**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 March 31, 2008





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


SECURITIES
      EXCHANGE ACT OF 1934





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


Commission
      file number 0-8460





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


(Exact
      name of registrant as specified in its charter)





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





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


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


Large
      accelerated filer [ ]   Accelerated filer [ ]  
Non-accelerated filer [ ] Smaller
      reporting company x





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





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





Common
      stock (par value $0.01) 10,053,617 shares as of May 9, 2008.










**PART
      I.- FINANCIAL INFORMATION**


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


PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Consolidated
      Balance Sheets


(In
      thousands, except shares and par value)


UnauditedMarch
                31,
            
            December
                31,2008
            
            2007AssetsCurrent
                assets:Cash
                and cash equivalents
            
            $
            315
            
            $
            494Accounts
                receivable - trade,
              less
                allowance for doubtful accounts of $25 in 2008 and $50 in
                2007
            
            
            5,462
            
            
            5,098Inventories
            
            
            7,098
            
            
            6,411Prepaid
                expenses and other current assets
            
            
            503
            
            
            203Total
                current assets
            
            
            13,378
            
            
            12,206Property,
                plant and equipment, net
            
            
            1,645
            
            
            1,678Goodwill
            
            
            2,961
            
            
            2,961Other
                assets
            
            
            54
            
            
            54Total
                assets
            
            $
            18,038
            
            $
            16,899Liabilities
                and Stockholders’ DeficitCurrent
                liabilities:Senior
                debt
            
            $
            24,373
            
            $
            24,373Subordinated
                notes
            
            
            6,144
            
            
            6,1446%
                Convertible subordinated debentures
            
            
            385
            
            
            385Accounts
                payable
            
            
            6,289
            
            
            5,523Accrued
                expenses and other
            
            
            2,855
            
            
            2,447Other
                accrued interest payable
            
            
            8,436
            
            
            7,847Total
                current liabilities
            
            
            48,482
            
            
            46,719Deferred
                compensation and other long term liabilities
            
            
            704
            
            
            707Total
                liabilities
            
            
            49,186
            
            
            47,426Commitments
                and contingenciesStockholders’
                deficit:Preferred
                stock, no par value; authorized 1,000,000 shares, none
                issued
            
            
            -
            
            
            -Common
                stock, par value $.01; authorized 20,000,000 shares, issued 10,084,557
                shares in 2008 and 2007
            
            
            101
            
            
            101Additional
                paid-in capital
            
            
            76,125
            
            
            76,125Accumulated
                deficit
            
            
            (100,994
            )
            
            (100,457
            )Accumulated
                other comprehensive loss:Foreign
                currency translation adjustment
            
            
            (4,442
            )
            
            (4,358
            )(29,210
            )
            
            (28,589
            )Treasury
                stock, at cost, 30,940 shares
            
            
            (1,938
            )
            
            (1,938
            )Total
                stockholders’ deficit
            
            
            (31,148
            )
            
            (30,527
            )Total
                liabilities and stockholders’ deficit
            
            $
            18,038
            
            $
            16,899








See
      accompanying notes to unaudited consolidated financial
      statements


Page
          1 of
          20




PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Unaudited
      Consolidated Statements of Operations and Comprehensive Income


(In
      thousands, except per share amounts)





Three
                  Months EndedMarch
                  31**,**
              
              March
                  31,2008
              
              2007Sales
              
              $
              6,545
              
              $
              8,202Cost
                  of sales
              
              
              4,708
              
              
              5,582Gross
                  profit
              
              
              1,837
              
              
              2,620Selling,
                  general and administrative expenses
              
              
              1,342
              
              
              1,581Research
                  and development expenses
              
              
              424
              
              
              373Total
                  expenses
              
              
              1,766
              
              
              1,954Operating
                  income
              
              
              71
              
              
              666Interest
                  expense, net
              
              
              (591
              )
              
              (440
              )Other
                  income (expense), net
              
              
              8
              
              
              (1
              )Income
                  (loss) from continuing operations before income taxes
              
              
              (512
              )
              
              225Income
                  tax expense
              
              
              (25
              )
              
              (26
              )Income
                  (loss) from continuing operations
              
              
              (537
              )
              
              199Discontinued
                  operations:Loss
                  from discontinued operations (net of taxes of zero)
              
              
              --
              
              
              (34
              )Net
                  income (loss)
              
              $
              (537
              )
              $
              165Other
                  comprehensive loss:Foreign
                  currency translation adjustments
              
              
              (84
              )
              
              (73
              )Comprehensive
                  income (loss)
              
              $
              (621
              )
              $
              92Basic
                  income (loss) per share of common stock
              
              $
              (0.05
              )
              $
              0.02Weighted
                  average shares outstanding
              
              
              10,054
              
              
              10,054Diluted
                  income (loss) per share of common stock
              
              $
              (0.05
              )
              $
              0.02Weighted
                  average shares outstanding
              
              
              10,054
              
              
              10,054






See
      accompanying notes to unaudited consolidated financial statements.




Page
          2 of
          20




PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


Unaudited
      Consolidated Statements of Cash Flows


(In
      thousands)




Three
                Months EndedMarch
                31,
            
            March
                31,2008
            
            2007Cash
                flows from operating activities of continuing operations:Net
                income (loss)
            
            $
            (537
            )
            $
            165Loss
                from discontinued operations
            
            
            --
            
            
            34Adjustments
                to reconcile net income (loss) to net cash(used
                in) operating activities of continuing operations:Depreciation
                and amortization
            
            
            79
            
            
            71Inventory
                reserves
            
            
            (177
            )
            
            -Allowance
                for bad debt
            
            
            (25
            )
            
            -Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (333
            )
            
            (1,738
            )Inventories
            
            
            (514
            )
            
            (1,661
            )Prepaid
                expenses and other current assets
            
            
            (265
            )
            
            (23
            )Other
                assets
            
            
            (2
            )
            
            (9
            )Accounts
                payable, accrued expenses and other liabilities
            
            
            1,657
            
            
            1,769Net
                cash used in by continuing operations
            
            
            (117
            )
            
