Tii Network (TIII) 10-Q 2010 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

[Missing Graphic Reference]

FORM 10-Q

[Missing Graphic Reference]

(Mark One)

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

For the quarterly period ended June 30, 2010

Or

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: 001-08048

TII NETWORK TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
State of incorporation:	Delaware	IRS Employer Identification No:	66-0328885

141 Rodeo Drive, Edgewood, New York 11717

(Address and zip code of principal executive office)

(631) 789-5000

(Registrant'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 or 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 check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o        No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o                                                Accelerated filer o                                           Non-accelerated filer o                                            Smaller reporting company x

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

Yes o        No x

The number of shares of the registrant's Common Stock, $.01 par value, outstanding as of August 10, 2010 was 14,485,847

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TII NETWORK TECHNOLOGIES, INC.AND SUBSIDIARIES

INDEX

			PAGE
	PART I     FINANCIAL INFORMATION
Item 1		CONDENSED CONSOLIDATED BALANCE SHEETS June 30, 2010 (unaudited) and December 31, 2009	3
		UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND      COMPREHENSIVE INCOME (LOSS) Three and six months ended June 30, 2010 and 2009	4
		UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Six months ended June 30, 2010	5
		UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six months ended June 30, 2010 and 2009	6
		NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	7
Item 2		MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND      RESULTS OF OPERATIONS	15
Item 3		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	21
Item 4		CONTROLS AND PROCEDURES	22
	PART II     OTHER INFORMATION
Item 1		LEGAL PROCEEDINGS	23
Item 5		OTHER INFORMATION	23
Item 6		EXHIBITS	23
SIGNATURES			23
EXHIBIT INDEX			24

2

PART I.  FINANCIAL INFORMATION

Item 1.       Financial Statements

TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES

 CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

	2010			2009
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	3,144		$	5,129
Certificate of deposit		-			7,000
Accounts receivable, net of allowance of $99 and $82 at      June 30, 2010 and December 31, 2009, respectively		7,103			3,468
Other receivable		605			-
Inventories, net		12,204			8,044
Deferred tax assets, net		1,614			1,100
Other current assets		890			235
Total current assets		25,560			24,976
Property, plant and equipment, net		8,948			8,020
Deferred tax assets, net		7,495			7,791
Intangible assets, net		1,029			-
Goodwill		5,469			-
Other assets, net		220			175
Total assets	$	48,721		$	40,962
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	7,646		$	2,429
Accrued liabilities		1,651			688
Other current liabilities		492			-
Total current liabilities		9,789			3,117
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $1.00 per share; 1,000,000 shares authorized;      no shares outstanding		-			-
Common stock, par value $.01 per share; 30,000,000 shares authorized;      14,503,484 shares issued and 14,485,847 shares outstanding as of      June 30, 2010, and 14,240,853 shares issued and 14,223,216 shares      outstanding as of December 31, 2009		142			143
Additional paid-in capital		43,404			43,050
Accumulated deficit		(4,412	)		(5,067	)
Accumulated other comprehensive income - foreign currency translation		79			-
		39,213			38,126
Less: Treasury shares, at cost, 17,637 common shares at      June 30, 2010 and December 31, 2009		(281	)		(281	)
Total stockholders' equity		38,932			37,845
Total liabilities and stockholders' equity	$	48,721		$	40,962

See notes to unaudited condensed consolidated financial statements

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TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPRENSIVE INCOME (LOSS)

(in thousands, except per share data)

(Unaudited)

	Three months ended June 30,					Six months ended June 30,
	2010		2009			2010		2009
Net sales	$	10,345	$	6,494		$	18,088	$	12,243
Cost of sales		6,682		4,252			11,234		7,874
Gross profit		3,663		2,242			6,854		4,369
Operating expenses:
Selling, general and administrative (including       acquisition-related expenses of $607 and       $744 in the three and six months ended       June 30, 2010, respectively)		2,853		1,765			4,902		3,649
Research and development		487		396			872		834
Total operating expenses		3,340		2,161			5,774		4,483
Operating income (loss)		323		81			1,080		(114	)
Interest expense		-		(2	)		-		(2	)
Interest income		3		4			9		6
Income (loss) before income taxes		326		83			1,089		(110	)
Income tax provision		134		36			434		75
Net income (loss)	$	192	$	47		$	655	$	(185	)
Foreign currency translation adjustment		79		-			79		-
Comprehensive income (loss)	$	271	$	47		$	734	$	(185	)
Net income (loss) per common share:
Basic and Diluted	$	0.01	$	0.00		$	0.05	$	(0.01	)
Weighted average common shares outstanding:
Basic		13,677		13,575			13,636		13,568
Diluted		14,316		13,738			14,149		13,568

See notes to unaudited condensed consolidated financial statements

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TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(in thousands, except share data)

(Unaudited)

	Common Stock Shares			Common Stock Amount			Additional Paid-In Capital		Accumulated Deficit				Accumulated Other Comprehensive Income	Treasury Stock			Total Stockholders' Equity
Balance January 1, 2010		14,223,216		$	143		$	43,050	$	(5,067	)	$	-	$	(281	)	$	37,845
Share-based compensation		-			-			354		-			-		-			354
Restricted shares forfeited		(12,369	)		(1	)		-		-			-		-			(1	)
Restricted shares issued		275,000			-			-		-			-		-			-
Foreign currency translation adjustment		-			-			-		-			79		-			79
Net income for the six months      ended June 30, 2010		-			-			-		655			-		-			655
Balance June 30, 2010		14,485,847		$	142		$	43,404	$	(4,412	)	$	79	$	(281	)	$	38,932

