**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-Q**





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


SECURITIES
      EXCHANGE ACT OF 1934





For
      the
      quarterly period ended June 30, 2006





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


SECURITIES
      EXCHANGE ACT OF 1934





For
      the
      transition period from.................to...................


Commission
      file number 1-8191





**PORTA
      SYSTEMS CORP.**


(Exact
      name of registrant as specified in its charter)





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





6851
      Jericho Turnpike, Suite 170, Syosset, New York


(Address
      of principal executive offices)





11791


(Zip
      Code)





516-364-9300


(Company’s
      telephone number, including area code)





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


Yes x No
o





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


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





Indicate
      by a check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act).


Yes o       
      No x





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





Common
      stock (par value $0.01) 10,053,617 shares as of July 18, 2006.





PART
      I.-
      FINANCIAL INFORMATION


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





PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Consolidated
      Balance Sheets


(In
      thousands, except shares and par value)




June
                30,
            
            December
                31,2006
            
            2005Assets
            
            (Unaudited)Current
                assets:Cash
                and cash equivalents
            
            $
            1,539
            
            $
            1,254Accounts
                receivable - trade, less allowance for doubtful accountsof
                $256 in 2006 and $256 in 2005
            
            
            4,931
            
            
            3,471Inventories
            
            
            3,862
            
            
            4,541Prepaid
                expenses and other current assets
            
            
            759
            
            
            446Assets
                of discontinued operations
            
            
            455
            
            
            588Total
                current assets
            
            
            11,546
            
            
            10,300Property,
                plant and equipment, net
            
            
            1,491
            
            
            1,351Goodwill,
                net
            
            
            2,961
            
            
            2,961Other
                assets
            
            
            49
            
            
            49Total
                assets
            
            $
            16,047
            
            $
            14,661Liabilities
                and Stockholders’ DeficitCurrent
                liabilities:Senior
                debt
            
            $
            24,124
            
            $
            24,675Subordinated
                notes
            
            
            6,144
            
            
            6,1446%
                convertible subordinated debentures
            
            
            385
            
            
            385Accounts
                payable
            
            
            4,937
            
            
            4,035Accrued
                expenses and other
            
            
            2,264
            
            
            1,567Other
                accrued interest payable
            
            
            5,653
            
            
            5,180Liabilities
                of discontinued operations
            
            
            575
            
            
            2,033Total
                current liabilities
            
            
            44,082
            
            
            44,019Deferred
                compensation
            
            
            794
            
            
            827Total
                long-term liabilities
            
            
            794
            
            
            827Total
                liabilities
            
            
            44,876
            
            
            44,846Stockholders’
                deficit:Preferred
                stock, no par value; authorized 1,000,000 shares, none
                issued
            
            
            ---
            
            
            ---Common
                stock, par value $.01; authorized 20,000,000 shares,
                issued10,084,577
                shares in 2006 and 10,084,577 shares in 2005
            
            
            101
            
            
            101Additional
                paid-in capital
            
            
            76,124
            
            
            76,124Accumulated
                deficit
            
            
            (98,413
            )
            
            (99,895
            )Accumulated
                other comprehensive loss:Foreign
                currency translation adjustment
            
            
            (4,703
            )
            
            (4,577
            )(26,891
            )
            
            (28,247
            )Treasury
                stock, at cost, 30,940 shares
            
            
            (1,938
            )
            
            (
                1,938
            )Total
                stockholders’ deficit
            
            
            (28,829
            )
            
            (30,185
            )Total
                liabilities and stockholders’ deficit
            
            $
            16,047
            
            $
            14,661




See
      accompanying notes to unaudited consolidated financial statements.


Page
          2 of 20





PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Unaudited
      Consolidated Statements of Operations and Comprehensive Income


(In
      thousands, except per share amounts)




Six
                Months EndedJune
                30,
            
            June
                30,2006
            
            2005Sales
            
            $
            16,021
            
            $
            15,631Cost
                of sales
            
            
            10,556
            
            
            9,197Gross
                profit
            
            
            5,465
            
            
            6,434Selling,
                general and administrative expenses
            
            
            2,704
            
            
            2,488Research
                and development expenses
            
            
            756
            
            
            651Total
                expenses
            
            
            3,460
            
            
            3,139Operating
                income
            
            
            2,005
            
            
            3,295Interest
                expense, net of interest income
            
            
            (587
            )
            
            (646
            )Other
                income, net
            
            
            2
            
            
            1Income
                from continuing operations before income taxes
            
            
            1,420
            
            
            2,650Income
                tax expense
            
            
            (70
            )
            
            (23
            )Income
                from continuing operations before discontinued operations
            
            
            1,350
            
            
            2,627Discontinued
                operations:Loss
                from discontinued operations (net of taxes of zero)
            
            
            (159
            )
            