            (1,392
            )Cash
                flows from investing activities:Capital
                expenditures, net
            
            
            (22
            )
            
            (144
            )Net
                cash used in investing activities
            
            
            (22
            )
            
            (144
            )Cash
                flows from financing activities:Increase
                in debt
            
            
            --
            
            
            191Repayments
                of senior debt
            
            
            --
            
            
            (150
            )Net
                cash provided by financing activities
            
            
            --
            
            
            41Effect
                of exchange rate changes on cash
            
            
            (40
            )
            
            (43
            )Decrease
                in cash and cash equivalents
            
            
            (179
            )
            
            (1,538
            )Cash
                and cash equivalents - beginning of the year
            
            
            494
            
            
            2,102Cash
                and cash equivalents - end of the period
            
            $
            315
            
            $
            564Supplemental
                cash flow disclosure:Cash
                paid for interest expense
            
            $
            --
            
            $
            24Cash
                paid for income taxes
            
            $
            2
            
            $
            --Schedule
                of noncash transactions:Acquisition
                of leased equipment
            
            $
            34
            
            $
            --





See
      accompanying notes to unaudited consolidated financial statements.


Page
            3 of
            20




PORTA
      SYSTEMS CORP. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





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





Management
      acknowledges its responsibility for the preparation of the accompanying interim
      consolidated financial statements which reflect all adjustments, consisting
      of
      normal recurring adjustments, considered necessary in its opinion for a fair
      statement of its consolidated financial position and the results of its
      operations for the interim period presented. These consolidated financial
      statements should be read in conjunction with the summary of significant
      accounting policies and notes to consolidated financial statements included
      in
      the Company’s Form 10-K annual report for the year ended December 31, 2007.
      These financial statements have been prepared assuming that the Company will
      continue as a going concern and, accordingly, do not include any adjustments
      that might result from the outcome of the uncertainties described within. The
      audit opinion included in the December 31, 2007 Form 10-K annual report
      contained an explanatory paragraph regarding the Company’s ability to continue
      as a going concern. The factors which resulted in the explanatory paragraph
      are
      continuing. Results for the first quarter of 2008 are not necessarily indicative
      of results for the year.  Certain
      reclassifications have been made to the prior consolidated financial statements
      to conform to the current year presentation.





**Note
      2: Inventories**





Inventories
      are stated at the lower of cost (on the average or first-in, first-out method)
      or market. The composition of inventories at the end of the respective periods
      is as follows (net of reserve of $1,775,000 for 2008 and $1,952,000 for
      2007):


March
                  31, 2008
              
              December
                  31, 2007Parts
                  and components
              
              $
              4,075,000
              
              $
              3,669,000Work-in-process
              
              
              892,000
              
              
              858,000Finished
                  goods
              
              
              2,131,000
              
              
              1,884,000$
              7,098,000
              
              $
              6,411,000


**Note
        3: Senior and Subordinated Debt**




Senior
      Debt:





On
      March
      31, 2008 and December 31, 2007, the Company’s senior debt consisted of principal
      in the amount of $24,373,000. Substantially all of the Company’s assets are
      pledged as collateral for the senior debt. The current agreement with the holder
      of the senior debt will expire on September 1, 2008 and, accordingly, the senior
      debt has been classified as a current liability. Senior debt, at both March
      31,
      2008 and December 31, 2007 includes $1,000,000 which the Company borrowed from
      the holder of the senior debt in October 2007 in order to meet its current
      working capital needs. The Company does not accrue interest on the entire amount
      of the senior debt under the terms of its agreement with the senior debt holder.
      Interest has accrued from February 7, 2007 on $10,000,000 of the senior debt
      at
      12.5% as a result of the terms of the February 7, 2007 extension of the maturity
      of our senior debt. In addition, we accrue interest on the $1,000,000 note
      issued in October 2007 at a rate of LIBOR plus 10%, which was approximately
      14.74% for the quarter ended March 31, 2008. The holder of the senior debt
      prohibited the Company from making any payments on indebtedness to any
      subordinated creditors or from paying any dividends on common stock, but the
      Company is not prohibited from paying accounts payable in the ordinary course
      of
      business. The holder of the senior debt has no obligation to make any further
      loans to the Company.


Page
            4 of
            20


Any
      adverse event, including declines in business, could have an effect on the
      decision of the senior debt holder to extend or demand payment on the debt.
      If
      the senior debt holder does not extend the maturity of the Company’s senior debt
      beyond September 1, 2008 or if the senior debt holder demands payment of all
      or
      a significant portion of the senior debt when due, the Company will not be
      able
      to continue in business, and it is likely that it will seek protection under
      the
      Bankruptcy Code.





Subordinated
      Notes:





As
      of
      March 31, 2008 and December 31, 2007, subordinated notes in the principal amount
      of $6,144,000 were outstanding. The interest rate on the subordinated notes
      increased to 15% as a result of our failure to pay the subordinated notes when
      due on July 3, 2001. As of March 31, 2008, $7,131,000 of accrued interest was
      also due and payable and is included in other accrued interest payable. However,
      the Company does not have the resources to pay either the $6,144,000 principal
      or the $7,131,000 interest due on the subordinated notes. In addition, the
      holder of its senior debt has precluded the Company from making payments on
      the
      subordinated debt.





Convertible
      Subordinated Debentures:





As
      of
      March 31, 2008 and December 31, 2007, the Company had outstanding $385,000
      principal amount of its convertible subordinated debentures due July 1, 2002
      (the “Debentures”). The interest rate on these debentures increased from the
      stated interest rate of 6% to 8.26% as a result of our failure to make interest
      payments on the debentures since July 1, 2000 and our failure to pay principal
      on July 2, 2002. The Company has not paid interest on these Debentures since
      July 2000, and the holder of its senior debt prohibits it from making any
      payments of principal and interest. At March 31, 2008 and December 31, 2007,
      accrued interest, including additional assessments due to the default, on the
      debentures was $300,000 and $291,000, respectively, and is included in other
      accrued interest payable. The trustee of the Debentures gave notice to the
      Company that the non-payment caused an event of default. The convertibility
      feature associated with the Debentures expired upon their stated maturity date,
      which was July 1, 2002. The holder of the senior debt has precluded the Company
      from making payments on the debentures.