See notes to unaudited condensed consolidated financial statements

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TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	Six months ended June 30,
	2010			2009
Cash Flows from Operating Activities
Net income (loss)	$	655		$	(185	)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization		715			828
Share-based compensation		354			385
Deferred income taxes		338			68
Loss on write-offs and disposals of capital assets		-			19
Changes in operating assets and liabilities:
Accounts receivable		(2,070	)		889
Other receivable		625			-
Inventories		(3,889	)		1,336
Other assets		(353	)		(69	)
Accounts payable, accrued liabilities, and other current liabilities		2,384			(463	)
Net cash (used in) provided by operating activities		(1,241	)		2,808
Cash Flows from Investing Activities
Capital expenditures		(600	)		(239	)
Redemption of certificate of deposit		7,000			-
Net cash paid for the acquisition of the
Copper Products Division of Porta Systems Corp. (See Note 2)		(7,150	)		-
Net cash used in investing activities		(750	)		(239	)
Cash Flows from Financing Activities
Repayment of short term debt		-			(71	)
Net effect of exchange rate changes on cash		6			-
Net (decrease) increase  in cash and cash equivalents		(1,985	)		2,498
Cash and cash equivalents, at beginning of period		5,129			8,282
Cash and cash equivalents, at end of period	$	3,144		$	10,780
Non-cash Investing and Financing Activities
Capital expenditures included in accounts payable	$	6		$	15
Insurance premiums financed with short term debt	$	-		$	242
Issuance of common stock	$	-		$	2
Supplemental Cash Flow Information
Cash paid during the period for interest	$	-		$	3
Cash paid during the period for income taxes	$	27		$	9

See notes to unaudited condensed consolidated financial statements

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TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

Note 1 – Basis of Presentation

The unaudited interim condensed consolidated financial statements presented herein have been prepared by Tii Network Technologies, Inc. and subsidiaries (together “Tii,” the “company,” “we,” “us,” or “our”) in accordance with U.S. generally accepted accounting principles for interim financial statements and in accordance with the instructions to Form 10-Q and Regulation S-X pertaining to interim financial statements.  Accordingly, they do not include all information and notes required by U.S. generally accepted accounting principles for complete financial statements.  The unaudited interim condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments and accruals which, in the opinion of management, are cons idered necessary for a fair presentation of our consolidated financial position, results of operations and cash flows for the interim periods presented.  The condensed consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2009.

Results of operations for interim periods presented are not necessarily indicative of results of operations that might be expected for future interim periods or for the full fiscal year ending December 31, 2010.

Subsequent Events

We have evaluated all events or transactions that occurred subsequent to June 30, 2010 through the date the financial statements were issued and no reportable subsequent events were noted that were not disclosed in the financial statements.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our more significant estimates include the valuation of accounts receivable, inventories and deferred income taxes, the preliminary estimated purchase price and allocation of such purchase price relating to the acquisition of the Copper Products Division of Porta Systems Corp. (the “Copper Products Division”) (see Note 2), and the fair value of share-based payments. Actual results could differ from such estimates.

Certificate of Deposit

Certificate of deposit of $7,000,000 at December 31, 2009 was a one-year certificate of deposit with a maturity date of November 12, 2010. This certificate was redeemed in May 2010 and the proceeds were used for the acquisition of the Copper Products Division.

Concentration of Credit Risk

At June 30, 2010 our cash deposits were maintained at one high credit quality financial institution.  At December 31, 2009, our cash deposits, temporary cash investments and certificate of deposit were maintained at this same institution. At times, our cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation insurance limit.

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, receivables, accounts payable and accrued liabilities approximate fair value due to the short-term nature of these instruments.

Foreign Currency Translation

Our newly formed Mexican subsidiary maintains its accounting records in Mexican Pesos, which is its functional currency.  Our acquired United Kingdom subsidiary maintains its accounting records in Pound Sterling, which is its functional currency.  We translate the foreign subsidiaries’ assets and liabilities into U.S. dollars based on exchange rates at the end of the respective reporting periods and reflect the effect of foreign currency translation as a component of stockholders’ equity.  Income and expense items are translated at an average exchange rate during the period.  Transaction gains and losses are included in the determination of the results from operations.

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TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

Goodwill and Other Intangible Assets

Our acquisition of the Copper Products Division has been accounted for using the purchase method of accounting (see Note 2).  The assets and liabilities of the acquired business are recorded at their estimated fair values at the date of acquisition.  The excess of the purchase price over the estimated fair values is recorded as goodwill.  All acquisition costs were expensed as incurred.  We will measure and test goodwill and intangible assets not subject to amortization for impairment in accordance with ASC 350, “Intangible – Goodwill and Other,” at least annually or more frequently if events or circumstances indicate that it is “more likely than not” that goodwill or intangible assets might be impaired, such as a change in business conditions.  Other intan gible assets, which include customer contracts and relationships, are amortized by the straight-line method over the estimated useful lives of the related assets.  We test intangible assets that are subject to amortization for impairment at the reporting unit level at least annually based upon either a discounted cash flow or common market multiple analyses.  As of June 30, 2010, there was no impairment of goodwill and other intangible assets.

Recently Adopted Accounting Pronouncements

Accounting Standards Update (“ASU”) 2009-17 (“ASU 2009-17”), originally issued as Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 167, “Amendments to FASB Interpretation No. 46(R)” amends the guidance on variable interest entities in Accounting Standards Codification (“ASC”) 810.  ASC 810 eliminates exceptions in FASB Interpretation (“FIN”) No. 46(R) to a consolidating qualifying special-purpose entity, contains new criteria for determiningthe primary beneficiary, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a variable interest entity.  ASU 2009-17 also contains a new requirement that any term, transaction or arrangement that does not have a substantive effect on an entity’s status as a variable interest entity, a company’s power over a variable interest entity or a company’s obligation to absorb losses or its right to receive benefits of an entity must be disregarded in applying FIN 46(R).  The elimination of the qualifying special-purpose entity concept and its consolidation exceptions means more entities will be subject to consolidation assessments and reassessments.  ASU 2009-17 became effective for us on January 1, 2010.  The adoption of ASU 2009-17 did not have any impact on our financial statements or results of operations.

ASU 2010-06, “Improving Disclosures about Fair Value,” (“ASU 2010-06”) amends ASC 820 to require reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information about purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value measurements.  ASU 2010-06 also clarifies existing fair-value measurement disclosure guidance about the level of disaggregation, inputs and valuation techniques.  We adopted the guidance of ASU 2010-06 effective January 1, 2010.  The adoption of ASU 2010-06 did not impact our financial position or results of operations.

Note 2 – Acquisition of the Copper Products Division of Porta Systems Corp.

On May 19, 2010, we acquired all of the assets, exclusive of cash, and assumed certain operating liabilities, primarily accounts payable and accrued expenses, of the Copper Products Division of Porta Systems Corp. for cash of $8,150,000, subject to potential purchase price adjustments, as defined in the Asset Purchase Agreement.  This acquisition was made in order to increase our sales levels, expand into key markets and acquire new products and technology.