            (536
            )Net
                income
            
            $
            1,191
            
            $
            2,091Other
                comprehensive loss:Foreign
                currency translation adjustments
            
            
            (126
            )
            
            (108
            )Comprehensive
                income
            
            $
            1,065
            
            $
            1,983Basic
                income (loss) per common share:Continuing
                operations
            
            $
            0.13
            
            $
            0.26Discontinued
                operations
            
            
            (0.01
            )
            
            (0.05
            )$
            0.12
            
            
            0.21Weighted
                average shares outstanding
            
            
            10,076
            
            
            10,005Diluted
                income (loss) per common share:Continuing
                operations
            
            $
            0.13
            
            $
            0.26Discontinued
                operations
            
            $
            (0.01
            )
            $
            (0.05
            )$
            0.12
            
            $
            0.21Weighted
                average shares outstanding
            
            
            10,105
            
            
            10,036




See
      accompanying notes to unaudited consolidated financial statements.




Page
          3 of 20





PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Unaudited
      Consolidated Statements of Operations and Comprehensive Income


(In
      thousands, except per share amounts)




Three
                Months EndedJune
                30,
            
            June
                30,2006
            
            2005Sales
            
            $
            8,084
            
            $
            8,223Cost
                of sales
            
            
            5,332
            
            
            4,948Gross
                profit
            
            
            2,752
            
            
            3,275Selling,
                general and administrative expenses
            
            
            1,406
            
            
            1,457Research
                and development expenses
            
            
            346
            
            
            340Total
                expenses
            
            
            1,752
            
            
            1,797Operating
                income
            
            
            999
            
            
            1,478Interest
                expense, net of interest income
            
            
            (289
            )
            
            (321
            )Other
                income, net
            
            
            ---
            
            
            1Income
                from continuing operations before income taxes
            
            
            710
            
            
            1,158Income
                tax expense
            
            
            (47
            )
            
            (7
            )Income
                from continuing operations before discontinued operations
            
            
            663
            
            
            1,151Discontinued
                operations:Loss
                from discontinued operations (net of taxes of zero)
            
            
            (76
            )
            
            (264
            )Net
                income
            
            $
            587
            
            $
            887Other
                comprehensive income (loss):Foreign
                currency translation adjustments
            
            
            167
            
            
            (46
            )Comprehensive
                income
            
            $
            754
            
            $
            841Basic
                income (loss) per common share:Continuing
                operations
            
            $
            0.07
            
            $
            0.12Discontinued
                operations
            
            
            (0.01
            )
            
            (0.03
            )$
            0.06
            
            $
            0.09Weighted
                average shares outstanding
            
            
            10,076
            
            
            10,038Diluted
                income (loss) per common shareContinuing
                operations
            
            $
            0.07
            
            $
            0.12Discontinued
                operations
            
            
            (0.01
            )
            
            (0.03
            )$
            0.06
            
            $
            0.09Weighted
                average shares outstanding
            
            
            10,098
            
            
            10,067




See
      accompanying notes to unaudited consolidated financial statements.




Page
          4 of 20





PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Unaudited
      Consolidated Statements of Cash Flows


(In
      thousands)





Six
                Months EndedJune
                30,
            
            June
                30,2006
            
            2005Cash
                flows from operating activities of continuing operations:Net
                income
            
            $
            1,191
            
            $
            2,091Loss
                from discontinued operations
            
            
            159
            
            
            536Adjustments
                to reconcile net income to net cashprovided
                by operating activities of continuing operations:Depreciation
                and amortization
            
            
            175
            
            
            171Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (1,459
            )
            
            (356
            )Inventories
            
            
            679
            
            
            (140
            )Prepaid
                expenses and other current assets
            
            
            (312
            )
            
            (221
            )Other
                assets
            
            
            --
            
            
            --Accounts
                payable, accrued expenses and other liabilities
            
            
            2,161
            
            
            (14
            )Net
                cash provided by continuing operations
            
            
            2,594
            
            
            2,067Net
                cash used in operations of discontinued operations
            
            
            (1,480
            )
            
            (525
            )Net
                cash from operations
            
            
            1,114
            
            
            1,542Cash
                flows from investing activities:Capital
                expenditures, net
            
            
            (292
            )
            
            (351
            )Net
                cash used in investing activities
            
            
            (292
            )
            
            (351
            )Cash
                flows from financing activities:Repayments
                of senior debt
            
            
            (675
            )
            
            (375
            )Net
                cash used in financing activities
            
            
            (675
            )
            
            (375
            )Effect
                of exchange rate changes on cash
            
            
            138
            
            
            (96
            )Increase
                in cash and cash equivalents
            
            
            285
            
            
            720Cash
                and cash equivalents - beginning of the year
            
            
            1,254
            
            
            2,040Cash
                and cash equivalents - end of the period
            
            $
            1,539
            
            $
            2,760Supplemental
                cash flow disclosure:Cash
                paid for interest expense
            
            $
            678
            
            $
            375Cash
                paid for income taxes
            
            $
            52
            
            $
            73Common
                stock issued for accrued director fees
            
            $
            ---
            
            $
            66





See
      accompanying notes to unaudited consolidated financial statements.