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





For
      the
      three months ended March 31, 2008 and 2007, the Company did not issue any stock
      options and, therefore did not recognize non-cash compensation expense
      attributable to stock options granted during the quarter. The Company uses
      the
      Black-Scholes valuation model and straight-line amortization of compensation
      expense over the requisite service period when granting stock options. All
      options previously granted are fully vested.





**Note
      5: Segment Data**





The
      Company develops, designs, manufactures and markets a range of standard and
      proprietary telecommunications equipment for sale domestically and
      internationally. Its core products, focused on ensuring communications for
      service providers worldwide, fall principally into two categories:





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


Page
            5 of
            20


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





The
      Company formerly had a third reportable segment - Operating Support Systems
      (“OSS”), which was engaged in the business of marketing, manufacturing and
      selling products that automated the testing, provisioning, maintenance and
      administration of communication networks and the management of support personnel
      and equipment. The Company’s operations in this segment were discontinued as of
      June 30, 2007. The
      operation of this segment for the quarter ended March 31, 2007 are reflected
      as
      Loss from discontinued operations.





The
      factors used to determine the above segments focused primarily on the types
      of
      products and services provided, and the type of customer served. Each of these
      segments is managed separately from the others, and management evaluates segment
      performance based on operating income.





There
      has
      been no significant change, from December 31, 2007, in the basis of measurement
      of segment revenues and profit or loss, and no significant change in the
      Company’s assets for the Line and Signal reporting segments.


Three
                  Months EndedMarch
                  31,
              
              March
                  31,2008
              
              2007**Sales:**Line
              
              $
              5,392,000
              
              $
              6,814,000Signal
              
              
              1,153,000
              
              
              1,388,000Total
                  of Continuing Operations
              
              $
              6,545,000
              
              $
              8,202,000**Segment
                  profit from operations:**Line
              
              $
              447,000
              
              $
              1,062,000Signal
              
              
              241,000
              
              
              418,000Total
                  of Continuing Operations
              
              $
              688,000
              
              $
              1,480,000The
                  following table reconciles segment totals to consolidated
                  totals:**Operating
                  income:**Total
                  segment incomefor
                  reportable segments
              
              $
              688,000
              
              $
              1,480,000Corporate
                  and unallocated
              
              
              (617,000
              )
              
              (814,000
              )Consolidated
                  total operating income
              
              $
              71,000
              
              $
              666,000
   Page
            6 of
            20




**Note
      6:** **Adoption
      of New Accounting Standards**




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





SFAS
      157




(a)
      Fair
      Value Measurement




We
      adopted FAS 157, Fair Value Measurements (“FAS 157”), effective
      January 1, 2008. Under this standard, fair value is defined as the price
      that would be received to sell an asset or paid to transfer a liability (i.e.
      the “exit price”) in an orderly transaction between market participants at the
      measurement date.




In
      determining fair value, we use various valuation approaches, including market
      and income approaches. FAS 157 establishes a hierarchy for inputs used in
      measuring fair value that maximizes the use of observable inputs and minimizes
      the use of unobservable inputs by requiring that the most observable inputs
      be
      used when available. The hierarchy is broken down into three levels based on
      the
      reliability of inputs as follows:




•
            
            Level
                1—Valuations based on quoted prices in active markets for identical
                assets
                or liabilities that we have the ability to access. Valuation adjustments
                and block discounts are not applied to Level 1 instruments. Since
                valuations are based on quoted prices that are readily and regularly
                available in an active market, valuation of these products does not
                entail
                a significant degree of judgment.




Assets
      and liabilities utilizing Level 1 inputs include: exchange-traded equity
      securities and listed derivatives that are actively traded.




•
            
            Level
                2—Valuations based on quoted prices in markets that are not active
                or for
                which significant inputs are observable (e.g. interest rates, yield
                curves, prepayment speeds, default rates, loss severities, etc.)
                or can be
                corroborated by observable market
                data.




Assets
      and liabilities utilizing Level 2 inputs include: exchange-traded equity
      securities and listed derivatives that are not actively traded; U.S. government
      and agency securities; non-U.S. government obligations; corporate and municipal
      bonds; mortgage-backed securities (“MBS”) and asset-backed securities (“ABS”);
      and over-the-counter (“OTC”) derivatives (e.g. foreign currency options and
      forward contracts).




•
            
            Level
                3—Valuations based on inputs that are unobservable and significant
                to the
                overall fair value measurements. The unobservable inputs reflect
                our own
                assumptions about assumptions that market participants might
                use.




Assets
      and liabilities utilizing Level 3 inputs include: insurance and reinsurance
      derivative contracts; hedge funds with partial transparency; and collateralized
      loan obligation (“CLO”) - equity tranche securities, credit funds and short
      duration high yield funds that are traded in less liquid markets.




The
      availability of observable inputs can vary from financial instrument to
      financial instruments and is affected by a wide variety of factors, including,
      for example, the type of financial instrument, whether the financial instrument
      is new and not yet established in the marketplace, and other characteristics
      particular to the transaction. To the extent that valuation is based on models
      or inputs that are less observable or unobservable in the market, the
      determination of fair value requires significantly more judgment. Accordingly,
      the degree of judgment exercised by management in determining fair value is
      greatest for instruments categorized on Level 3. We use prices and inputs that
      are current as of the measurement date including during periods of market
      dislocation. In periods of market dislocation, the observability of prices
      and
      inputs may be reduced for many instruments. This condition could cause an
      instrument to be reclassified between levels.