The Copper Products Division is comprised of two wholly owned subsidiaries, one in the United Kingdom and the other in Mexico, as well as domestic assets, liabilities, sales and expenses exclusively related to copper telecommunications products.

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TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

Concurrent with this acquisition, we sold the acquired Mexican subsidiary, exclusive of customer contracts and certain machinery and equipment which we retained, to our principal contract manufacturer, which will operate this manufacturing facility.  In consideration for this sale, we received $1,000,000 from the contract manufacturer, subject to purchase price adjustments, as well as an option to reacquire up to approximately 9% of a newly formed entity that now owns the Mexican subsidiary, for a total exercise price of $100,000. We believe that the value of this option, which expires on May 18, 2011, is not material and we did not allocate a portion of the net Copper Products Division purchase price to it.

Additionally, we sold to the contract manufacturer certain raw material and component inventories, which were acquired as part of the Copper Products Division transaction, for approximately $1,230,000, subject to subsequent finalization of valuation, which will be paid as these materials are used in production.

The condensed consolidated statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2010 include Copper Product Division sales of $1,872,000 from the acquisition date through June 30, 2010, and negligible net income for the same periods.

The following is a preliminary summary of the fair value of the net assets acquired as a result of the May 19, 2010 acquisition of the Copper Products Division, net of the concurrent sale of the Mexican manufacturing operations to our principal contract manufacturer:

Assets
Accounts receivable	$	1,529,000
Other receivable		1,230,000
Inventories		253,000
Prepaid expenses and other assets		373,000
Deferred tax asset		544,000
Property and equipment		998,000
Intangible assets subject to amortization		1,040,000
Goodwill		5,469,000
Liabilities
Accounts payable		(3,400,000	)
Accrued expenses		(394,000	)
Estimated purchase price adjustment payable		(492,000	)
	$	7,150,000

The preliminary estimated purchase price adjustment resulting from the sale of the Mexican manufacturing operations of $492,000 is payable by us and is included in other current liabilities as of June 30, 2010 in the accompanying condensed consolidated balance sheets.  However, the purchase price adjustments, as well as the allocation of purchase price to identifiable tangible and intangible assets and assumed liabilities have not yet been finalized.  As such, the estimate is subject to change once we make a final determination of purchase price and the fair values of tangible and intangible assets acquired and liabilities assumed, which will be completed at a later date.

Intangible assets subject to amortization, which include customer contracts and relationships, are amortized by the straight-line method over the estimated useful lives of the related assets.  The estimated useful life of the intangible assets, which is expected to approximate twelve years, is subject to the final determination of the intangible assets acquired as discussed above.  The accompanying condensed consolidated statements of operations include related amortization expense of $11,000 in the three and six month periods ended June 30, 2010. Net intangible assets as of June 30, 2010, reported in the accompanying condensed consolidated balance sheets, includes accumulated amortization of $11,000.

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TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

Pro forma revenue and net income for the three months ended June 30, 2010, calculated under the premise that the acquisition of the Copper Products Division had occurred on April 1, 2010, were $13,485,000 and $114,000 respectively.  Related basic, as well as diluted, earnings per share were $0.01

Pro forma revenue and net income for the six months ended June 30, 2010, calculated under the premise that the acquisition of the Copper Products Division had occurred on January 1, 2010, were $26,995,000 and $434,000 respectively.  Related basic, as well as diluted, earnings per share were $0.03.

Related pro forma information for the three and six months ended June 30, 2009 was deemed impracticable to obtain due to the fact that no separate financial records were maintained or prepared for the Copper Products Division for the three months ended June 30, 2009, and it was prohibitive from a cost as well as timing perspective to prepare such records.

Note 3 – Comprehensive Income (Loss)

Comprehensive income or loss includes, in addition to net income or loss, as income or loss, foreign currency translation which is included in the stockholders’ equity section of the balance sheet.  We reported comprehensive income in the amounts of $271,000 and $734,000 during the three and six month periods ended June 30, 2010, respectively.  In 2009, we reported comprehensive income of $47,000 during the three month period ended June 30, 2009 and comprehensive loss of $185,000 during the six months ended June 30, 2009.

Note 4 – Share–Based Compensation

Share-based compensation is attributable to the granting of stock options and restricted stock awards, and vesting of these options and restricted stock awards over the remaining requisite service period.  Expense attributable to share-based compensation during the three and six months ended June 30, 2010 was $187,000 and $354,000, respectively.  Expense attributable to share-based compensation during the three and six months ended June 30, 2009 was $190,000 and $385,000, respectively.

During the three months ended June 30, 2010, we granted restricted stock awards covering 100,000 shares of our common stock with a grant date fair value of $143,000 to our non-employee directors and restricted stock awards covering 175,000 shares of our common stock with a grant date fair value of $296,000 to certain employees.  All restricted stock awards granted are pursuant to our 2008 Equity Compensation Plan. The awards issued to the non-employee directors vest ratably over three years and the awards issued to employees generally vest over three to five years.

In connection with the resignation of a director in January 2010, 12,369 shares of restricted stock and approximately 16,200 unvested options were forfeited, which resulted in a reversal of $15,000 in share-based compensation expense in the six months ended June 30, 2010.

Note 5 - Net income (loss) per common share

Basic earnings (loss) per share (“EPS”) is computed by dividing income (loss) available to common stockholders (which equals our net income (loss)) by the weighted average number of common shares outstanding, and dilutive EPS adds the dilutive effect of stock options and other common stock equivalents.  During the three and six months ended June 30, 2010, outstanding options to purchase an aggregate of approximately 1,843,000, and 1,878,000 shares of common stock, respectively, were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive.  During the three and six noths ended June 30, 2010, there were no restricted stock awards excluded from the computation of diluted earnings per share.  During the three months ended June 30, 2009, 255,000 r estricted stock awards and outstanding options to purchase an aggregate of approximately 2,314,000 shares of common stock were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive.  Due to the net loss for the six months ended June 30, 2009, all potentially dilutive common stock equivalents for the period, consisting of approximately 403,000 restricted stock awards and outstanding options to purchase an aggregate of approximately 2,515,000 shares of common stock were excluded because their inclusion would have been anti-dilutive.

