld
                                                   Vice President and 
                                                     Chief Financial Officer

                               Page 17 of 17 pages