Page
            7 of
            20




The
      adoption of FAS 157 did not result in any cumulative-effect adjustment to our
      beginning retained earnings at January 1, 2008, or any material impact on out
      results of operations, financial position of liquidity. In February 2008, the
      FASB issued FASP FAS 157-2, *Effective
      date of FASB Statement No. 157* (“FSP
      FAS 157-2”), which permits a one-year deferral of the application of FAS 157 for
      all non-financial assets and non-financial liabilities, except those that are
      recognized or disclosed at fair value in the financial statements on a recurring
      basis (at least annually). Accordingly, we have also adopted FSPFAS 157-2
      effective January 1, 2008 and FAS 157 will not be applied to our goodwill and
      other intangible assets measured annually for impairment testing purpose only.
      We will adopt FAS 157 for non-financial assets and non-financial liabilities
      on
      January 1, 2009 and we do not anticipate this adoption will have a material
      impact on our results of operations, financial position or liquidity.




SFAS
      159





The
      Company adopted FAS 159, The Fair Value Option for Financial Assets and
      Financial Liabilities (“FAS 159”), effective January 1, 2008. SFAS 159
      allows entities the option of measuring eligible financial instruments at fair
      value as of specified dates. Such election, which may be applied on an
      instrument by instrument basis, is typically irrevocable once elected. The
      adoption of this statement did not have a material effect on the Company’s
      financial position or results of operations.





EITF
      07-3





In
      the
      first quarter 2008, the Company adopted the Emerging Issues Task Force issued
      EITF Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or
      Services Received for Use in Future Research and Development Activities” (“EITF
      07-3”). EITF 07-3 requires that nonrefundable advance payments for goods or
      services that will be used or rendered for future research and development
      activities be deferred and capitalized and recognized as an expense as the
      goods
      are delivered or the related services are performed. EITF 07-3 did not have
      a
      material impact on the Company’s financial position or results of
      operations


.


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




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





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


**Three
                  Months Ended March 31,****2008**
              
              **2007**Revenues
              
              $
              --
              
              $
              72,000Loss
                  from discontinued operations
              
              
              --
              
              
              (34,000
              )


Page
            8 of
            20





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





British
      Telecommunications PLC and its systems integrators represent the Company’s
      largest customers and accounted for approximately $2,926,000, or 45% of sales,
      in the first quarter of 2008, and approximately $4,455,000, or 54% of sales,
      in
      the first quarter of 2007.





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





****  On
      May 8,
      2008, the Company entered into an agreement with the holder of our senior debt
      which contemplates a restructure of our senior and subordinated debt and our
      obligations to certain other creditors. The senior debt holder presently holds
      two notes -- a note in the principal amount of $23,373,000 at March 31, 2008
      (the “Old Note”), and a note (the “New Note”) in the principal amount of
      $1,000,000, which the Company issued in October 2007. Both the Old Note and
      the
      New Note mature on September 1, 2008. Pursuant to this agreement:





**·**
            The
                Company’s board of directors approved a one-for-11.11 reverse split of the
                Company’**s**common
                stock, subject to stockholder
                approval.




**·**
            The
                holder of the senior debt agreed to exchange the principal of the
                Old Note
                in excess of $10,000,000 for 70% of the Company’s common stock. Any unpaid
                interest on the $10,000,000 principal amount accrued through June
                30,
                2008, which is estimated at $1,250,000, will be added to
                principal.




**·**
            The
                Company will issue a modified promissory note in favor of the senior
                debt
                holder for the remaining $11,250,000 principal amount of the Old
                Note to
                provide for payments of interest of $351,156 on September 30, 2008
                and
                December 31, 2008 and thereafter at 121⁄2% per annum on the outstanding
                principal amount, payable quarterly in arrears, and payments of principal
                in twelve quarterly installments each in the amount of $250,000,
                with the
                first payment of principal becoming due on December 31, 2008, followed
                by
                13 quarterly installments of principal each in the amount of $500,000,
                with a final payment of $1,750,000 becoming due on March 31, 2015.
                If the
                accrued interest to the closing date is an amount other than $1,250,000,
                the final payment will be adjusted accordingly. The Old Note, as
                reduced
                and modified pursuant to this Agreement, is referred to as the “Amended
                Note.”




**·**
            The
                maturity date of the New Note will be extended from September 1,
                2008 to
                September 1, 2010 on the same terms. Principal and interest payments
                shall
                be payable on the first day of each calendar month commencing on
                August 1,
                2008 in the amount equal to the amount by which the excess of the
                average
                cash balance of the Company exceeds $250,000, exclusive of the proceeds
                of
                the New Note, for the three full Business Weeks ending immediately
                prior
                to such Payment Date. Interest shall accrue and be payable on the
                outstanding principal balance of the New Note at an amount equal
                to the
                six-month rate of LIBOR. Any interest due on a Payment Date which
                remains
                unpaid shall be added to principal and shall bear interest at the
                same
                rate as provided in the New Note.




**·**
            Until
                completion of the debt restructuring, the senior debt holder shall
                have
                the right to designate two members to the Company’s board of
                directors, each of whom shall be an independent director as defined
                by the
                rule of the Nasdaq Stock Market.


Page 9 of
            20


**·**
            The
                debt restructuring is subject to stockholder approval of the reverse
                split
                and the debt restructuring and the approval by the holders of the
                Company’s subordinated notes in the principal amount of $6,144,000,
                together with interest, which was $7,131,000 at March 31, 2008, for
                notes
                in the principal amount of $1,750,000 and 14% of the Company’s outstanding
                common stock, after giving effect to the reverse split. These notes
                bear
                interest at 10% per annum, are amortized based on a 25-year amortization
                schedule and mature 71⁄2 years after issuance. We have obtained the
                agreement of more than 95% of the holders of the subordinated
                notes to these terms.




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




**·**
            The
                agreement also provides that the Company will offer the holders of
                its
                debentures in the principal amount of $385,000 the right to exchange
                their
                debentures for their proportionate share of notes in the aggregate
                principal amount of $100,000 plus 1% of the Company’s common stock after
                giving effect to the reverse split.




**·**
            The
                Company has agreed to issue to its key employees 6% of the Company’s
                common stock, after giving effect to the reverse split.