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TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

The following table sets forth the amounts used in the computation of basic and diluted net earnings (loss) per share:

	Three months ended June 30,				Six months ended June 30,
	2010		2009		2010		2009
Numerator for diluted EPS calculation:
Net income (loss)	$	192,000	$	47,000	$	655,000	$	(185,000	)
Denominator for basic EPS calculation:
Weighted average shares outstanding - Basic		13,677,000		13,575,000		13,636,000		13,568,000
Denominator for diluted EPS calculation:
Weighted average shares outstanding - Basic		13,677,000		13,575,000		13,636,000		13,568,000
Effect of dilutive stock options		204,000		114,000		195,000		-
Effect of unvested restricted stock awards		435,000		49,000		318,000		-
		14,316,000		13,738,000		14,149,000		13,568,000
Basic EPS	$	0.01	$	0.00	$	0.05	$	(0.01	)
Diluted EPS	$	0.01	$	0.00	$	0.05	$	(0.01	)

Note 6 – Inventories

The following table sets forth the cost basis of each major class of inventory as of June 30, 2010 and December 31, 2009:

	June 30,		December 31,
	2010		2009
Raw material and subassemblies	$	1,407,000	$	1,313,000
Finished goods		10,797,000		6,731,000
	$	12,204,000	$	8,044,000

Inventories are net of reserves of $845,000 and $753,000 at June 30, 2010 and December 31, 2009, respectively.

Note 7 – Property, Plant and Equipment

Property, plant and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful life of the related asset.  The following table sets forth the amounts of each major class of property, plant and equipment as of June 30, 2010 and December 31, 2009:

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TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

	June 30,			December 31,
	2010			2009
Land	$	1,244,000		$	1,244,000
Building and building improvements		4,307,000			4,307,000
Construction in progress		175,000			147,000
Machinery and equipment		8,793,000			7,901,000
Computer hardware and software		882,000			839,000
Office furniture, fixtures, and equipment		735,000			730,000
	$	16,136,000		$	15,168,000
Less: accumulated depreciation and amortization		(7,188,000	)		(7,148,000	)
	$	8,948,000		$	8,020,000

Depreciation and amortization of property, plant and equipment was $331,000 and $676,000 for the three and six months ended June 30, 2010, respectively, and $365,000 and $804,000 for the three and six months ended June 30, 2009, respectively.  These amounts included accelerated depreciation of $11,000 and $75,000 for the three and six months ended June 30, 2009, respectively, resulting from a revision to the estimate of the useful life of certain machinery and equipment, which revision was accounted for in accordance with ASC 250, “Accounting Changes and Error Corrections.” Of these amounts, $11,000 and $69,000 were included in cost of sales for the three and six months ended June 30, 2009 and the remaining $6,000 during the six months ended June 30, 2009 was included in research and development expenses.

We recorded a loss on disposal of capital assets of approximately $19,000 for the six months ended June 30, 2009 related to disposals of obsolete equipment.  These charges are included in selling, general and administrative expenses.

As of June 30, 2010 and December 31, 2009, we had costs, primarily for the development of machinery and equipment, of $175,000 and $147,000, respectively, classified as construction in progress.  The machinery was not in service at either date and is therefore not being depreciated.

Note 8 – Credit Facility

In December 2008, we entered into an amended credit agreement with JP Morgan Chase Bank, N.A. (the “amended agreement”) which replaced a $5,000,000 credit facility that was expiring.  Under the amended agreement, we are entitled to borrow from the bank up to $5,000,000 in the aggregate at any one time outstanding, but limited to a borrowing base, in general, equal to 80% of eligible accounts receivable (as defined), plus the lesser of 30% of eligible inventory (as defined, generally to include, with certain exceptions, inventories at the Company’s continental United States warehouse), after certain reserves, or $1,500,000.

As of June 30, 2010, our borrowing base was in excess of the amount available to borrow of $5,000,000.  Loans under the amended agreement mature on December 31, 2010.  We had no borrowings outstanding under the credit agreement as of June 30, 2010 or December 31, 2009.

Outstanding loans under the amended agreement bear interest, at our option, either at (a) the bank's prime rate plus 2.75% per annum, provided that the prime rate shall not be less than an adjusted one-month London Interbank Offered Rate (“LIBOR”) (as defined in the amended agreement), or (b) under a formula based on LIBOR plus 4.5% per annum. We also pay a commitment fee equal to 0.25% per annum on the average daily unused portion of the credit facility.

Our obligations under the amended agreement are collateralized, pursuant to a Continuing Security Agreement, by all of our accounts receivable and inventory, and are also guaranteed by one of our subsidiaries.

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TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

The amended agreement contains various covenants, including financial covenants and covenants that prohibit or limit a variety of actions without the bank's consent. These include, among other things, covenants that prohibit our payment of dividends and limit our ability to repurchase stock, incur or guarantee indebtedness, create liens, purchase all or a substantial part of the assets or stock of another entity, other than certain permitted acquisitions, create or acquire any subsidiary, or substantially change our business. The amended agreement requires us to maintain, as of the end of each fiscal quarter, tangible net worth and subordinated debt of at least $28,500,000, a ratio of net income before interest expense and taxes for the 12-month period ending with such fiscal quarter to interest expense for the same period of at least 2.25 to 1.00, and a ratio of total liabilities, excluding accounts payable in the ordinary course of business, accrued expenses and losses and deferred revenues or gains, to net income before interest expense, income taxes, depreciation and amortization for the 12-month period ending with the fiscal quarter for which compliance is being determined of not greater than 2.5 to 1.0.  As of  June 30, 2010 and December 31, 2009, we were in compliance with all financial covenants in the amended agreement.

In May 2010, in connection with our acquisition of the Copper Product Division, we entered into an amendment to our bank credit agreement to reduce the minimum amount of tangible net worth and subordinated debt that we are required to maintain from $35,300,000 to $28,500,000.

Note 9 – Income Taxes

For the three and six months ended June 30, 2010 and 2009, our income tax provision consisted of amounts necessary to align our year-to-date tax provision with the effective tax rate we expect for the full year.  That rate differs from the U.S. statutory rate primarily as a result of the non-deductibility of certain share-based compensation expense for income tax purposes that has been expensed for financial statement purposes, foreign tax rate differential and state taxes.

We do not expect that our unrecognized tax benefits will significantly change within the next twelve months.  We file a consolidated U.S. income tax return and tax returns in certain state, local, and foreign jurisdictions.  There are no current tax examinations in progress.  Accordingly, as of June 30, 2010, we remain subject to examination in all tax jurisdictions for all relevant jurisdictional statutes.