Page
          5 of 20





PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





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





Management
      acknowledges its responsibility for the preparation of the accompanying interim
      consolidated financial statements which reflect all adjustments, consisting
      of
      normal recurring adjustments, considered necessary in its opinion for a fair
      statement of its consolidated financial position and the results of its
      operations for the interim period presented. These consolidated financial
      statements should be read in conjunction with the summary of significant
      accounting policies and notes to consolidated financial statements included
      in
      the Company’s Form 10-K annual report for the year ended December 31, 2005.
      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, 2005 Form 10-K annual report
      contained an explanatory paragraph regarding the Company’s ability to continue
      as a going concern. The factors which resulted in the explanatory paragraph
      are
      continuing. Results for the second quarter or the first six months of 2006
      are
      not necessarily indicative of results for the year.





**Note
              2:**
            **Inventories**





Inventories,
      from continuing operations, 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 $2,173,000 for 2006
      and $2,101,000 for 2005):





June
                30, 2006
            
            December
                31, 2005(in
                thousands)Parts
                and components
            
            $
            2,668
            
            $
            3,192Work-in-process
            
            
            773
            
            
            459Finished
                goods
            
            
            421
            
            
            890$
            3,862
            
            $
            4,541





**Note
              3:**
            **Senior
                and Subordinated Debt**





On
      June
      30, 2006, the Company’s liability to the holder of its senior debt was
      $24,124,000. During the fourth quarter of 2004, SHF IX LLC, an affiliate of
      Stonehill Financial, LLC, purchased the Company’s senior debt of approximately
      $25,000,000 from Wells Fargo Foothill, Inc. The Company has made payments
      through June 30, 2006 totaling $2,597,500 as required by amendments and
      extensions of the loan agreement, of which $926,000 was applied to interest
      and
      $1,671,500 was applied to principal. The most recent extension, which extended
      the maturity date, subject to the Company attaining certain milestones, from
      May
      1, 2006 to September 30, 2006, requires the Company to continue to make monthly
      payments of $112,500. The most recent extension also includes a number of
      milestones to the continuation of efforts towards a restructure of the Company
      in a manner which would enable the holder of the senior debt to receive
      significant payments on account of the senior debt. The loan becomes due and
      payable on September 30, 2006 or earlier if the Company fails to achieve any
      of
      the milestones and the holder of the senior debt declares a default. If the
      holder of the senior debt demands payment of all or a significant portion of
      the
      loan when due, the Company will not be able to continue in business and it
      is
      likely that the Company will seek protection under the Bankruptcy
      Code.





Page
          6 of 20


As
      of
      June 30, 2006, the Company’s short-term debt also included $6,144,000 of
      subordinated debt, which became due on July 3, 2001, and $385,000 of 6%
      debentures, which became due on July 2, 2002. Accrued interest on the
      subordinated notes was approximately $5,515,000 as of June 30, 2006, which
      represents interest from July 2000 through June 30, 2006, and accrued interest
      on the 6% debentures was $139,000. The Company is precluded by the holder of
      its
      senior debt from paying any principal or interest on the subordinated
      debt.





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





Incentive
      awards are provided to employees under the terms of our 1998 Non-Qualified
      Stock
      Option Plan and our 1999 Incentive and Non-Qualified Stock Option Plan (the
      "1998 Plan" and “1999 Plan”, respectively). Options under the 1998 Plan may be
      granted to key employees, including officers and directors of the Company and
      its subsidiaries. The exercise prices for all options granted under the 1998
      Plan are equal to the fair market value at the date of grant and vest as
      determined by the board of directors. Options under the 1999 Plan may be granted
      to key employees, including officers and directors of the Company and its
      subsidiaries, except that members
      and alternate members of the stock option committee are not eligible for options
      under the 1999 Plan. The exercise prices for all options granted are equal
      to
      the fair market value at the date of grant and vest as determined by the board
      of directors, which is historically determined as six months. In addition,
      the
      1999 Plan provides for the automatic grant to non-management directors of
      non-qualified options to purchase 5,000 shares on May 1st of each year
      commencing May 1, 1999, based upon the average closing price of the last ten
      trading days of April of each year. Options under both the 1998 and 1999 Plans
      have expiration terms between 5 and 10 years.