**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:


Three
                  Months EndedMarch
                  31,2008
              
              
              2007Sales
              
              
              100
              %
              
              100
              %Cost
                  of sales
              
              
              72
              %
              
              68
              %Gross
                  profit
              
              
              28
              %
              
              32
              %Selling,
                  general and administrative expenses
              
              
              21
              %
              
              19
              %Research
                  and development expenses
              
              
              6
              %
              
              5
              %Operating
                  income
              
              
              1
              %
              
              8
              %Interest
                  expense - net
              
              
              (9
              %)
              
              (6
              %)Income
                  (loss) from continuing operations
              
              
              (8
              %)
              
              2
              %Net
                  (loss) income
              
              
              (8
              %)
              
              2
              %
 
 The
        Company’s sales, from continuing operations, by product line for the periods
        ended March 31, 2008 and 2007 are as follows:
  Three
                  Months Ended March 31,2008
              
              
              
              2007Line
              
              $
              5,392,000
              
              
              82
              %
              $
              6,814,000
              
              
              83
              %Signal
              
              
              1,153,000
              
              
              18
              %
              
              1,388,000
              
              
              17
              %$
              6,545,000
              
              
              100
              %
              $
              8,202,000
              
              
              100
              %


**Overview**





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


Page 10 of
            20


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





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





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





Our
      Line
      division generated net income from operations for the three months ended March
      31, 2008 and the comparable period of 2007. The
      Signal division generated net income from operations for the three months ended
      March 31, 2008 and the comparable period of 2007. We recognize revenue from
      Line
      and Signal products when the product is shipped.





On
      March
      31, 2008, our liability to our senior debt holder was $24,373,000 plus accrued
      interest of $1,002,000. On
      February 7, 2007, Cheyne Special Situation Fund L.P. (“Cheyne”) purchased our
      senior debt of $23,400,000 from SHF IX, LLC and subsequently extended the
      maturity of our senior debt to September 1, 2008. In October 2007, Cheyne lent
      us an additional $1,000,000 which is due on September 1, 2008. We cannot give
      any assurance that our senior debt holder will extend the maturity date beyond
      September 1, 2008. Any adverse event, including declines in business, could
      have
      an effect on the decision of our senior debt holder to extend or demand payment
      on the notes. If our senior debt holder does not extend the maturity of our
      senior debt beyond September 1, 2008 or if our senior debt holder demands
      payment of all or a significant portion of the senior debt when due, we will
      not
      be able to continue in business, and it is likely that we will seek protection
      under the Bankruptcy Code.





We
      are
      very dependent upon our continued sales to British Telecommunications and its
      systems integrators. Our
      sales
      to British Telecommunications and its systems integrators declined $1,529,000,
      or 34%, from $4,455,000 for the three months ended March 31, 2007 to $2,926,000
      for the three months ended March 31, 2008. Sales to British Telecommunications
      and its systems integrators represented 51% of sales in the first quarter of
      2008 and 45% of sales for the first quarter of 2007. The decline was primarily
      due to decreased sales of connector products of $2,729,000, partially offset
      by
      increased sales of protection modules of $1,200,000. To the extent that British
      Telecommunications reduces its purchases from, or purchases products at a price
      which results in a reduced gross margin, our ability to operate profitably
      will
      be impaired. This decline in sales is the principal reason for the reduction
      of
      profit on continuing operations of $71,000 as compared to income of $666,000
      for
      the comparable period of 2007. We may not be able to replace this business
      from
      other customers and we cannot give any assurance that British Telecommunications
      will increase its purchases from us in the future or that we will be able to
      improve our margins on these sales.


Page 11 of
            20


We
      have
      entered agreements with Cheyne and the holders of our subordinated notes and
      certain creditors regarding the restructuring of our debt. Any such
      restructuring, if approved by our stockholders, would result in both a reduction
      of senior debt, subordinated debt and other liabilities and a significant
      dilution to our common stock stockholders. Regardless of whether we implement
      the debt restructure, if we are unable to increase our sales to a level where
      we
      can operate profitably it is likely that we will seek protection under the
      Bankruptcy Code.





**Results
      of Operations** ****





Line
      equipment sales for the three months ended March 3 1,
      2008,
      compared to the three months ended March 31, 2007, decreased by $1,422,000
      (20.9%) from $6,814,000 to $5,392,000. The
      decline was primarily due to decreased sales of connector products to British
      Telecommunications and its systems integrators of approximately $2,729,000,
      partially offset by increased sales of protection modules of $1,200,000. A
      significant percentage of our revenues are derived from British
      Telecommunications and its installers. Any continuation of the significant
      reduction in the level of business from British Telecommunications and its
      installers could continue to have a material adverse effect upon both our
      revenue and net income.





Signal
      sales for the three months ended March 31, 2008 compared to the comparable
      period in 2007, decreased by $235,000 (16.9%) from $1,388,000 to $1,153,000.
      The
      decline in Signal revenue was primarily due to the failure of the military
      sector to place orders due to the delay in Congress’ approval of the U.S.
      military budget until late 2007.





Gross
      margin for the quarter ended March
      31,
      2008 was 28% compared to 32% for the quarter ended March 31, 2007. The decrease
      for the quarter is primarily related to excess capacity in our Mexico facility
      due to lower production levels as compared to the same quarter in 2007.





Selling,
      general and administrative expenses decreased by $239,000 (15.1%) from
      $1,581,000 to $1,342,000 for the quarter ended March 31, 2008 compared to 2007.
      Selling expenses decreased in the first quarter primarily due to a reduction
      in
      advertising expenses and a reduction in the allowance for bad debt, when
      compared to the 2007 quarter. General and administrative costs decreased, for
      the first quarter of 2008 compared to 2007, primarily due to a reduction of
      costs associated with our negotiations relating to a proposed debt restructuring
      in the first quarter of 2008.





For
      the
      quarter ended March 31, 2008 compared to 2007, research and development expenses
      increased by $51,000 (13.7%) to $424,000 from $373,000. The increase for the
      quarter resulted primarily from increased spending by our line division to
      enhance our existing line products and develop new products.




As
      a
      result of the foregoing, for the quarter ended March 31, 2008, we had operating
      income from continuing operations of $71,000 compared with an operating income
      of $666,000 in the same period of 2007.