Note 10- Significant Customers

The following customers accounted for 10% or more of our consolidated net sales during at least one of the periods presented below:

	Three months ended June 30,		Six months ended June 30,
	2010	2009	2010	2009
Customer A	23%	46%	28%	36%
Customer B	*	11%	*	11%
Customer D	*	*	*	17%
Customer E	10%	*	*	*

___________________

* Amounts are less than 10%

As of June 30, 2010, two customers accounted for approximately 24% and 18% of accounts receivable, respectively, and as of December 31, 2009, three customers accounted for approximately 34%, 12% and 10% of accounts receivable, respectively.

Note 11 – Litigation

In February 2009, a lawsuit was filed in Puerto Rico by a former sales representative against us.  The complaint alleges that we terminated our relationship with the former sales representative without just cause and is seeking $1,400,000 in damages, plus attorney’s fees and costs.  We are vigorously defending this case.

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TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

In November 2009 and February 2010, the respective Courts dismissed two separate lawsuits instituted against us and each member of our Board of Directors in Suffolk County, New York and the State of Delaware in May 2009 and June 2009, respectively, arising from an unsolicited expression of interest to acquire all our outstanding shares of common stock for $1.00 per share.  We rejected this expression of interest as inadequate and not in the best interest of us or our stockholders on July 20, 2009.  The actions, which were similar, sought class action status, and, in general, alleged that our Board of Directors violated the fiduciary duties owed by them to us and our public stockholders in connection with the transaction contemplated in the expression of interest.  These actions sought, in general, equitabl e relief compelling our Board to properly exercise its fiduciary duty to consider whether the transaction contemplated in the expression of interest or an alternate transaction maximizes shareholder value, plus attorneys’ fees, costs and expenses.

From time to time, we are subject to legal proceedings or claims which arise in the ordinary course of business.  While the outcome of such matters can not be predicted with certainty, we believe that such matters will not have a material adverse effect on our financial condition or liquidity.

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Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the foregoing unaudited Condensed Consolidated Financial Statements and related notes thereto appearing elsewhere in this Report.

Overview

Business

Tii Network Technologies, Inc. and subsidiaries (together, “Tii,” the “company,” “we,” “us” or “our”) designs, manufactures and sells products to the service providers in the communications industry for use in their networks.  Our products are typically found in the Telco Central Office, outdoors in the service providers’ distribution network, at the interface where the service providers’ network connects to the users’ network, and inside the users’ home or apartment, and are critical to the successful delivery of voice and broadband communication services.

We sell our products through a network of sales channels, principally to telephone operating companies (“Telcos”), multi-system operators (“MSOs”) of communications services, including cable and satellite service providers, and original equipment manufacturers ("OEMs").

Recent Acquisition

On May 19, 2010, we acquired all of the assets, exclusive of cash, and assumed certain operating liabilities, primarily accounts payable and accrued expenses, of the Copper Products Division of Porta Systems Corp. (the “Copper Products Division” or “CPD”) for cash of $8,150,000, subject to potential purchase price adjustments, as defined in the Asset Purchase Agreement.  The Copper Products Division is comprised of two wholly owned subsidiaries, one in the United Kingdom and the other in Mexico, as well as domestic assets, liabiliaties, sales and expenses exclusively related to copper telecommunications products.

Concurrent with this acquisition, we sold the acquired Mexican subsidiary, exclusive of customer contracts and certain machinery and equipment which we retained, to our principal contract manufacturer, who will operate this manufacturing facility.  In consideration for this sale, we received $1,000,000 from the contract manufacturer, subject to purchase price adjustments, as well as an option to reacquire up to approximately 9% of a newly formed entity that now owns the Mexican subsidiary, for a total exercise price of $100,000. We believe that the value of this option, which expires on May 18, 2011, is not material and we did not allocate a portion of the net Copper Products Division purchase price to it.

We paid the net purchase price of $7,150,000 predominantly with the proceeds from the redemption of our $7,000,000 certificate of deposit.

Additionally, we sold to the aforementioned contract manufacturer certain raw material and component inventories, which were acquired as part of the Copper Products Division transaction, for approximately $1,230,000, subject to subsequent finalization of valuation, which will be paid as these materials are used in production.

Our financial statements for the three and six months ended June 30, 2010 includes, and the following discussion and analysis of operations reflects, the activity of the Copper Products Division since May 20, 2010.

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Results of Operations

The following table sets forth certain statement of operations information as a percentage of net sales for the periods indicated (except “Income tax provision,” which is stated as a percentage of “Income (loss) before income taxes”):

	Three months ended June 30,
(dollars in thousands)	2010					2009
	Amount		% of Net sales			Amount			% of Net sales		Dollar increase (decrease)			Percent increase (decrease)
Net sales	$	10,345		100.0	%	$	6,494		100.0	%	$	3,851			59.3	%
Cost of sales		6,682		64.6	%		4,252		65.5	%		2,430			57.1	%
Gross profit		3,663		35.4	%		2,242		34.5	%		1,421			63.4	%
Operating expenses:
Selling, general and administrative		2,853		27.6	%		1,765		27.2	%		1,088			61.6	%
Research and development		487		4.7	%		396		6.1	%		91			23.0	%
Total operating expenses		3,340		32.3	%		2,161		33.3	%		1,179			54.6	%
Operating income		323		3.1	%		81		1.2	%		242			298.8	%
Interest expense		-		0.0	%		(2	)	0.0	%		(2	)		-100.0	%
Interest income		3		0.0	%		4		0.1	%		(1	)		-25.0	%
Income before income taxes		326		3.2	%		83		1.3	%		243			292.8	%
Income tax provision		134		41.1	%		36		43.4	%		98			272.2	%
Net income	$	192		1.9	%	$	47		0.7	%	$	145			308.5	%