Effective
      January 1, 2006, the Company adopted the provisions of FAS No. 123(R),
      "Share-Based Payment" ("FAS123(R)"). Under FAS123(R), share-based compensation
      cost is measured at the grant date, based on the estimated fair value of the
      award, and is recognized as expense over the requisite service period. The
      Company adopted the provisions of FAS123(R) using a modified prospective
      application. Under this method, compensation cost is recognized for all
      share-based payments granted, modified or settled after the date of adoption,
      as
      well as for any unvested awards that were granted prior to the date of adoption.
      Prior periods are not revised for comparative purposes. Because all of the
      Company’s outstanding options are fully vested, there is no stock-based
      compensation expense for the three and six months ended June 30, 2006 as all
      options are either fully vested or will vest in future periods.





Page
          7 of 20





Stock
      option activity through the six months ended June 30, 2006 is as
      follows:





**Options**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price
                Per**
              **Share**
            
            **Weighted**
              **Average**
              **Remaining**
              **Term**
            
            **Aggregate**
              **Intrinsic
                Value****Outstanding
                at January 1, 2006**
            
            
            337,780
            
            $
            1.39
            
            
            2.73
            
            $
            --Granted
            
            
            --
            
            
            --
            
            
            --
            
            
            --Forfeited
            
            
            (28,500
            )
            
            3.31
            
            
            --
            
            
            --Exercised
            
            
            --
            
            
            --
            
            
            --
            
            
            --**Outstanding
                at March 31, 2006**
            
            
            309,280
            
            $
            1.22
            
            
            2.71
            
            $
            3,240Granted
            
            
            20,000
            
            
            0.11
            
            
            9.84
            
            
            --Forfeited
            
            
            (2,000
            )
            
            3.69
            
            
            --
            
            
            --Exercised
            
            
            --
            
            
            --
            
            
            --
            
            
            --**Options
                Outstanding at June 30, 2006**
            
            
            327,280
            
            $
            1.13
            
            
            2.91
            
            $
            5,690**Options
                Exercisable at June 30, 2006**
            
            
            307,280
            
            $
            1.20
            
            
            2.46
            
            $
            4,890





Prior
      to
      the beginning of fiscal 2006, the Company did not record compensation expense
      for its stock based compensation plans, as such treatment was permitted under
      the provisions of Accounting Principles Board (“APB”) Opinion No. 25 “Accounting
      for Stock Issued to Employees,” related interpretations, and SFAS 123,
“Accounting for Stock-Based Compensation.” The Company provided the requisite
      pro forma disclosures and complied with provisions of SFAS 148, “Accounting for
      Stock-Based Compensation—Transition and Disclosures.” For the three and six
      months ended June 30, 2005, there was no pro-forma disclosure as there were
      no
      unvested options.





Presented
      in the table below are the options granted, weighted average fair value using
      a
      Black Sholes pricing model and total compensation charges, net of estimated
      forfeitures:





**Weighted****Average****Options**
            
            **Black
                Scholes**
            
            **Compensation****Granted**
            
            **Value**
            
            **Charge**Options
                granted subsequent to SFAS 123R
            
            
            20,000
            
            $
            0.0432
            
            $
            874Non-vested
                options granted prior to adoptionof
                SFAS 123R
            
            
            ---
            
            
            ---
            
            
            ---Total
            
            
            20,000
            
            $
            0.0432
            
            $
            874





Unrecognized
      stock compensation charges, weighted average stock compensation expenses charged
      to operations for the quarter and six months ended June 30, 2006 are as
      follows:





·
            $874.00
                of total unrecognized compensation cost, net of estimated forfeitures,
                related to non-vested share-based compensation arrangements and options
                granted subsequent to the January 1, 2006 adoption of SFAS 123R is
                outstanding.





·
            Compensation
                cost is expected to be recognized in the fourth quarter of
                2006.





Page
          8 of 20


A
      summary
      of our non-vested shares as of June 30, 2006 and changes during the six months
      ended June 30, 2006 is presented below:





**Weighted****Average****Grant
                Date****Shares**
            
            **Fair
                Value**Non-vested
                as of January 1, 2006
            
            
            ---
            
            
            ---Granted
            
            
            20,000
            
            $
            0.11Vested
            
            
            ---
            
            
            ---Forfeited
            
            
            ---
            
            
            ---Non-vested
                as of June 30, 2006
            
            
            20,000
            
            $
            0.11





**Note
              5:**
            **Segment
                Data**





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





Due
      to
      continuing losses in the Operating Support Systems (“OSS”) division, combined
      with difficulties in marketing OSS products in view of our financial condition, the
      Company decided to exit this operating segment in December, 2003. We
      currently limit our OSS activities to the performance of contractual maintenance
      and warranty services which are anticipated to expire in June, 2007 (see Note
      8
      to the unaudited consolidated financial statements). It is currently anticipated
      that these services will cease by June 2007. Accordingly, as of June 30, 2006,
      t he
      assets
      and liabilities and results of operations of the OSS division have been
      segregated and reported separately as discontinued operations on the
      Consolidated Financial Statements present
      in this Form 10-Q. OSS was
      engaged in the business whose products automate the testing, provisioning,
      maintenance and administration of communication networks and the management
      of
      support personnel and equipment. Currently we limit OSS activities to the
      performance of
      contractual maintenance and warranty services.