Interest
      expense, net, for the three months ended March 31, 2008 was $591,000 compared
      to
      $440,000 for the comparable period last year. This increase of $151,000 is
      primarily related to interest on our senior debt under the terms of our
      extension agreement with the senior debt holder. We do not accrue interest
      on
      the entire amount of the senior debt of $24,373,000 under the terms of our
      agreement with the holder of our senior debt. Interest has accrued from February
      7, 2007 on $10,000,000 of the senior debt at 12.5% as a result of the terms
      of
      extension of the maturity of our senior debt to September 1, 2008. In addition,
      we accrue interest on the $1,000,000 loan to us by our senior lender in October,
      2007 at a rate of LIBOR plus 10%, approximately 14.74% for the first quarter
      2008. This $1,000,000 loan is due on September 1, 2008.


Page 12 of
            20


Income
      tax expense for the quarter ended March 31, 2008 relates to state and foreign
      taxes. No federal income tax expense has been provided due to the loss from
      continuing operations and the availability of net operating loss carry
      forwards.




As
      a
      result of the foregoing, we generated a loss from continuing operations of
      $537,000, for the three months ended March 31, 2008, compared with income from
      continuing operations of $199,000 for the comparable quarter in
      2007.





During
      the first quarter of 2007, we had a loss from discontinued operations of
      $34,000. Since these operations were discontinued as of June 30, 2007, there
      was
      no income or loss from discontinued operations for the first quarter of
      2008.





For
      the
      quarter ended March 31, 2008, we sustained a net loss of $537,000, or $0.05
      per
      share (basic and diluted) as compared with net income of $165,000, or $0.02
      per
      share (basic and diluted) for the first quarter of 2007.





**Liquidity
      and Capital Resources**





At
      March
      31, 2008, we had cash and cash equivalents of $315,000 compared with $494,000
      at
      December 31, 2007. The reduction in our cash position primarily reflects
      increases of $330,000 in accounts receivable and $514,000 in inventory, offset
      by an increase of $1,680,000 in accounts payable and accrued expense. These
      factors were also reflected in our working capital deficit at March 31, 2008
      of
      $35,104,000 as compared with a working capital deficit of $34,513,000 at
      December 31, 2007, an increase of $591,000 in our working capital deficit.





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





During
      both the quarter ended March 31, 2008 and 2007, our only investing activities
      were capital expenditures of $22,000 and $144,000, respectively. Our financing
      activities of $191,000 were primarily an assessment due to the default on the
      convertible subordinated debentures in the first quarter of 2007. We made
      payments of principal of $150,000 on the senior debt in the first quarter of
      2007.





As
      of
      March 31, 2008, our senior debt includes $24,373,000 of principal and $1,002,000
      of accrued interest, which matures on September 1, 2008; and $6,529,000 of
      principal and $7,431,000 of accrued interest on our subordinated notes and
      6%
      debentures that became due on July 3, 2001 and July 2, 2002, respectively.
      We
      are prohibited by our senior debt holder from paying principal or interest
      on
      any of the subordinated debt. During the quarter ended March 31, 2008, we did
      not make any payments on principal or interest on the senior debt. At March
      31,
      2008, we did not have sufficient resources to repay either the senior lender
      or
      the subordinated lenders.





As
      of
      June 30, 2007, the Company discontinued operating the OSS division. Accordingly,
      as of June 30, 2007, the OSS net assets of $434,000 were written off and the
      operations of the OSS segment are reported in the Consolidated Financial
      Statements as a discontinued operation in fiscal 2007.


Page 13 of
            20


We
      are
      seeking to address our working capital and liquidity problems by seeking a
      restructuring of our senior and subordinated debt as well as significant amounts
      of unsecured debt due to third parties, as described below. Although the debt
      restructuring, if implemented, will reduce our working capital deficiency,
      it
      will not provide us with any additional cash for our operations. Our only source
      of funds other than normal operations is Cheyne, which advanced us $1,000,000
      in
      October 2007. However, our continuing losses and the uncertainty of any
      significant increase in business from British Telecommunications will increase
      the difficulties in obtaining financings from other sources, and we cannot
      give
      any assurance that Cheyne will provide us with any additional funding if the
      need arises. Any restructuring of our Company will result in very significant
      dilution to the holders of our common stock and will require the approval of
      the
      holders of our common stock. If we do not restructure our debt and the senior
      lender does not extend the maturity of our senior debt beyond September 1,
      2008,
      or if our senior debt holder demands payment of all or a significant portion
      of
      the senior debt when due, whether on September 1, 2008 or upon the expiration
      of
      a subsequent extension, we will not be able to continue in business, and it
      is
      likely that we will seek protection under the Bankruptcy Code.





We
      have
      in the past, and may in the future, consider the sale of one or more of our
      divisions. However, all of our past discussions terminated without any agreement
      and we cannot give any assurance that we would be able to effect any sale of
      our
      business or that such a sale would not be part of a bankruptcy
      reorganization.





On
      May 8,
      2008, we entered into an agreement with Cheyne that contemplates a restructure
      of our senior and subordinated debt and our obligations to certain other
      creditors. Cheyne presently holds two notes - a note in the principal amount
      of
      $23,373,000 at March 31, 2008 (the “Old Note”), and a note (the “New Note”) in
      the principal amount of $1,000,000, which we issued in October 2007. Both the
      Old Note and the New Note mature on September 1, 2008. Pursuant to this
      agreement:





**·**
            Our
                board of directors approved a one-for-11.11 reverse split of our
                common
                stock, subject to stockholder
                approval.




**·**
            Cheyne
                agreed to exchange the principal of the Old Note in excess of $10,000,000
                for 70% of our common stock. Any unpaid interest on the $10,000,000
                principal amount accrued through June 30, 2008, which is estimated
                at
                $1,250,000, will be added to
                principal.