	Six months ended June 30,
(dollars in thousands)	2010					2009
	Amount		% of Net sales			Amount			% of Net sales		Dollar increase (decrease)			Percent increase (decrease)
Net sales	$	18,088		100.0	%	$	12,243		100.0	%	$	5,845			47.7	%
Cost of sales		11,234		62.1	%		7,874		64.3	%		3,360			42.7	%
Gross profit		6,854		37.9	%		4,369		35.7	%		2,485			56.9	%
Operating expenses:
Selling, general and administrative		4,902		27.1	%		3,649		29.8	%		1,253			34.3	%
Research and development		872		4.8	%		834		6.8	%		38			4.6	%
Total operating expenses		5,774		31.9	%		4,483		36.6	%		1,291			28.8	%
Operating income (loss)		1,080		6.0	%		(114	)	-0.9	%		1,194			-1047.4	%
Interest expense		-		0.0	%		(2	)	0.0	%		(2	)		-100.0	%
Interest income		9		0.0	%		6		0.0	%		3			50.0	%
Income (loss) before income taxes		1,089		6.0	%		(110	)	-0.9	%		1,199			-1090.0	%
Income tax provision		434		39.9	%		75		-68.2	%		359			478.7	%
Net income (loss)	$	655		3.6	%	$	(185	)	-1.5	%	$	840			-454.1	%

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Net sales for the three months ended June 30, 2010 were $10,345,000 compared to $6,494,000 in the comparable prior year period, an increase of $3,851,000 or 59.3%.  Net sales for the six months ended June 30, 2010 were $18,088,000 compared to $12,243,000 in the comparable prior year period, an increase of $5,845,000 or 47.7%.  The sales growth was primarily due to the sales from our newly acquired Copper Products Division, increased sales to existing customers and sales to new customers from market share gains made in the second half of last year.  Sales of $1,872,000 from the newly acquired CPD accounted for 48.6% and 32.0% of the total sales increase f or the three and six month periods, respectively.

Gross profit for the three months ended June 30, 2010 was $3,663,000 compared to $2,242,000 in the prior year period, an increase of $1,421,000 or 63.4%, and gross profit margin remained relatively consistent at 35.4% in the current period compared to 34.5% in the prior period.  Gross profit for the six months ended June 30, 2010 was $6,854,000 compared to $4,369,000 in the prior year period, an increase of $2,485,000 or 56.9%, and gross profit margin increased to 37.9% from 35.7%. The improvement in gross profit margin for the six month period was primarily attributable to consistent fixed cost levels in the 2010 period compared to the 2009 period on higher sales in the 2010 period, which improved absorption of these costs.

Selling, general and administrative expenses for the three months ended June 30, 2010 were $2,853,000 compared to $1,765,000 in the comparable prior year period, an increase of $1,088,000 or 61.6%.  Selling, general and administrative expenses for the six months ended June 30, 2010 were $4,902,000 compared to $3,649,000 in the comparable prior year period, an increase of $1,253,000 or 34.3%.  The current period increases were primarily attributable to transaction and integration costs of approximately $607,000 and $744,000 incurred during the three and six months ended June 30, 2010, respectively, in connection with the CPD acquisition, increases in salaries and related benefits resulting from the CPD acquisition, and an increase in commissions resulting from the increase in sales.

Research and development expenses for the three months ended June 30, 2010 were $487,000 compared to $396,000 for the comparable prior year period, an increase of $91,000 or 23.0%. Research and development expenses for the six months ended June 30, 2010 were $872,000 compared to $834,000 in the comparable prior year period, an increase of $38,000 or 4.6%.  These increases are primarily attributable to higher product development expenses, in addition to increases in salaries and related benefits resulting from the CPD acquisition.

During the three months ended June 30, 2010 and 2009, we recorded a provision for income taxes of $134,000 and $36,000, respectively.  During the six months ended June 30, 2010 and 2009, we recorded a provision for income taxes of $434,000 and $75,000, respectively. Our income tax provision for each period consists of amounts necessary to align our year-to-date tax provision with the effective tax rate we expect to achieve for the full year.  That rate differs from the U.S. statutory rate primarily as a result of the non-deductibility of certain share-based compensation expense for income tax purposes that has been recognized for financial statement purposes, a foreign tax rate differential and state taxes.

Impact of Inflation

We do not believe our business is affected by inflation to a greater extent than the general economy.  Our products contain a significant amount of plastic that is petroleum based. We import most of our products from contract manufacturers, principally in Malaysia, China and Mexico, and fuel costs are, therefore, a significant component of transportation costs to obtain delivery of products.  Accordingly, an increase in petroleum prices can potentially increase the cost of our products.   Increased labor costs in the countries in which our contract manufacturers produce products for us and a continuing increase in the cost of precious metals could also increase the cost of our products. We monitor the impact of inflation and attempt to adjust prices where market conditions permit, except that we may n ot increase prices under our general supply agreements.  Inflation has not had a significant effect on our operations during any of the reported periods.

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Liquidity and Capital Resources

As of June 30, 2010, we had $15,770,000 of working capital, which included $3,144,000 of cash and cash equivalents, and our current ratio was 2.6 to 1.  As of December 31, 2009, we had $21,900,000 of working capital, which included $5,100,000 of cash and cash equivalents and a one-year $7,000,000 certificate of deposit, and our current ratio was 8.0 to 1.0.  The reduction in our working capital and current ratio since December 31, 2009 was due primarily to our purchase of the Copper Products Division from Porta Systems Corp. in May 2010, which resulted in both the use of a portion of our cash to acquire long term assets and the assumption of current liabilities of the Copper Products Division.  See our discussion of investing activities below.

The primary reason for the $1,241,000 of cash used in operating activities in the first six months of 2010 compared to the $2,808,000 cash provided by operating activities in the first six months of 2009 was a $3,889,000 increase in inventories in the 2010 period to fulfill anticipated sales, compared to a $1,336,000 reduction in inventories in the 2009 period.  Additionally there was a $2,070,000 increase in accounts receivable during the six months of 2010 compared to a $889,000 decrease in accounts receivable during the six months of 2009, due to increased sales in the current period resulting from both organic sales growth and sales resulting from the Copper Products Division acquisition.  This was partially offset by net income of $655,000 in the 2010 period, as compared to net loss of $185,000 in the 2009 peri od, a $625,000 reduction of the other receivable in the 2010 period, which was related to the sale of acquired inventories to our contract manufacturer, and a $2,384,000 increase in accounts payable and accrued liabilities in the 2010 period, as compared to a $463,000 decrease in accounts payable and accrued liabilities in the 2009 period, largely correlated to the increased inventory purchases.

Investing activities in the first six months of 2010 used cash of $750,000 for capital expenditures, primarily for machinery and equipment used to manufacture new products, and a net $150,000 (after redeeming a $7,000,000 certificate of deposit) paid out for the acquisition of the Copper Products Division.  During the first six months of 2009, investing activities used cash of $239,000 for capital expenditures.