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, 2005, in the basis of measurement
      of segment revenues and profit or loss, and no significant change in the
      Company’s assets for the Line and Signal reporting segments.





Page
          9 of 20





Six
                Months Ended
            
            Three
                Months EndedJune
                30, 2006
            
            June
                30, 2005
            
            June
                30, 2006
            
            June
                30, 2005**Sales:**Line
            
            $
            13,468,000
            
            $
            12,281,000
            
            $
            6,981,000
            
            $
            6,574,000Signal
            
            
            2,407,000
            
            
            3,255,000
            
            
            994,000
            
            
            1,598,000Total
                  of ContinuingOperations
            
            $
            15,875,000
            
            $
            15,536,000
            
            $
            7,975,000
            
            $
            8,172,000**Segment
                profit:**Line
            
            $
            2,615,000
            
            $
            3,109,000
            
            $
            1,410,000
            
            $
            1,537,000Signal
            
            
            606,000
            
            
            1,387,000
            
            
            222,000
            
            
            689,000Total
                  of ContinuingOperations
            
            $
            3,221,000
            
            $
            4,496,000
            
            $
            1,632,000
            
            $
            2,226,000





The
      following table reconciles segment totals to consolidated totals:





Six
                Months Ended
            
            Three
                Months EndedJune
                30, 2006
            
            June
                30, 2005
            
            June
                30, 2006
            
            June
                30, 2005**Sales:**Total
                revenue for reportablesegments
            
            $
            15,875,000
            
            $
            15,536,000
            
            $
            7,975,000
            
            $
            8,172,000Other
                revenue
            
            
            146,000
            
            
            95,000
            
            
            109,000
            
            
            51,000Consolidated
                total revenue
            
            $
            16,021,000
            
            $
            15,631,000
            
            $
            8,084,000
            
            $
            8,223,000**Operating
                income:**Total
                segment incomefor
                reportable segments
            
            $
            3,221,000
            
            $
            4,496,000
            
            $
            1,632,000
            
            $
            2,226,000Corporate
                and unallocated
            
            
            (1,216,000
            )
            
            (1,201,000
            )
            
            (633,000
            )
            
            (748,000
            )Consolidated
                totaloperating
                income
            
            $
            2,005,000
            
            $
            3,295,000
            
            $
            999,000
            
            $
            1,478,000





**Note
              6:**
            **Legal
                Proceedings**




In
      April,
      2006, the Company commenced legal action against a former officer of one of
      its
      operating divisions and against the corporation he is currently employed by,
      in
      which the Company asserts that the former officer breached his duties to the
      Company and engaged in unfair competition by using the Company's confidential
      and proprietary information and trade secrets, without authorization, to
      manufacture and sell products which are identical in all material respects
      to
      those sold by the Company’s division which he managed. At this time the Company
      is uncertain about the outcome.





**Note
              7:**
            **New
                Accounting
                Pronouncements**




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





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**Note
              8:**
            **Discontinued
                operations**




**Operating
      Support Systems (“OSS”)**





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 our financial
      condition. The Company anticipates the discontinuation of this business by
      June 30, 2007. Accordingly, as of June 30, 2006, the OSS operating segment
      is
      reported in the Consolidated Financial Statements as a discontinued operation. Currently,
      its operating activities are limited to the performance of
      contractual maintenance and warranty services.





The
      following amounts related to OSS have been segregated from the Company’s
      continuing operations and are reported as assets and liabilities of discontinued
      operations in the consolidated balance sheet:





**June
                30, 2006**
            
            **December
                31, 2005**Assets
                of discontinued operations:Prepaid
                expenses
            
            $
            39,000
            
            $
            35,000Accounts
                receivable
            
            
            37,000
            
            
            184,000Inventories
            
            
            339,000
            
            
            311,000Property,
                plant and equipment
            
            
            39,000
            
            
            57,000Other
                assets
            
            
            1,000
            
            
            1,000**Total
                assets of discontinued operations**
            
            $
            455,000
            
            $
            588,000Liabilities
                of discontinued operations:Accounts
                payable and accrued expenses
            
            $
            575,000
            
            $
            2,033,000**Total
                liabilities of discontinued operations**
            
            $
            575,000
            
            $
            2,033,000





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




**Six
                Months Ended June 30,****2006**
            
            **2005**Revenues
            
            $
            196,000
            
            $
            410,000Loss
                from discontinued operations
            
            $
            (159,000
            )
            $
            (536,000
            )