**·**
            The
                Company will issue a modified promissory note in favor of the senior
                debt
                holder for the remaining $11,250,000 principal amount of the Old
                Note to
                provide for payments of interest of $351,156 on September 30, 2008
                and
                December 31, 2008 and thereafter at 121⁄2% per annum on the outstanding
                principal amount, payable quarterly in arrears, and payments of principal
                in twelve quarterly installments each in the amount of $250,000,
                with the
                first payment of principal becoming due on December 31, 2008, followed
                by
                13 quarterly installments of principal each in the amount of $500,000,
                with a final payment of $1,750,000 becoming due on March 31, 2015.
                If the
                accrued interest to the closing date is an amount other than $1,250,000,
                the final payment will be adjusted accordingly. The Old Note, as
                reduced
                and modified pursuant to this Agreement, is referred to as the “Amended
                Note.”




**·**
            The
                maturity date of the New Note will be extended from September 1,
                2008 to
                September 1, 2010 on the same terms. Principal and interest payments
                shall
                be payable on the first day of each calendar month commencing on
                August 1,
                2008 in the amount equal to the amount by which the excess of our
                average
                cash balance exceeds $250,000, exclusive of the proceeds of the New
                Note,
                for the three full business weeks ending immediately prior to such
                payment
                date. Interest shall accrue and be payable on the outstanding principal
                balance of the New Note at an amount equal to the six-month rate
                of LIBOR.
                Any interest due on a payment date which remains unpaid shall be
                added to
                principal and shall bear interest at the same rate as provided in
                the New
                Note.


Page 14 of
            20


**·**
            Until
                completion of the debt restructuring, Cheyne shall have the right
                to
                designate two members to our board of directors, each of whom shall
                be an independent director as defined by the rule of the Nasdaq Stock
                Market.




**·**
            The
                debt restructuring is subject to stockholder approval of the reverse
                split
                and the debt restructuring and the approval by the holders of our
                subordinated notes in the principal amount of $6,144,000, together
                with
                interest, which was $7,131,000 at March 31, 2008, for notes in the
                principal amount of $1,750,000 and 14% of our outstanding common
                stock,
                after giving effect to the reverse split. These notes bear interest
                at 10%
                per annum, are amortized based on a 25-year amortization schedule
                and
                mature 71⁄2 years after issuance. We have obtained the agreement of more
                than 95% of the holders of the subordinated notes to these
                terms.




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




**·**
            The
                agreement also provides that we will offer the holders of our debentures
                in the principal amount of $385,000 the right to exchange their debentures
                for their proportionate share of notes in the aggregate principal
                amount
                of $100,000 plus 1% of the Company’s common stock after giving effect to
                the reverse split.




**·**
            We
                have agreed to issue to our key employees 6% of the Company’s common
                stock, after giving effect to the reverse split.







**Forward
      Looking Statements**





Statements
      contained in this Form 10-Q include forward-looking statements that are subject
      to risks and uncertainties. In particular, statements in this Form 10-Q that
      state our intentions, beliefs, expectations, strategies, predictions or any
      other statements relating to our future activities or other future events or
      conditions are “forward-looking statements.” Forward-looking statements are
      subject to risks, uncertainties and other factors, including, but not limited
      to, those identified under “Risk Factors,” in our Form 10-K for the year ended
      December 31, 2007 and in the Form 10-Q and those described in “Management's
      Discussion and Analysis of Financial Conditions and Results of Operations” in
      our Form 10-K and this Form 10-Q, and those described in any other filings
      by us
      with the Securities and Exchange Commission, as well as general economic
      conditions and economic conditions affecting the telecommunications industry,
      any one or more of which could cause actual results to differ materially from
      those stated in such statements. S uch
      statements could be affected by risks and uncertainties related to our financial
      conditions, our relationship with the holder of our senior and subordinated
      debt, including the willingness or unwillingness of the holder of the senior
      debt to extend the maturity date of the senior debt and the amount and timing
      of
      any payments which the holder of the senior debt may require, our ability to
      sell any or all of our divisions or effect a restructure of our business and
      our
      debt and equity structure on terms acceptable to the holder of the senior debt,
      our relationship with British Telecommunications including its continued
      requirements for our products, factors which affect the telecommunications
      industry, market and customer acceptance, our access to current technology,
      competition, domestic and foreign government regulations and requirements and
      pricing, as well as general industry and market conditions and growth rates,
      and
      general economic conditions. Any forward-looking statements speak only as of
      the
      date on which they are made, and we do not undertake any obligation to update
      any forward-looking statement to reflect events or circumstances after the
      date
      of this Form 10-Q.





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





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


Page 15 of
            20


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





Evaluation
      of disclosure controls and procedures




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





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





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





Internal
      Control over Financial Reporting





During
      the first quarter of fiscal year 2008, the Company was engaged in the assessment
      and evaluation of its internal control over financial reporting for fiscal
      year
      2007. As previously reported in form 10-K for the year ended December 31, 2007,
      management identified significant deficiencies that when aggregated may give
      rise to a material weakness specifically relating to a) program change
      management in the Company’s PROCOMM system, b) lack of integrated modules with
      the general ledger and c) excessive manual adjustments to the inventory module
      are required.





*Management’s
      Plan of Remediation*





Management
      plans to evaluate, select and install a new integrated ERP system that will
      include a complete general ledger and reporting package to eliminate the need
      for manual updates and significantly reduce the need for journal entries in
      the
      financial reporting process. Specific remediation actions used in 2008 to
      address our material weakness in internal control over financial reporting
      in
      respect to Information Technology include the following:


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In-depth
      review of all perpetual inventory reports


Analyzing
      of production reporting in respect to ending inventory


Re-computation
      of reports on a test basis





*Changes
      in Internal Control over Financial Reporting*





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





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








**PART
      II - OTHER INFORMATION**





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





**** In
      addition to the other information set forth in this report, you should carefully
      consider the factors discussed in Part 1, “Item 1A. Risk Factors” in our Annual
      Report on Form 10-K for the year ended December 31, 2007, which could materially
      affect our business, financial condition or future results. The risks described
      in our Annual Report on Form 10-K and in this Form 10-Q are not the only risks
      facing our Company.





During
      the three months ended March 31, 2008, we sustained declines in revenue from
      our
      largest customer, British Telecommunications, from the comparable three month
      period of 2007, and, based on a change in the product mix, our gross margin
      declined on our sales to British Telecommunications. Due to our reliance on
      significant business from British Telecommunications, our revenue and net income
      could be impaired by any material reduction of sales to British
      Telecommunications or any material reduction in the gross margin on sales to
      British Telecommunications.