There were no cash financing activities during the first six months of 2010. Financing activities in the first six months of 2009, totaling $71,000, related to repayments of insurance premiums financed with short term debt.

In December 2008, we entered into an amended credit agreement with JP Morgan Chase Bank, N.A. (the “amended agreement”) which replaced a $5,000,000 credit facility that was expiring.  Under the amended agreement, we are entitled to borrow from the bank up to $5,000,000 in the aggregate at any one time outstanding, but limited to a borrowing base, in general, equal to 80% of eligible accounts receivable (as defined), plus the lesser of 30% of eligible inventory (as defined, generally to include, with certain exceptions, inventories at the Company’s continental United States warehouse), after certain reserves, or $1,500,000.

As of June 30, 2010, our borrowing base was $5,000,000.  Loans under the amended agreement mature on December 31, 2010.  We had no borrowings outstanding under the credit agreement as of June 30, 2010 or December 31, 2009.

Outstanding loans under the amended agreement bear interest, at our option, either at (a) the bank's prime rate plus 2.75% per annum, provided that the prime rate shall not be less than an adjusted one-month London Interbank Offered Rate (“LIBOR”) (as defined in the amended agreement), or (b) under a formula based on LIBOR plus 4.5% per annum. We also pay a commitment fee equal to 0.25% per annum on the average daily unused portion of the credit facility.

Our obligations under the amended agreement are collateralized, pursuant to a Continuing Security Agreement, by all of our accounts receivable and inventory, and are also guaranteed by one of our subsidiaries.

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The amended agreement contains various covenants, including financial covenants and covenants that prohibit or limit a variety of actions without the bank's consent. These include, among other things, covenants that prohibit our payment of dividends and limit our ability to repurchase stock, incur or guarantee indebtedness, create liens, purchase all or a substantial part of the assets or stock of another entity, other than certain permitted acquisitions, create or acquire any subsidiary, or substantially change our business. The amended agreement requires us to maintain, as of the end of each fiscal quarter, tangible net worth and subordinated debt of at least $28,500,000, a ratio of net income before interest expense and taxes for the 12-month period ending with such fiscal quarter to interest expense for the same period of at least 2.25 to 1.00, and a ratio of total liabilities, excluding accounts payable in the ordinary course of business, accrued expenses or losses and deferred revenues or gains, to net income before interest expense, income taxes, depreciation and amortization for the 12-month period ending with the fiscal quarter for which compliance is being determined of not greater than 2.5 to 1.0. As of June 30, 2010, we were in compliance with all financial covenants in the amended agreement.

In May 2010, in connection with our acquisition of the Copper Product Division, we entered into an amendment to our bank credit agreement to reduce the minimum amount of tangible net worth and subordinated debt that we are required to maintain from $35,300,000 to $28,500,000.

We believe that existing cash, together with internally generated funds and the available line of credit, will be sufficient for our working capital requirements and capital expenditure needs for at least the next twelve months.

Seasonality

Our operations are subject to seasonal variations primarily due to the fact that our principal products, NIDs, are typically installed on the side of homes.  During the hurricane season, sales may increase depending upon the severity and location of hurricanes and the number of NIDs that are damaged and need replacement.  Conversely, during winter months when severe weather hinders or delays the Telco's installation and maintenance of their outside plant network, NID sales have been adversely affected until replacements can be installed (at which time sales increase).

Off Balance Sheet Financing

We have no off-balance sheet contractual arrangements, as that term is defined in Item 303(a)(4) of Regulation S-K.

Critical Accounting Policies, Estimates and Judgments

Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and judgments.  A summary of our most critical accounting policies as they existed prior to our acquisition of the Copper Products Division can be found in the Management’s Discussion and Analysis of Financial Condition and Results of Operation section of our Annual Report on Form 10-K for year ended December 31, 2009.  In addition to those critical accounting policies, as a result of our acquisition of the Copper Products Division in May 2010, we now also consider goodwill impairment estimates critical due to the significant amount of goodwill recorded on our balance sheet in connection with that acquisiti on and the judgment required in determining fair value amounts.  We regularly evaluate items which may impact our critical accounting estimates and judgments.

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Recently Adopted Accounting Pronouncements

Accounting Standards Update (“ASU”) 2009-17 (“ASU 2009-17”), originally issued as Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 167, “Amendments to FASB Interpretation No. 46(R)” amends the guidance on variable interest entities in Accounting Standards Codification (“ASC”) 810.  ASC 810 eliminates exceptions in Financial Interpretation (“FIN”) No. 46(R) to a consolidating qualifying special-purpose entity, contains new criteria for determining the primary beneficiary, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a variable interest entit y.  ASU 2009-17 also contains a new requirement that any term, transaction or arrangement that does not have a substantive effect on an entity’s status as a variable interest entity, a company’s power over a variable interest entity or a company’s obligation to absorb losses or its right to receive benefits of an entity must be disregarded in applying FIN 46(R).  The elimination of the qualifying special-purpose entity concept and its consolidation exceptions means more entities will be subject to consolidation assessments and reassessments.  ASU 2009-17 became effective for us on January 1, 2010.  The adoption of ASU 2009-17 did not have any impact on our financial statements or results of operations.

ASU 2010-06, “Improving Disclosures about Fair Value,” (“ASU 2010-06”) amends ASC 820 to require reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information about purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value measurements.  ASU 2010-06 also clarifies existing fair-value measurement disclosure guidance about the level of disaggregation, inputs and valuation techniques.  With the exception of the detailed Level 3 roll forward disclosures, we adopted the guidance of ASU 2010-06 effective January 1, 2010.  The adoption of ASU 2010-06 did not impact our financial position or results o f operations.

Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.  When used in this Report, words such as "may," "should," "seek," "believe," "expect," "anticipate," "estimate," "project," "intend," "strategy" and similar expressions are intended to identify forward-looking statements regarding events, conditions and financial trends that may affect our future plans, operations, business strategies, operating results and financial position. Forward-looking statements are subject to a number of known and unknown risks and uncertainties that could cause our actual results, performance or achievements to differ materially from those described or implied in the forward-looking statements as a result of several factors, including, but not limited to, those factors discussed below and elsewhere in this document.  We undertake no obligation to update any forward-looking statement to reflect events after the date of this Report. Among those factors are:

Relating specifically to our recent acquisition:

·   our ability to integrate the acquired products and sales force into our business;

·   our ability to execute our plans with our manufacturing partner to improve gross margins of the acquired products; and

·   the stability of the Pound Sterling and Mexican Peso relative to the U.S. dollar exchange rate.