**Three
                Months Ended June 30,****2006**
            
            **2005**Revenues
            
            $
            91,000
            
            $
            202,000Loss
                from discontinued operations
            
            $
            (76,000
            )
            $
            (264,000
            )




Page
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**Part
      II - Other Information**





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





**** In
      addition to the other information set forth in this report, you should carefully
      consider the factors discussed in Part 1, “Item 1A. Risk Factors” in our Annual
      Report on Form 10-K for the year ended December 31, 2005, which could materially
      affect our business, financial condition or future results. The risks described
      in our Annual Report on Form 10-K are not the only risks facing our Company.
      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
              2.**
            **Management’s
                Discussion and Analysis of Financial Condition and Results
                of****Operations**




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




Six
                Months Ended
            
            Three
                Months EndedJune
                30,
            
            June
                  30,2006
            
            2005
            
            2006
            
            2005Sales
            
            
            100
            %
            
            100
            %
            
            100
            %
            
            100
            %Cost
                of sales
            
            
            66
            %
            
            59
            %
            
            66
            %
            
            60
            %Gross
                profit
            
            
            34
            %
            
            41
            %
            
            34
            %
            
            40
            %Selling,
                general and administrative expenses
            
            
            17
            %
            
            16
            %
            
            17
            %
            
            18
            %Research
                and development expenses
            
            
            5
            %
            
            4
            %
            
            4
            %
            
            4
            %Operating
                income
            
            
            13
            %
            
            21
            %
            
            12
            %
            
            18
            %Interest
                expense - net
            
            
            (4
            %)
            
            (4
            %)
            
            (4
            %)
            
            (4
            %)Other
            
            
            0
            %
            
            0
            %
            
            0
            %
            
            0
            %Discontinued
                operations
            
            
            (1
            %)
            
            3
            %
            
            (1
            %)
            
            3
            %Net
                income
            
            
            7
            %
            
            13
            %
            
            7
            %
            
            11
            %





The
      Company’s sales, from continuing operations, by product line for the periods
      ended June 30, 2006 and 2005 are as follows:





Six
                Months Ended June 30,$(000)2006
            
            2005Line
                connection/protection equipment
            
            $
            13,468
            
            
            84
            %
            $
            12,281
            
            
            79
            %Signal
                Processing
            
            
            2,407
            
            
            15
            %
            
            3,255
            
            
            21
            %Other
            
            
            146
            
            
            1
            %
            
            95
            
            
            0
            %$
            16,021
            
            
            100
            %
            $
            15,631
            
            
            100
            %




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          12 of
          20





Three
                Months Ended June 30,$(000)2006
            
            2005Line
                connection/protection equipment
            
            $
            6,981
            
            
            86
            %
            $
            6,574
            
            
            80
            %Signal
                Processing
            
            
            994
            
            
            12
            %
            
            1,598
            
            
            19
            %Other
            
            
            109
            
            
            2
            %
            
            51
            
            
            1
            %$
            8,084
            
            
            100
            %
            $
            8,223
            
            
            100
            %





**Overview**





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





We
      currently limit our OSS activities to the performance of contractual maintenance
      and warranty services which are anticipated to cease in June, 2007 (see Note
      8
      to the unaudited consolidated financial statements). Accordingly, as of June
      30,
      2006, the
      Company’s Consolidated Results of Operations present the OSS division as
      discontinued operations.




Our
      Line
      equipment is designed to connect copper-wired telecommunications networks and
      to
      protect telecommunications equipment from voltage surges. We market this
      equipment primarily to telephone operating companies outside the United States
      and through distribution to designers, engineers and installers in the United
      States. Our Line division operated at a profit for the three and six months
      ended June 30, 2006 and June 30, 2005. We market Signal equipment principally
      for use in defense and aerospace applications. The Signal division generated
      operating profit for the three and six months ended June 30, 2006 and the
      comparable periods of 2005. We recognize revenue from Line and Signal products
      when the product is shipped.





On
      June
      30, 2006, our liability to the holder of our senior debt was $24,124,000. The
      most recent extension, which extended the maturity date, subject to our
      attaining certain milestones, from May 1, 2006 to September 30, 2006, requires
      us to continue to make monthly payments of $112,500. The most recent extension
      also includes a number of milestones to the continuation of efforts towards a restructure in a manner which would enable
      the
      holder of the senior debt to receive significant payments on account of the
      senior debt. The loan becomes due and payable on September 30, 2006, or earlier,
      if we fail to achieve any of the milestones and the holder of the senior debt
      declares a default. If the holder of the senior debt demands payment of all
      or a
      significant portion of the loan when due, we will not be able to continue in
      business and it is likely that we will seek protection under the Bankruptcy
      Code.





**Results
      of Continuing Operations**





The
      below
      narratives discuss the activities of our continuing operations.