In
      May
      2008, we entered into a debt restructuring agreement with Cheyne. This agreement
      requires, as a condition to the implementation of the debt restructure, that
      we
      obtain stockholder approval for a one-for-11.11 reverse split and the debt
      restructuring. The approval of the reverse split requires the affirmative vote
      of the holders of a majority of the outstanding shares of common stock. We
      cannot assure you that we will obtain stockholder approval. If we do not obtain
      stockholder approval, it is likely that we will seek protection under the
      Bankruptcy Code. Further, even if we do obtain stockholder approval and
      implement the debt restructuring, we may still seek protection under the
      Bankruptcy Code if we cannot generate income from our business.





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.


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**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
      5. Other Information**





On
      May 8,
      2008, we entered into an agreement with Cheyne which contemplates a restructure
      of our senior and subordinated debt and our obligations to certain other
      creditors. Cheyne presently holds two notes - a note in the principal amount
      of
      $23,373,000 at March 31, 2008 (the “Old Note”), and a note (the “New Note”) in
      the principal amount of $1,000,000, which we issued in October 2007. Both the
      Old Note and the New Note mature on September 1, 2008. Pursuant to this
      agreement:





**·**
            Our
                board of directors approved a one-for-11.11 reverse split of our
                common
                stock, subject to stockholder
                approval.




**·**
            Cheyne
                agreed to exchange the principal of the Old Note in excess of $10,000,000
                for 70% of our common stock. Any unpaid interest on the $10,000,000
                principal amount accrued through June 30, 2008, which is estimated
                at
                $1,250,000, will be added to
                principal.




**·**
            The
                Company will issue a modified promissory note in favor of the senior
                debt
                holder for the remaining $11,250,000 principal amount of the Old
                Note to
                provide for payments of interest of $351,156 on September 30, 2008
                and
                December 31, 2008 and thereafter at 121⁄2% per annum on the outstanding
                principal amount, payable quarterly in arrears, and payments of principal
                in twelve quarterly installments each in the amount of $250,000,
                with the
                first payment of principal becoming due on December 31, 2008, followed
                by
                13 quarterly installments of principal each in the amount of $500,000,
                with a final payment of $1,750,000 becoming due on March 31, 2015.
                If the
                accrued interest to the closing date is an amount other than $1,250,000,
                the final payment will be adjusted accordingly.




**·**
            The
                maturity date of the New Note will be extended from September 1,
                2008 to
                September 1, 2010 on the same terms. Principal and interest payments
                shall
                be payable on the first day of each calendar month commencing on
                August 1,
                2008 in the amount equal to the amount by which the excess of our
                average
                cash balance exceeds $250,000, exclusive of the proceeds of the New
                Note,
                for the three full business weeks ending immediately prior to such
                payment
                date. Interest shall accrue and be payable on the outstanding principal
                balance of the New Note at an amount equal to the six-month rate
                of LIBOR.
                Any interest due on a payment date which remains unpaid shall be
                added to
                principal and shall bear interest at the same rate as provided in
                the New
                Note.




**·**
            Until
                completion of the debt restructuring, Cheyne shall have the right
                to
                designate two members to our board of directors, each of whom shall
                be an independent director as defined by the rule of the Nasdaq Stock
                Market.




**·**
            The
                debt restructuring is subject to stockholder approval of the reverse
                split
                and the debt restructuring and the approval by the holders of our
                subordinated notes in the principal amount of $6,144,000, together
                with
                interest, which was $7,131,000 at March 31, 2008, for notes in the
                principal amount of $1,750,000 and 14% of our outstanding common
                stock,
                after giving effect to the reverse split. These notes bear interest
                at 10%
                per annum, are amortized based on a 25-year amortization schedule,
                and
                mature 71⁄2 years after issuance. We have obtained the agreement of more
                than 95% of the holders of the subordinated notes to the terms
                of the debt restructuring.


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            20


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




**·**
            The
                agreement also provides that we will offer the holders of our debentures
                in the principal amount of $385,000 the right to exchange their debentures
                for their proportionate share of notes in the aggregate principal
                amount
                of $100,000 plus 1% of the Company’s common stock after giving effect to
                the reverse split. The agreement permits us to make payments on the
                new
                notes being issued, but not on the outstanding
                debentures.




**·**
            We
                have agreed to issue to our key employees 6% of the Company’s common
                stock, after giving effect to the reverse
                split.




·
            For
                services relating to the restructuring plan, we are paying Advicorp,
                PLC a
                fee of $200,000, payable without interest in twenty five equal monthly
                installments of $8,000 which are due from January 2009 until January
                2011.
                In addition, we will issue to Advicorp five-year warrants to purchase
                2%
                of the common stock,
                after giving effect to the issuances in connection with the debt
                restructuring (including shares reserved for issuance to management),
                at
                an exercise price equal to the average closing price of our common
                stock
                on the five trading days commencing with the first trading day which
                follows the 30th day after the effective date of the reverse
                split.
                Mr. Marco Elser, a director, is chief executive officer of
                Advicorp.







**Item
      6. Exhibits**





10.1
            Agreement
                dated May 8, 2008 between the Company and Cheyne Special Situation
                Fund
                L.P.


10.2
            Form
                of agreement between the Company and the holders of the Company’s
                subordinated notes.


31.1
            Certificate
                of Chief Executive Officer and Chief Financial Officer pursuant to
                Section
                302 of the Sarbanes-Oxley Act of 2002. 32.1
            Certificate
                of Chief Executive Officer and Chief Financial Officer pursuant to
                Section
                906 of the Sarbanes-Oxley Act of
                2002.






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**SIGNATURES**





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





**PORTA
                SYSTEMS
                CORP.**Dated:
                  May 13, 2008
              By  
                  /s/ Edward B. Kornfeld
                Edward
                  B. Kornfeld
                Chief
                  Executive Officer
                and
                  Chief Financial Officer





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