Relating to our overall business:

·   general economic and business conditions, especially as they pertain to the telecommunications industry;

·   potential changes in customers’ spending and purchasing policies and practices, which are effected by customers’ internal budgetary allotments that may be impacted by the current economic climate, particularly in the United States;

·   pressures from customers to reduce pricing without achieving a commensurate reduction in costs;

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·   the ability to market and sell products to new markets beyond our principal copper-based telephone operating company (“Telco”) market which has been declining over the last several years, due principally to the impact of alternate technologies;

·   the ability to timely develop products and adapt our existing products to address technological changes, including changes in our principal market;

·   exposure to increases in the cost of our products, including increases in the cost of our petroleum-based plastic products and precious metals;

·   the ability to obtain raw materials and components used in manufacturing our products given the supply shortages of these items resulting from increased economic activity;

·   dependence on, and ability to retain, our “as-ordered” general supply agreements with our largest customers and our ability to win new contracts;

·   dependence on third parties for certain product development;

·   dependence for products and product components from Pacific Rim contract manufacturers, including on-time delivery that could be interrupted as a result of third party labor disputes, political factors or shipping disruptions, quality control and exposure to changes in costs and changes in the valuation of the Chinese Yuan;

·   weather and similar conditions, including the effect of typhoons on our assembly facilities in the Pacific Rim which can disrupt production, the effect of hurricanes in the United States which can increase the demand for our products and the effect of harsh winter conditions in the United States which can temporarily disrupt the installation of certain of our products by Telcos;

·   the ability to attract and retain technologically qualified personnel; and

·   the availability of financing on satisfactory terms.

We undertake no obligation to update any forward-looking statement to reflect events after the date of this Report.

Item 3.       Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks, including changes in interest rates.  The interest payable under our credit facility, under which there were no borrowings outstanding as of June 30, 2010, is based on a specified bank’s prime interest rate and, therefore, is affected by changes in market interest rates.  Historically, the effects of movements in the market interest rates have been immaterial to our consolidated operating results, as we have not borrowed to any significant degree.

Our products contain a significant amount of plastic that is petroleum based, as well as certain precious metals. We import most of our products from contract manufacturers, principally in Malaysia, China and Mexico.  An increased cost in either petroleum or certain precious metals can potentially increase the cost of our products.

Other than sales generated by our Mexico and U.K. subsidiaries, we require foreign sales to be paid in U.S. currency, and we are billed by our contract manufacturers in U.S. currency.   However, assets, liabilities and revenues generated by our Mexico and U.K. subsidiaries are denominated in Mexican Pesos and the Pound Sterling, respectively, and, accordingly, fluctuations in the exchange rate of the Mexican Peso and Pound Sterling could have a material impact on our financial position and results of operations.  Additionally, since one of our Pacific Rim suppliers is based in China, the cost of our products could be affected by changes in the valuation of the Chinese Yuan and or abnormal wage increases.

Historically, we have not purchased or entered into interest rate swaps or future, forward, option or other instruments designed to hedge against changes in interest rates, the price of materials we purchase or the value of foreign currencies.

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Item 4.       Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Report, our management, with the participation of our President and Principal Executive Officer and our Vice President-Finance and Principal Financial Officer, evaluated the effectiveness of our “disclosure controls and procedures,” as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934.  Based on that evaluation, these officers concluded that, as of June 30, 2010, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our periodic filings under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including those officers, to allow timely decisions re garding required disclosure. It should be noted that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within us to disclose material information otherwise required to be set forth in our periodic reports.

Changes in Internal Control Over Financial Reporting

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

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PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

Reference is made to our Form 10-Q for the quarter ended March 31, 2010 for information regarding the dismissal of the action instituted on June 15, 2009 in the Court of Chancery of the State of Delaware by Vladimir Gusinsky, a purported stockholder of Tii, individually and on behalf of all others similarly situated, against Tii and each member of our Board of Directors.

Item 5.  Other Information

On May 18, 2010, in connection with our acquisition of the Copper Products Division from Porta Systems Corp., we entered into an Amendment to our Credit Agreement, dated December 15, 2006, with JPMorgan Chase Bank, N.A. pursuant to which the amount of tangible net worth and subordinated debt that we are required to maintain under the Credit Agreement was reduced from $35,300,000 to $28,500,000.

On July 8, 2005, we received a Product Purchase Agreement (the “Verizon Agreement”), which is a general supply agreement, from Verizon Services Corp. (“Verizon”) setting forth the terms under which we provide product to Verizon.  In 2008, Verizon outsourced its purchasing, distribution and warehousing functions for certain of its products to certain third parties, one of which was Team Alliance, Inc.  On May 15, 2009, we entered into a Product Purchase Agreement with Team Alliance, Inc., which effectively replaced our existing Verizon Agreement for a majority of the products covered under the Verizon Agreement.  In June 2010, we entered into an amendment to the Verizon Agreement which covers the products not transitioned to the Team Alliance Agreement and extends the term of the Verizo n Agreement, as amended, until March 31, 2013.  

Item 6.  Exhibits

4(a)	Amendment, dated May 18, 2010, to Credit Agreement, dated as of December 15, 2006, between JPMorgan Chase Bank, N.A. and us.
10(a)	Amendment Number 3 to Product Purchase Agreement, effective as of April 1, 2005, between us and Verizon Services Corp. (confidential treatment has been requested with respect to certain portions of this amendment).
31(a)	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31(b)	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32(a)	Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32(b)	Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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.

	Tii NETWORK TECHNOLOGIES, INC.
Date: August 16, 2010	By:	­­­­­­­­­­­­­­­/s/ Jennifer E. Katsch
	Jennifer E. Katsch         Vice President-Finance, Treasurer and         Chief Financial Officer

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Exhibit Index

4(a)	Amendment, dated May 18, 2010, to Credit Agreement, dated as of December 15, 2006, between JPMorgan Chase Bank, N.A. and us.
10(a)	Amendment Number 3 to Product Purchase Agreement, effective as of April 1, 2005, between us and Verizon Services Corp. (confidential treatment has been requested with respect to certain portions of this amendment).
31(a)	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31(b)	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32(a)	Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32(b)	Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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