Line
      equipment sales for the six months ended June 30, 2006, compared to the six
      months ended June 30, 2005, increased by $1,187,000 (10%) from $12,281,000
      to
      $13,468,000. Sales for the three months ended June 30, 2006 increased by
      $407,000 (6%) from $6,574,000 in 2005 to $6,981,000 in 2006. The increase in
      sales for the six and the three months is the result of increased sales volume
      to British Telecommunications as a result of British Telecommunications’
continuing rollout of DSL lines, and its implementation of the local loop
      unbundling program, demanded by regulators in the United Kingdom to enable
      third
      party providers of the telephone service to gain access to British
      Telecommunications’ systems.





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          13 of
          20


Signal
      sales for the six months ended June 30, 2006 were $2,407,000, compared to
      $3,255,000 in the same period of 2005, a decrease of $848,000 (26%). Sales
      for
      the three months ended June 30, 2006 compared to 2005, decreased by $604,000
      (38%) from $1,598,000 to $994,000. The decline in Signal revenue from the first
      half of 2006 resulted primarily from sluggish order rates from the military
      sector in the first six months of 2006. In addition, the revenue for the six
      months ended June 30, 2005 was positively impacted by shipments to customers
      from 2004 backlog that were not shipped in 2004 due to cash constraints which
      existed back then.  Sales
      for
      the second quarter and six months of 2006 represent shipments of current orders
      and backlog.





Gross
      margin, for the six months ended June 30, 2006, was 34% compared to 41% for
      the
      six months ended June 30, 2005. Gross margin for the quarter ended June 30,
      2006
      was 34% compared to 40% for the quarter ended June 30, 2005. This
      decrease for the six months was attributable to a change in products sold to
      British Telecommunications during the first quarter of the year (from the higher
      gross margin DSL products to the lower margin local loop unbundling products)
      and additional freight costs associated with on time deliveries to customers.
      The quarter ended June 30, 2006 was negatively impacted primarily by short-term
      manufacturing inefficiencies at our assembly facility in Mexico, additional
      freight costs and, to a lesser extent, the continuation of sales to British
      Telecommunications of lower margin products. Also, our Signal segment gross
      margin decreased during the quarter and six months due to sales of lower margin
      products.





Selling,
      general and administrative expenses increased by $216,000 (9%) from $2,488,000
      to $2,704,000 for the six months ended June 30, 2006 compared to 2005. For
      the
      quarter ended June 30, 2006 selling, general and administrative expenses
      decreased by $51,000 (4%) from $1,457,000 in 2005 to $1,406,000 in 2006. The
      increase for the six months ended June 30, 2006 relates primarily to increased
      expenses in our Signal segment for salaries, commissions and advertising as
      our
      marketing activities for Signal were increased during the first quarter of
      2006.
      Additionally, selling and marketing salaries increased in our Line segment
      as
      well as increased administrative salaries  which
      were partially offset by a decrease in general and administrative expenses
      relating to the OSS division as we were winding down that operation in the
      first
      quarter





For
      the
      six months ended June 30, 2006 compared to 2005, research and development
      expenses increased by $105,000 (16%) to $756,000 from $651,000. For the quarter
      ended June 30, 2006 compared to 2005, research and development expenses
      increased by $6,000 (2%) to $346,000 from $340,000. The increase for the six
      months resulted primarily from increased spending by our line
      connection/protection division of approximately $100,000 to enhance our existing
      line products and develop new products.




As
      a
      result of the above, for the six months ended June 30, 2006, we had an operating
      income from continuing operations of $2,005,000 compared with $3,295,000 in
      the
      same period of 2005. We had an operating income of $999,000 for the quarter
      ended June 30, 2006 as compared with $1,478,000 in the same period of
      2005.





We
      continue to accrue interest on obligations to the holder of $1,514,000 of our
      senior debt, which represents interest on senior debt that we incurred
      subsequent to March 2002. In
      addition, there is outstanding an old term loan, in the principal amount of
      $22,610,000, that accrues no interest commencing March 1, 2002, until such
      time
      as the holder of the debt, in its sole discretion, notifies us that interest,
      at
      a rate of 12%, or a default rate of 14%, shall be payable. The holder of the
      senior debt has not required us to pay interest on this amount.





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          14 of
          20


Income
      tax expense for the six months ended June 30, 2006 relates to federal, state
      and
      foreign taxes.





As
      a
      result of the foregoing, we generated net income, from continuing operations,
      of
      $1,350,000, $.13 per share (basic and diluted), for the six months ended June
      30, 2006, compared with $2,627,000, $0.26 per share (basic and diluted), in
      2005. The net income for the three months ended June 30, 2006, from continuing
      operations, was $663,000, $.07 per share (basic and diluted), compared with
      $1,151,000, $0.12 per share (basic and diluted) in 2005.





**DISCONTINUED
      OPERATIONS**




**Operating
      Support Systems (“OSS”)**





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 our financial condition.
      The Company anticipates the discontinuation of this business by June 30, 2007.
      Accordingly, as of June 30, 2006, the OSS operating segment is reported in
      the
      Consolidated Financial Statements as a discontinued operation. Currently,
      its operating activities are limited to the performance of
      contractual maintenance and warranty services.  (See
      Note
      8 to the unaudited consolidated financial statements.)





**Liquidity
      and Capital Resources**





At
      June
      30, 2006, we had cash and cash equivalents of $1,539,000 compared with
      $1,254,000 at December 31, 2005. Our working capital deficit at June 30, 2006
      was $32,536,000 compared to a working capital deficit of $33,719,000 at December
      31, 2005, a reduction of $1,183,000 in our working capital deficit since
      December 31, 2005. This decrease in the working capital deficiency reflects
      our
      improved operating results for the six months ended June 30, 2006. During the
      six months of 2006, we made payments to the holder of our senior debt of
      $675,000, of **** which
      approximately $124,000 was applied to interest and the remaining $551,000 was
      applied to principal.





As
      of
      June 30, 2006, our debt includes $24,124,000 of senior debt, which matures
      on
      September 30, 2006, or earlier if we fail to meet required milestones and the
      holder of the senior debt calls a default, $6,144,000 of subordinated debt
      that
      became due on July 3, 2001, and $385,000 of 6% debentures that became due on
      July 2, 2002. We were unable to pay the interest payment on the subordinated
      notes of approximately $5,515,000 that represents interest from July 2000
      through June 2006, or the interest on the subordinated debentures of
      approximately $139,000. We have been notified by the trustee of 6% debentures
      that the non-payment of the principal and interest caused an event of default.
      At June 30, 2006, we did not have sufficient resources to pay either the senior
      lender or the subordinated lenders; it is unlikely that we can generate such
      cash from our operations, and our senior lender has precluded us from making
      any
      payments on the subordinated debt.





Page
          15 of
          20


We have
      sought to
      address our need for liquidity by exploring alternatives, including the possible
      sale of one or more of our divisions. During 2004 and 2005, we were engaged
      in
      discussions with respect to the possible sale of our divisions; however, those
      negotiations were terminated without an agreement having been reached, and
      we
      may not be able to sell those divisions on acceptable, if any, terms.
      Furthermore, if we sell a division, we anticipate that a substantial
      portion ,
      if not
      all, of the
      net proceeds will be paid to the holder of our senior debt, and we will not
      receive any significant amount of working capital from such a sale. We continue
      our efforts to reduce costs while we seek additional business from new and
      existing customers, or seek to sell one or more of our divisions. As a result
      of
      the significant reduction in the operations of our OSS division, we do not
      believe that we will be able to sell that division on terms which would generate
      any significant cash. Further, the dependence of our copper business on several
      significant customers, principally British Telecommunications, are major factors
      which may impair our ability to sell the copper division or our business as
      a
      whole or may affect the terms on which we would be able to sell the business.





**Forward
      Looking Statements**





Statements
      contained in this Form 10-Q include forward-looking statements that are subject
      to risks and uncertainties. In particular, statements in this Form 10-Q that
      state the Company’s intentions, beliefs, expectations, strategies, predictions
      or any other statements relating to our future activities or other future events
      or conditions are “forward-looking statements.” Forward-looking statements are
      subject to risks, uncertainties and other factors, including, but not limited
      to, those identified under “Risk Factors,” in our Form 10-K for the year ended
      December 31, 2005 and those described in “Management’s Discussion and Analysis
      of Financial Conditions and Results of Operations” in our Form 10-K and this
      Form 10-Q, and those described in any other filings by us with the Securities
      and Exchange Commission, as well as general economic conditions and economic
      conditions affecting the telecommunications industry, any one or more of which
      could cause actual results to differ materially from those stated in such
      statements.





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





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





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





**Evaluation
      of Disclosure Controls and Procedures**





As
      of the
      end of the period covered by this report, our Chief Executive Officer and Chief
      Financial Officer evaluated the effectiveness of our disclosure controls and
      procedures. Based on his evaluation, the Chief Executive Officer and Chief
      Financial Officer has concluded that our disclosure controls and procedures
      are
      effective.





**Changes
      in Internal Control over Financial Reporting**





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




Page
          16 of
          20


**PART
      II - OTHER INFORMATION**





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





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





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





Exhibits


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


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




Page
          17 of
          20





**SIGNATURES**





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the Registrant
      has
      duly caused this report to be signed on its behalf by the undersigned thereunto
      duly authorized.




**PORTA SYSTEMS
              CORP.**Dated:
              August 14, 2006
            By:
            /s/
              Edward B. KornfeldEdward
              B. KornfeldChief
                Executive Officer
              and
                Chief Financial Officer






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